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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-12993
ALEXANDRIA REAL ESTATE EQUITIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 95-4502084
(State or other jurisdiction (IRS Employer I.D. Number)
of incorporation or organization)
135 N. LOS ROBLES AVENUE, SUITE 250
PASADENA, CALIFORNIA 91101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (626) 578-0777
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value per share New York Stock Exchange
9.50% Series A Cumulative New York Stock Exchange
Redeemable Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the shares of Common Stock held by
non-affiliates was approximately $413.8 million based on the closing price
for such shares on the New York Stock Exchange on March 22, 2000.
As of March 22, 2000 the Registrant had 13,792,422 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates information by reference from the
definitive Proxy Statement to be mailed in connection with the registrant's
annual meeting of stockholders to be held on April 28, 2000.
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INDEX TO FORM 10-K
ALEXANDRIA REAL ESTATE EQUITIES, INC.
PAGE REFERENCE
PART I
Item 1. Business.......................................................................1
Item 2. Properties....................................................................13
Item 3. Legal Proceedings.............................................................20
Item 4. Submission of Matters to a Vote of Security Holders...........................20
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.....21
Item 6. Selected Financial Data.......................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................37
Item 8. Financial Statements and Supplementary Data...................................38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure....................................................................38
PART III
Item 10. Directors and Executive Officers of the Registrant............................39
Item 11. Executive Compensation........................................................39
Item 12. Security Ownership of Certain Beneficial Owners and Management................39
Item 13. Certain Relationships and Related Transactions................................39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............40
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PART I
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. You can identify some of the
forward-looking statements by the use of forward-looking words such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimates" or "anticipates," or the negative of these
words or similiar words. Forward-looking statements involve inherent risks
and uncertainties regarding events, conditions and financial trends that may
affect our future plan of operation, business strategy, results of operations
and financial position. A number of important factors could cause actual
results to differ materially from those included within the forward-looking
statements, including, but not limited to, those described below under the
headings "Business Risks" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." We do not take any
responsibility to update any of these factors or to announce publicly any
revisions to any of the forward-looking statements, whether as a result of
new information, future events or otherwise.
ITEM 1. BUSINESS.
GENERAL
Alexandria Real Estate Equities, Inc., a Maryland corporation formed in
October 1994, is a real estate investment trust ("REIT") engaged primarily in
the ownership, operation, management, acquisition, conversion, retrofit,
expansion and selective development and redevelopment of high quality,
strategically located properties containing office and laboratory space designed
and improved for lease principally to pharmaceutical, biotechnology, diagnostic
and personal care products companies, major scientific research institutions and
related government agencies (collectively, the "Life Science Industry").
Properties leased to tenants in the Life Science Industry typically consist of
suburban office buildings containing scientific research and development
laboratories and other improvements that are generic to tenants operating in the
Life Science Industry (such properties, "Life Science Facilities"). In addition
to principally serving the Life Science Industry, we provide creative space to
various high technology and Internet tenants. As of December 31, 1999, we owned
58 properties (the "Properties"), containing approximately 4.0 million rentable
square feet of office and laboratory space.
BUSINESS AND GROWTH STRATEGY.
We focus our operations and investment activities principally in the
following cluster markets:
- California (in the San Diego, Pasadena and San Francisco Bay areas);
- Seattle;
- suburban Washington, D.C. (including Maryland and Virginia);
- eastern Massachusetts;
- New Jersey and suburban Philadelphia; and
- the Southeast (including Georgia and North Carolina).
Our tenant base is broad and diverse and reflects our focus on regional,
national and international tenants with substantial financial and operational
resources. For a detailed description of our Properties and tenants, see "Item
2. Properties." Alexandria is led by a senior management team with extensive
experience in both the real estate and Life Science industries and is supported
by a highly experienced Board of Directors.
We seek to maximize growth in funds from operations ("FFO") and cash
available for distribution to stockholders through effective management,
operation, acquisition, conversion, expansion and selective development of
Life Science Facilities. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Funds from Operations" for a
complete discussion of how we compute and view FFO, as well as a discussion
of other measures of cash flow. In particular, we seek to increase FFO and
cash available for distribution per share by:
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- acquiring high quality Life Science Facilities at prices that will
enable us to realize attractive returns in our cluster markets;
- realizing contractual rental rate escalations;
- retenanting and releasing space within our portfolio at higher
rental rates and with minimal non-revenue enhancing tenant
improvement costs;
- expanding existing Properties or converting existing office or
warehouse space to generic laboratory space that can be leased
at higher rental rates;
- selectively developing properties on a retrofit or build-to-suit
basis; and
- continuing to implement effective cost control measures, including
negotiating pass-through provisions in tenant leases for operating
expenses and certain capital expenditures.
INTERNAL GROWTH. We seek to achieve internal growth from several sources.
For example, we seek to:
- include rental rate escalation provisions in our leases;
- acquire undervalued or underperforming properties where we can
improve investment returns through releasing of vacant space and
replacement of existing tenants with new tenants at higher rental
rates;
- achieve higher rental rates as existing leases expire; and
- expand existing facilities that are fully leased and/or convert
existing office space to higher rent, generic laboratory space.
Our ability to negotiate contractual rent escalations in future leases and to
achieve increases in rental rates will depend upon market conditions and demand
for Life Science Facilities at the time the leases are negotiated and the
increases are proposed.
ACQUISITIONS. We seek to identify and acquire high quality Life Science
Facilities in our cluster markets. Critical evaluation of prospective property
acquisitions is an essential component of our acquisition strategy. When
evaluating acquisition opportunities, we assess a full range of matters relating
to the properties, including the:
- location of the property and our strategy in the market;
- quality of existing and prospective tenants;
- condition and capacity of the building infrastructure;
- quality and generic characteristics of laboratory facilities;
- physical condition of the shell structure and common area
improvements;
- opportunities available for leasing vacant space and for retenanting
occupied space; and
- opportunities to convert existing office space to higher rent
generic laboratory space.
DEVELOPMENT. Although we have historically emphasized acquisitions over
development in pursuing our growth objectives, completed development projects
are anticipated to represent a more significant portion of our growth in the
future. Our strategy is to selectively pursue build-to-suit and retrofit
development projects where we expect to achieve investment returns that will
equal or exceed our returns on acquisitions. We generally have undertaken
build-to-suit and retrofit projects only if our investment in infrastructure
will be substantially made for generic, rather than tenant specific,
improvements.
FINANCING/WORKING CAPITAL. We believe that cash provided by operations and
our unsecured line of credit will be sufficient to fund our working capital
requirements. We generally expect to finance future acquisitions through our
unsecured line of credit and then to periodically refinance some or all of that
indebtedness with additional equity or debt capital. We also may issue shares of
our common stock or interests in our subsidiaries as consideration for
acquisitions. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources" for a
complete discussion of our unsecured line of credit and other outstanding
indebtedness.
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BUSINESS RISKS
WE ARE LARGELY DEPENDENT ON THE LIFE SCIENCE INDUSTRY FOR REVENUES FROM LEASE
PAYMENTS
In general, our strategy is to invest primarily in properties primarily
used by tenants in the Life Science Industry. Consequently, our revenues from
lease payments are largely dependent on a single industry. If the Life
Science Industry experiences an economic downturn, our business could be
adversely affected. Events within the Life Science Industry will have a more
pronounced effect on our ability to make distributions to our stockholders
than if we had diversified investments. Also, our Properties may be better
suited for a particular Life Science Industry tenant and could require
modification before we could release vacant space to another Life Science
Industry tenant. Our Properties also may not be suitable for lease to
traditional office tenants without significant expenditures on renovations.
OUR TENANTS MAY NOT BE ABLE TO PAY US IF THEY ARE UNSUCCESSFUL IN
DISCOVERING, DEVELOPING, MAKING OR SELLING THEIR PRODUCTS AND TECHNOLOGIES
Our Life Science Industry tenants are subject to a number of risks, any
one or more of which may adversely affect their ability to make rental
payments to us:
- Some of our tenants require significant funding to devolop and
commercialize their products and technologies, which is obtained
from private investors, the public market, companies in the Life
Science Industry or federal, state and local governments. Such
funding may be unavailable, decreased or discontinued in the future
which could adversely affect the ability of a tenant to successfully
discover, develop, make, market or sell its products and technologies,
to generate revenues or to make rental payments to us;
- Even with sufficient funding, some of our tenants may not be able to
successfully discover or identify potential drug targets in humans or
potential drugs for use in humans or to create tools or technologies
which are commercially useful in the discovery or identification of
potential drug targets or drugs;
- Some of our tenants developing potential drugs may find that their
drugs are not effective, or may even be harmful, when tested in humans;
- Some of our tenants may not be able to manufacture their drugs
ecomomically, even if such drugs are proven through human clinical
trials to be safe and effective in humans;
- Drugs which are developed and manufactured by some of our tenants
require governmental regulatory approval prior to being made,
marketed, sold and used. The regulatory approval process to manufacture
and market drugs is costly, typically takes several years, requires the
expenditure of substantial resources, is often unpredictable and a
tenant may fail or experience significant delays in obtaining these
approvals;
- Some of our tenants and their licensors typically require patent,
copyright and trade secret protection to succesfully develop, make,
market and sell their products and technologies. A tenant may be
unable to commercialize its products or technologies if patents
covering such products or technologies do not issue, or are
successfully challenged, narrowed, invalidated or circumvented by third
parties, or if a tenant fails to successfully obtain licenses to the
discoveries of third parties necessary to commercialize its products
or technologies; and
- A drug made by a tenant may not be well accepted by doctors and
patients, or may be less effective or accepted than competing drugs
made by others, or may be subsequently recalled from the market, even
if it is successfully developed, proven safe and effective in human
clinical trials, manufactured and the requisite regulatory approvals
obtained.
We cannot assure you that our tenants will be able to successfully
develop, make, market or sell their products and technologies due to the
risks inherent in the Life Science Industry. If a tenant is unable to
successfully avoid, or sufficiently mitigate, the risks described above, the
affected tenant may have difficulty making rental payments to us.
WE COULD BE HELD LIABLE FOR DAMAGES RESULTING FROM OUR TENANTS' USE OF HAZARDOUS
MATERIALS
Some of our Life Science Industry tenants engage in research and
development activities that involve the controlled use of hazardous materials,
chemicals and biological and radioactive compounds. In the event of
contamination or injury from the use of these hazardous materials, we could be
held liable for any damages that result. This liability could exceed our
resources and our environmental remediation coverage and could adversely affect
our ability to make distributions to our stockholders.
We and our tenants must comply with federal, state and local laws and
regulations that govern the use, manufacture, storage, handling and disposal of
hazardous materials and waste products. Changes in these laws and regulations
could adversely affect our business or our tenants' business and their ability
to make rental payments to us.
THE INABILITY OF ANY TENANT TO MAKE RENTAL PAYMENTS TO US COULD ADVERSELY AFFECT
OUR BUSINESS
Our revenues are derived primarily from rental payments under our leases.
Therefore, if our tenants, especially significant tenants, failed to make rental
payments under their leases, our financial condition and our ability to make
distributions to our stockholders could be adversely affected.
As of December 31, 1999, we had 169 leases with a total of 160 tenants.
Twenty-seven of our Properties were single-tenant properties. Three of our
tenants accounted for approximately 14.8% of our aggregate Annualized Base Rent,
or approximately 5.9%, 5.3% and 3.6%, respectively. "Annualized Base Rent" means
the annualized fixed base rental amount in effect as of December 31, 1999, using
rental revenue calculated on a straight-line basis in accordance with generally
accepted accounting principles ("GAAP"). Annualized Base Rent does not include
real estate taxes and insurance, common area and other operating expenses,
substantially all of which are borne by the tenants in the case of triple net
leases.
The bankruptcy or insolvency of a major tenant also may adversely affect
the income produced by a Property. If any of our tenants becomes a debtor in a
case under the U.S. Bankruptcy Code, we cannot evict that tenant solely
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because of its bankruptcy. The bankruptcy court might authorize the tenant to
reject and terminate its lease with us. Our claim against such a tenant for
unpaid, future rent would be subject to a statutory limitation that might be
substantially less than the remaining rent actually owed to us under the
tenant's lease. Any shortfall in rent payments could adversely affect our
cash flow and our ability to make distributions to our stockholders.
OUR U.S. GOVERNMENT TENANTS MAY NOT RECEIVE ANNUAL APPROPRIATIONS, WHICH COULD
ADVERSELY AFFECT THEIR ABILITY TO PAY US
U.S. government tenants are subject to annual appropriations. If one of
our U.S. government tenants failed to receive its annual appropriation, it might
not be able to make its lease payments to us. In addition, defaults under leases
with federal government tenants are governed by federal statute and not state
eviction or rent deficiency laws. All of our leases with U.S. government tenants
provide that the government tenant may terminate the lease under certain
circumstances. As of December 31, 1999, leases with U.S. government tenants at
our Properties accounted for approximately 7.6% of our aggregate Annualized Base
Rent.
LOSS OF A TENANT COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS
A lessee may not renew its lease upon the expiration of the initial term.
In addition, we may not be able to locate a qualified replacement tenant upon
expiration or termination of a lease. Consequently, we could lose the cash flow
from the affected Property, which could negatively impact our business. We may
have to divert cash flow generated by other Properties to meet our mortgage
payments, if any, or to pay other expenses related to owning the affected
Property. As of December 31, 1999, leases at our Properties representing
approximately 16.9% and 10.3% of the square footage of our Properties were
scheduled to expire in 2000 and 2001, respectively.
POOR ECONOMIC CONDITIONS IN OUR CLUSTER MARKETS COULD ADVERSELY AFFECT OUR
BUSINESS
Our Properties are located only in the following markets:
- California (in the San Diego, Pasadena and San Francisco Bay areas);
- Seattle;
- suburban Washington, D.C. (including Maryland and Virginia);
- eastern Massachusetts;
- New Jersey and suburban Philadelphia; and
- the Southeast (including North Carolina and Georgia).
As a result of this geographic concentration, we are dependent upon the
local economic conditions in each of these markets, including local real estate
conditions and competition. If there is a downturn in the economy in any of
these markets, our operations and our ability to make distributions to
stockholders could be adversely affected. We cannot assure you that these
markets will continue to grow or will remain favorable to the Life Science
Industry.
WE MAY HAVE DIFFICULTY MANAGING OUR RAPID GROWTH
We have grown rapidly and expect to continue to grow by acquiring and
selectively developing additional properties. To manage our growth effectively,
we must successfully integrate new acquisitions into our existing structure. We
may not succeed with the integration. In addition, we may not effectively manage
new properties, and new properties may not perform as expected. If we are
unsuccessful in managing our growth, our business would be adversely affected.
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OUR DEBT SERVICE OBLIGATIONS MAY HAVE ADVERSE CONSEQUENCES ON OUR BUSINESS
OPERATIONS
We use debt to finance our operations, including acquisitions of
properties. Our incurrence of debt may have consequences, including the
following:
- our cash flow from operations may be not be sufficient to meet
required payments of principal and interest;
- we may be forced to dispose of one or more of our Properties,
possibly on disadvantageous terms, to make payments on our debt;
- we may default on our debt obligations, and the lenders or
mortgagees may foreclose on our Properties that secure those loans;
- a foreclosure on one of our Properties could create taxable income
without any accompanying cash proceeds to pay the tax;
- we may default under a mortgage loan that has cross default
provisions, causing us automatically to default on another loan;
- we may not be able to refinance or extend our existing debt; and
- the terms of any refinancing or extension may not be as favorable as
the terms of our existing debt.
As of December 31, 1999, we had outstanding mortgage indebtedness of
approximately $158.5 million, secured by fourteen Properties, and outstanding
debt under our unsecured line of credit of approximately $192.0 million.
OUR LINE OF CREDIT RESTRICTS OUR ABILITY TO ENGAGE IN SOME BUSINESS ACTIVITIES
Our unsecured revolving credit facility contains customary negative
covenants and other financial and operating covenants that, among other things:
- restrict our ability to incur additional indebtedness;
- restrict our ability to make certain investments;
- restrict our ability to merge with another company;
- restrict our ability to make distributions to stockholders;
- require us to maintain financial coverage ratios; and
- require us to maintain a pool of unencumbered assets approved by the
lenders.
These restrictions could have a negative effect on our operations and our
ability to make distributions to our stockholders.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FURTHER OUR BUSINESS
OBJECTIVES
Our ability to acquire or develop properties is dependent upon our ability
to obtain capital. An inability to obtain capital on acceptable terms could
delay or prevent us from acquiring, structuring and closing desirable
investments, which would adversely affect our business. Also, the issuance of
additional shares of capital stock or interests in subsidiaries to obtain
capital for the acquisition of additional properties could result in a dilution
of ownership for the then existing stockholders.
IF INTEREST RATES RISE, OUR DEBT SERVICE COSTS WILL INCREASE
Borrowings outstanding under our unsecured line of credit and certain
other borrowings bear interest at a variable rate, and we may incur additional
variable rate debt in the future. Increases in market interest rates would
increase our interest expenses under these debt instruments and would increase
the costs of refinancing existing indebtedness or obtaining new debt.
Accordingly, these increases could adversely affect our financial position and
our ability to make distributions to stockholders.
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WE MAY NOT BE ABLE TO ACQUIRE PROPERTIES OR OPERATE THEM SUCCESSFULLY
Our success depends in large part upon our ability to acquire additional
properties on satisfactory terms and to operate them successfully. If we are
unable to do so, our business could be adversely affected. In addition, the
acquisition of Life Science Facilities generally involves a higher per square
foot price than the acquisition of traditional suburban office properties.
The acquisition, ownership and operation of real estate is subject to many
risks, including:
- our Properties may not perform as we expect;
- we may not be able to acquire a desired property because of
competition from other real estate investors with significant
capital;
- we may lease space at rates below our expectations;
- we may not be able to obtain financing on acceptable terms;
- we may overpay for new acquisitions; and
- we may underestimate the cost of improvements required to bring an
acquired property up to standards established for the market
position intended for that property.
If we encounter any of these risks, our business and our ability to make
payments to stockholders could be adversely affected.
WE MAY NOT BE ABLE TO COMPLETE DEVELOPMENT PROJECTS EFFECTIVELY
Our expansion and development activities subject us to many risks,
including:
- possible delays in construction;
- budget overruns;
- increasing costs of materials;
- financing availability;
- volatility in interest rates;
- labor availability;
- timing of the commencement of rental payments; and
- other property development uncertainties.
In addition, expansion and development activities, regardless of whether
they are ultimately successful, typically require a substantial portion of
management's time and attention. This may detract management from focusing on
other operational activities. If we are unable to successfully complete
expansion and development projects, our business may be adversely affected.
IF OUR REVENUES ARE LESS THAN OUR EXPENSES, WE MAY HAVE TO BORROW ADDITIONAL
FUNDS AND WE MAY NOT MAKE DISTRIBUTIONS TO OUR STOCKHOLDERS
If our Properties do not generate revenues sufficient to meet our
operating expenses, including debt service and other capital expenditures, we
may have to borrow additional amounts to cover fixed costs and cash flow needs.
This could adversely affect our ability to make distributions to our
stockholders. Factors that could adversely affect the revenues from and the
value of our Properties include:
- national and local economic conditions;
- competition from other Life Science Facilities;
- changes within the Life Science Industry;
- real estate conditions in our target markets;
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- our ability to collect rent payments;
- availability of financing;
- changes in interest rate levels;
- vacancies at our Properties and our ability to release space;
- changes in tax or other regulatory laws;
- cost of compliance with government regulation;
- illiquidity of real estate investments; and
- increased operating costs.
In addition, if a lease at a Property is not a triple net lease, we will
have greater expenses associated with that Property, and, as such, greater
exposure to increases in such expenses. Significant expenditures, such as
mortgage payments, real estate taxes, insurance and maintenance costs, generally
are fixed and do not decrease when revenues at the related property decrease.
IMPROVEMENTS TO LIFE SCIENCE FACILITIES ARE MORE COSTLY THAN TRADITIONAL OFFICE
SPACE
Our Properties contain generic infrastructure improvements that are more
costly than other property types. These improvements include:
- reinforced concrete floors;
- upgraded roof loading capacity;
- significantly upgraded electrical, gas and plumbing infrastructure;
- heavy-duty HVAC systems; and
- laboratory benches.
Although we have historically been able to reflect the additional
investment in generic infrastructure improvements in higher rental rates, we are
not sure that we will be able to continue to do so in the future.
WE MAY NOT BE ABLE TO SELL OUR PROPERTIES QUICKLY TO RAISE MONEY
Investments in real estate are relatively illiquid. Accordingly, we may
not be able to sell our Properties when we desire or at acceptable prices in
response to changes in economic or other conditions. In addition, the Internal
Revenue Code limits our ability to sell properties held for fewer than four
years. These limitations on our ability to sell our Properties may adversely
affect our cash flows and our ability to make distributions to stockholders.
WE FACE SUBSTANTIAL COMPETITION IN OUR TARGET MARKETS
The significant competition for business in our target markets could have
an adverse effect on our operations. We compete for investment opportunities
with:
- insurance companies;
- pension and investment funds;
- partnerships;
- developers;
- investment companies; and
- other REITs.
Many of these entities have substantially greater financial resources than
we do and may be able to accept more risk than we can manage. These entities may
be less sensitive to risks with respect to the creditworthiness of a tenant or
the geographic proximity of its investments. Competition from other entities
also may reduce the number of suitable investment opportunities offered to us or
may increase the bargaining power of property owners seeking to sell.
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OUR PROPERTIES MAY HAVE DEFECTS UNKNOWN TO US
Although we review the physical condition of our Properties before they
are acquired, and on a periodic basis after acquisition, any of our Properties
may have characteristics or deficiencies unknown to us that could adversely
affect the Property's valuation or revenue potential.
IF WE FAIL TO QUALIFY AS A REIT, WE WOULD BE TAXED AT CORPORATE RATES AND WOULD
NOT BE ABLE TO TAKE CERTAIN DEDUCTIONS WHEN COMPUTING OUR TAXABLE INCOME
If in any taxable year we fail to qualify as a REIT:
- we would be subject to federal income tax on our taxable income at
regular corporate rates;
- we would not be allowed a deduction for distributions to
stockholders in computing taxable income;
- unless we were entitled to relief under the Internal Revenue Code,
we would also be disqualified from treatment as a REIT for the four
taxable years following the year during which we lost qualification;
and
- we would no longer be required by the Internal Revenue Code to make
any distributions to our stockholders.
As a result of the additional tax liability, we might need to borrow funds
or liquidate certain investments in order to pay the applicable tax.
Accordingly, funds available for investment or distribution to our stockholders
would be reduced for each of the years involved.
Qualification as a REIT involves the application of highly technical and
complex provisions of the Internal Revenue Code to our operations and the
determination of various factual matters and circumstances not entirely within
our control. There are only limited judicial or administrative interpretations
of these provisions. Although we believe that we have operated since January
1996 in a manner so as to qualify as a REIT, we cannot assure you that we are or
will remain so qualified.
In addition, although we are not aware of any pending tax legislation that
would adversely affect our ability to operate as a REIT, new legislation,
regulations, administrative interpretations or court decisions could change the
tax laws or interpretations of the tax laws regarding qualification as a REIT,
or the federal income tax consequences of that qualification, in an adverse
manner.
Although certain of our officers and directors have extensive experience
in the acquisition, leasing, operation financing and development of real
properties, prior to commencement of our operations, no officer had significant
experience in operating a business in accordance with the requirements for
maintaining qualification as a REIT under the Internal Revenue Code.
THERE ARE LIMITS ON THE OWNERSHIP OF OUR CAPITAL STOCK; A STOCKHOLDER MAY LOSE
BENEFICIAL OWNERSHIP OF ITS SHARES OF OUR COMMON STOCK BECAUSE OF THE OWNERSHIP
LIMITS
The Internal Revenue Code provides that, in order for us to maintain our
qualification as a REIT, not more than 50% of the value of our outstanding
capital stock may be owned, directly or constructively, by five or fewer
individuals or entities.
In addition, our charter prohibits, with certain limited exceptions,
direct or constructive ownership of shares of our capital stock representing
more than 9.8% of the combined total value of outstanding shares of our capital
stock by any person (the "Ownership Limit"). Our Board of Directors may exempt a
stockholder from the Ownership Limit if, prior to the exemption, our Board of
Directors receives any information it deems necessary to determine or ensure our
status as a REIT.
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The constructive ownership rules are complex and may cause shares of our
common stock owned directly or constructively by a group of related individuals
or entities to be constructively owned by one individual or entity. A transfer
of shares to a person who, as a result of the transfer, violates the Ownership
Limit may be void or may be transferred to a trust, for the benefit of one or
more qualified charitable organizations designated by us. In that case, the
intended transferee will have only a right to share, to the extent of the
transferee's original purchase price for such shares, in proceeds from the
trust's sale of those shares.
THE OWNERSHIP LIMIT AND OTHER PROVISIONS OF OUR CHARTER MAY DELAY OR PREVENT
TRANSACTIONS THAT WOULD OTHERWISE BE BENEFICIAL TO OUR STOCKHOLDERS
The Ownership Limit may have the effect of delaying, deferring or
preventing a transaction or a change in control that might involve a premium
price for our common stock or otherwise be in the best interest of our
stockholders.
Our charter allows our Board of Directors to cause us to issue additional
authorized but unissued shares of our common stock or preferred stock without
any stockholder approval. The issuance of preferred stock could make it more
difficult for another party to gain control of Alexandria. In addition, our
Board of Directors could establish a series of preferred stock that could delay,
defer or prevent a transaction that might involve a premium price for our common
stock or otherwise be in the best interest of our common stockholders. Our Board
of Directors could also establish one or more additional series of preferred
stock that has a dividend preference, which may adversely affect our ability to
pay dividends on our common stock.
OUR INSURANCE MAY NOT ADEQUATELY COVER ALL POTENTIAL LOSSES
If we experience a loss at any of our Properties that is not covered by
insurance or that exceeds our insurance policy limits, we could lose the capital
invested in the affected Property and, possibly, future revenues from that
Property. In addition, we would continue to be obligated on any mortgage
indebtedness or other obligations related to the affected Properties.
We carry comprehensive liability, fire, extended coverage and rental loss
insurance with respect to our Properties. We have obtained earthquake insurance
for all of our Properties because many of them are located in the vicinity of
active earthquake faults. We also carry environmental remediation insurance and
have title insurance policies on all of our Properties. We obtain our title
insurance policies when we acquire the Property. As a result, each policy covers
an amount equal to the initial purchase price of each Property. Any of our title
insurance policies may be in an amount less than the current value of the
related Property.
We believe that our insurance policy specifications, insured limits and
deductibles are consistent with or superior to those customarily carried for
similar properties. In addition, we require our tenants to maintain
comprehensive insurance, including liability and casualty insurance, that is
customarily obtained for similar properties. There are, however, certain types
of losses that we and our tenants do not generally insure because they are
either uninsurable or because it is not economical to insure against them. In
addition, certain disaster-type insurance (covering catastrophic events) may not
be available or may only be available at rates that, in the opinion of our
management, are prohibitive.
WE COULD INCUR SIGNIFICANT COSTS COMPLYING WITH ENVIRONMENTAL LAWS
Federal, state and local environmental laws and regulations may require
us, as a current or previous owner or operator of real estate, to investigate
and clean up hazardous or toxic substances or petroleum products released at or
from any of our Properties. The cost of investigating and cleaning up
contamination could be substantial. In addition, the presence of contamination,
or the failure to properly clean it up, may adversely affect our ability to sell
or rent an affected Property or to borrow funds using that Property as
collateral.
9
Under environmental laws and regulations, we may have to pay governmental
entities or third parties for property damage and for investigation and clean-up
costs incurred by those parties relating to contaminated Properties regardless
of whether we knew of or caused the presence of the contaminants. Even if more
than one person may have been responsible for the contamination, we may be held
responsible for all of the clean-up costs. In addition, third parties may sue us
for damages and costs resulting from environmental contamination from that site.
Environmental laws also govern the presence, maintenance and removal of
asbestos-containing materials. These laws may impose fines and penalties on us
for the release of asbestos-containing materials and may allow third parties to
seek recovery from us for personal injury from exposure to asbestos fibers. We
have detected asbestos-containing materials at some of our Properties, but we do
not expect that it will result in material environmental costs or liabilities to
us.
Environmental laws and regulations also require the removal or upgrading
of certain underground storage tanks and regulate:
- the discharge of storm water, wastewater and any water pollutants;
- the emission of air pollutants;
- the generation, management and disposal of hazardous or toxic
chemicals, substances or wastes; and
- workplace health and safety.
Some of our tenants routinely handle hazardous substances and wastes as
part of their operations at our Properties. Environmental laws and regulations
subject our tenants, and potentially us, to liability resulting from these
activities. Environmental liabilities could also affect a tenant's ability to
make rental payments to us. We require our tenants to comply with these
environmental laws and regulations and to indemnify us for any related
liabilities. We are not aware of any material noncompliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of our Properties.
Independent environmental consultants have conducted Phase I or similar
environmental assessments at all of our Properties. We anticipate that
consultants will conduct similar environmental assessments on our future
acquisitions. This type of assessment generally includes a site inspection,
interviews and a public records review, but no subsurface sampling. These
assessments and certain additional investigations of our Properties have not
revealed any environmental liability that we believe would have a material
adverse effect on our business or results of operations.
The additional investigations included, as appropriate:
- asbestos surveys;
- radon surveys;
- lead surveys;
- additional public records review;
- subsurface sampling; and
- other testing.
Nevertheless, it is possible that the assessments on our Properties have
not revealed, or that the assessments on future acquisitions will not reveal,
all environmental liabilities. Consequently, there may be material environmental
liabilities of which we are unaware that may result in substantial costs to us
or our tenants and could have a material adverse effect on our business.
WE MAY INCUR SIGNIFICANT COSTS COMPLYING WITH THE AMERICANS WITH DISABILITIES
ACT AND SIMILAR LAWS
Under the Americans with Disabilities Act, places of public accommodation
and/or commercial facilities are required to meet federal requirements related
to access and use by disabled persons. We may be required to make substantial
capital expenditures at our Properties to comply with this law. In addition, our
noncompliance could result in the imposition of fines or an award of damages to
private litigants.
10
A number of additional federal, state and local laws and regulations exist
regarding access by disabled persons. These regulations may require
modifications to our Properties or may affect future renovations. This may limit
the overall returns on our investments.
We believe that our Properties are substantially in compliance with the
present requirements of the Americans with Disabilities Act and similar laws. We
have not, however, conducted an audit or an investigation of all of our
Properties to determine our compliance.
WE MAY INCUR SIGNIFICANT COSTS IF WE FAIL TO COMPLY WITH LAWS OR IF LAWS CHANGE
Our Properties are subject to many federal, state and local regulatory
requirements and to state and local fire and life-safety requirements. If we do
not comply with all of these requirements, we may have to pay fines to
governmental authorities or damage awards to private litigants.
We believe that our Properties are currently in compliance with all of
these regulatory requirements. We do not know whether these requirements will
change or whether new requirements will be imposed. Changes in these regulatory
requirements could require us to make significant unanticipated expenditures.
These expenditures could have an adverse effect on us and our ability to make
distributions to stockholders.
THE LOSS OF SERVICES OF ANY OF OUR EXECUTIVE OFFICERS COULD ADVERSELY AFFECT US
We depend upon the services of our executive officers. The loss of
services of any one of our executive officers could have an adverse effect on
our business, financial condition and prospects. We use the extensive personal
and business relationships that members of our management have developed over
time with owners of Life Science Facilities and with major Life Science Industry
tenants. We have employment agreements with most of our executive officers, but
we cannot assure you that our executive officers will remain employed with us.
WE MAY CHANGE OUR BUSINESS POLICIES WITHOUT STOCKHOLDER APPROVAL
Our Board of Directors determines all of our business policies, with
management's input, including our:
- status as a REIT;
- investment initiatives;
- growth management;
- debt incurrence;
- general financing;
- acquisition and selective development activities;
- shareholder distributions; and
- operations.
Our Board of Directors may amend or revise these policies at any time
without a vote of our stockholders. A change in these policies could adversely
affect us and our ability to make distributions to our stockholders.
WE COULD BECOME HIGHLY LEVERAGED AND OUR DEBT SERVICE OBLIGATIONS COULD INCREASE
Our organizational documents do not limit the amount of debt that we may
incur. Therefore, we could become highly leveraged. This would result in an
increase in our debt service obligations that could adversely affect our cash
flow and our ability to make distributions to our stockholders.
We have adopted a policy of incurring debt only if upon such incurrence
our debt to total market capitalization ratio would not exceed 57.5%. Our total
market capitalization is the market value of our capital stock, including
11
interests exchangeable for shares of capital stock, plus total debt. Our Board
of Directors could, however, change or eliminate this policy at any time. Higher
leverage also increases the risk of default on our debt obligations.
OUR DISTRIBUTIONS TO STOCKHOLDERS MAY DECLINE AT ANY TIME
We may not continue our current level of distributions to stockholders.
Our Board of Directors will determine future distributions based on a number of
factors, including:
- our amount of cash available for distribution;
- our financial condition;
- any decision by our Board of Directors to reinvest funds rather than
to distribute such funds;
- our capital expenditures;
- the annual distribution requirements under the REIT provisions of
the Internal Revenue Code; and
- other factors our Board of Directors deems relevant.
THE YEAR 2000 PROBLEM COULD DISRUPT OUR BUSINESS OPERATIONS
The year 2000 problem results from an inability of computer systems to
accurately recognize dates on and after January 1, 2000. The year 2000 problem
could lead to significant disruptions in our operations and in our tenants'
operations, which could adversely affect their ability to make rental payments
to us.
We have identified the following as the principal risks to us associated
with the year 2000 problem:
- disruption of our operations due to the failure of third parties,
including tenants, vendors and financial institutions, to achieve
year 2000 readiness; and
- business interruption due to building system failures at our
Properties.
We formed a Year 2000 Task Force to address the effects of the year
2000 problem on us. We have not experienced, and are not currently aware of,
any material year 2000-related problems that may pose significant operational
problems for our computer systems. We have also evaluated our significant
third-party vendors, our financial institutions and our major tenants for
their year 2000 readiness. We have not been informed by any of these parties
of the occurrence of any year 2000-related problems. However, we cannot
guarantee that our company, or our third-party vendors, financial
institutions or major tenants, will not experience any year 2000-related
problems in the future. If such problems do occur, there can be no assurance
that they will not have a material impact on our operations.
We have used internal staff and outside consultants to address our year
2000 problems. Our year 2000 costs to date have been minimal, and we do not
expect future costs to be material. However, unexpected future costs could be
significant and could have a material effect on our operations.
POSSIBLE FUTURE SALES OF SHARES OF OUR COMMON STOCK COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK
We cannot predict the effect, if any, of future sales of shares of our
common stock on the market price of our common stock prevailing from time to
time. Sales of substantial amounts of capital stock (including common stock
issued upon the exercise of stock options), or the perception that such sales
could occur, may adversely affect prevailing market prices for our common stock.
We have reserved for issuance to our officers, directors and employees
pursuant to our Amended and Restated 1997 Stock Award and Incentive Plan (the
"Plan") that number of shares of our common stock equal to 10% of the total
number of shares outstanding at any time, provided that in no event may the
number of shares of our common stock available for issuance under the Plan
exceed 3,000,000 shares at any time. Our Board of Directors has approved an
amendment to the Plan (the "Amendment") that would increase the number of shares
of our common stock reserved for issuance under the Plan to that number of
shares of our common stock equal to 12% of the total number of shares
12
outstanding at any time, provided that the number of shares available for
issuance under the Plan may still not exceed 3,000,000 shares at any time. The
Amendment is subject to approval by our stockholders at our annual meeting of
stockholders to be held on April 28, 2000.
As of December 31, 1999, there were options outstanding to purchase
785,000 shares of our common stock, of which options to purchase 426,003
shares of our common stock were exercisable. We have filed a registration
statement with respect to the issuance of shares of our common stock pursuant
to grants under the stock option plan. In addition, any shares issued under
our stock option plan will be available for sale in the public market from
time to time without restriction by persons who are not our Affiliates (as
defined in Rule 144 promulgated under the Securities Act). Affiliates will be
able to sell shares of our common stock pursuant to exemptions from the
registration requirements or upon registration.
FINANCIAL INFORMATION REGARDING INDUSTRY SEGMENTS AND OPERATIONS.
We are involved only in the real estate industry segment within the United
States, and we have no foreign operations. Accordingly, all financial statements
contained in this report relate to the real estate industry segment. See "Item
2. Properties" and "Item 8. Financial Statements and Supplementary Data" for
detailed financial information regarding our business.
EMPLOYEES
As of December 31, 1999, we had 38 full-time employees and one part-time
employee.
ITEM 2. PROPERTIES.
GENERAL.
Our Properties range in size from approximately 15,000 to 250,000 square
feet, are built to accommodate single or multiple tenants and are generally one
or two story concrete tilt-up or block and steel frame structures. The exteriors
typically resemble traditional suburban office properties, but interior
infrastructures are designed to accommodate the needs of Life Science Industry
tenants. These improvements typically are generic to Life Science Industry
tenants rather than specific to a particular tenant. As a result, we believe
that the improvements have long-term value and utility and are readily usable by
a wide range of Life Science Industry tenants. Generic infrastructure
improvements include:
- reinforced concrete floors;
- upgraded roof loading capacity;
- increased floor to ceiling heights;
- heavy-duty HVAC systems;
- advanced environmental control technology;
- significantly upgraded electrical, gas and plumbing infrastructure;
and
- laboratory benches.
We own fee simple title in each of our Properties, except with respect to:
- 1311, 1401 and 1431 Harbor Bay Parkway, in which we own a commercial
condominium interest, together with an undivided interest in the
common areas of the project in which the Property is a part; and
- 2425 Garcia Avenue, 2400/2450 Bayshore Parkway, 2625/2627/2631
Hanover Street, Buildings 79 & 96, Charlestown Navy Yard, and
8000/9000/10000 Virginia Manor Road,, in which we own ground
leasehold interests.
13
As of December 31, 1999, we had 169 leases with a total of 160 tenants,
and 27 of our Properties were single-tenant properties. Leases in our
multi-tenant buildings typically have terms of three to seven years, while the
single-tenant building leases typically have terms of 10 to 20 years. As of
December 31, 1999:
- approximately 79% of our leases (on a square footage basis) were
triple net leases, requiring tenants to pay substantially all real
estate taxes and insurance, common area and other operating expenses
(including increases thereto) in addition to base rent;
- approximately 16% of our leases (on a square footage basis) required
the tenants to pay a majority of operating expenses;
- approximately 85% of our leases (on a square footage basis)
contained effective annual rent escalations that are either fixed
(ranging from 2.5% to 4.0%) or indexed based on a consumer price
index or other index; and
- approximately 80% of our leases (on a square footage basis) provided
for the recapture of certain capital expenditures (such as HVAC
systems maintenance and/or replacement, roof replacement and parking
lot resurfacing), which we believe would typically be borne by the
landlord in traditional office leases.
Our leases also typically give us the right to review and approve tenant
alterations to the Property. Generally, tenant-installed improvements to the
facilities remain our property after termination of the lease. However, we are
permitted under the terms of most of our leases to require that the tenant
remove the improvements and restore the premises to their original condition.
As of December 31, 1999, we managed 57 of our Properties. The remaining
Property was managed by a third-party professional management company. We make
all material decisions with respect to this Property.
The following table sets forth pertinent information with respect to our
Properties as of December 31, 1999:
ANNUALIZED
YEAR BUILT/ RENTABLE PERCENTAGE BASE
PROPERTIES RENOVATED (1) SQUARE FEET LEASED (2) RENT (2)(3)
---------- ------------- ----------- ---------- -----------
SAN DIEGO
10933 North Torrey Pines 1971/1994 107,753 100% $ 2,353,543
Road
San Diego, CA
11099 North Torrey Pines 1986/1996 86,962 100 2,154,570
Road
San Diego, CA
3535 General Atomics Court 1986/1991 76,084 41 1,175,767
San Diego, CA
3565 General Atomics Court 1991 43,600 100 1,526,949
San Diego, CA
11025 Roselle Street 1983 18,173 100 401,568
San Diego, CA
4757 Nexus Centre Drive 1989 67,050 100 2,107,557
San Diego, CA
6166 Nancy Ridge Drive 1997 29,333 100 638,633
San Diego, CA
10505 Roselle Street late 1970's/1999 17,603 42 176,076
San Diego, CA
3770 Tansy Street 1978/1999 15,410 -- --
San Diego, CA
PERCENTAGE OF ANNUALIZED ANNUALIZED
AGGREGATE BASE RENT NET EFFECTIVE
PORTFOLIO PER LEASED RENT PER
ANNUALIZED SQUARE FOOT LEASED SQUARE
PROPERTIES BASE RENT (3) FOOT (4) MAJOR TENANTS
---------- --------- ----- -------- -------------
10933 North Torrey Pines 3.2% $21.84 16.41 The Scripps Research
Road Institute
San Diego, CA Advanced Tissue Sciences,
Inc.
11099 North Torrey Pines 2.9 24.78 22.96 Agouron Pharmaceuticals,
Road Inc. (5)
San Diego, CA Axys Pharmaceuticals, Inc.
3535 General Atomics Court 1.6 37.82 37.80 The Scripps Research
San Diego, CA Institute
Syntro Corporation(6)
3565 General Atomics Court 2.1 35.02 35.02 Agouron Pharmaceuticals,
San Diego, CA Inc. (5)
11025 Roselle Street 0.5 22.10 19.44 Collateral Therapeutics, Inc.
San Diego, CA Ciblex Corporation
4757 Nexus Centre Drive 2.9 31.43 24.53 Matrix Pharmaceutical, Inc.
San Diego, CA
6166 Nancy Ridge Drive 0.9 21.77 15.42 Arena Pharmaceuticals, Inc.
San Diego, CA
10505 Roselle Street 0.2 23.57 19.74 Structural GenomiX, Inc.(7)
San Diego, CA
3770 Tansy Street -- -- -- Vacant(7)
San Diego, CA
14
ANNUALIZED
YEAR BUILT/ RENTABLE PERCENTAGE BASE
PROPERTIES RENOVATED (1) SQUARE FEET LEASED (2) RENT (2)(3)
---------- ------------- ----------- ---------- -----------
3550 John Hopkins Court 1999 55,000 45 1,563,653
San Diego, CA
9363 Towne Centre Drive 1987 45,030 100 864,871
San Diego, CA
9373 Towne Centre Drive 1987 53,688 78 993,809
San Diego, CA
9393 Towne Centre Drive 1987 41,794 100 1,118,408
San Diego, CA
PASADENA
129/153/161 North Hill Street 1940's/1950's/ 51,980 -- --
Pasadena, CA 1960's
SAN FRANCISCO BAY AREA
1201 Harbor Bay Parkway 1983/1999 61,015 100 911,230
Alameda, CA
1311 Harbor Bay Parkway 1984 27,745 34 154,599
Alameda, CA
1401 Harbor Pay Parkway 1986/1994 47,777 100 518,593
Alameda, CA
1431 Harbor Bay Parkway 1985/1994 68,711 100 1,413,968
Alameda, CA
819-863 Mitten Road & 866 1962/1997 153,584 93 2,710,279
Malcolm Road
Burlingame, CA
2625/2627/2631 Hanover Street 1968/1985 32,074 100 1,058,442
Palo Alto, CA
2425 Garcia Avenue & 1980 98,964 100 3,639,360
2400/2450 Bayshore Parkway
Mountain View, CA
SEATTLE
1102/1124 Columbia Street 1975/1997 209,828 94 5,307,330
Seattle, WA
3000/3018 Western Avenue 1929/1990 47,746 100 1,458,386
Seattle, Washington
3005 First Avenue 1980/1990 70,647 100 2,190,993
Seattle, Washington
SUBURBAN WASHINGTON, D.C.
300 Professional Drive 1989 47,558 51 475,448
Gaithersburg, MD
401 Professional Drive 1987 62,739 100 1,038,585
Gaithersburg, MD
25/35/45 West Watkins Mill 1989/1997 138,938 100 1,984,161
Road
Gaithersburg, MD
708 Quince Orchard Road 1982/1997 49,225 100 1,461,699
Gaithersburg, MD
940 Clopper Road 1989 44,464 84 501,605
Gaithersburg, MD
PERCENTAGE OF ANNUALIZED ANNUALIZED
AGGREGATE BASE RENT NET EFFECTIVE
PORTFOLIO PER LEASED RENT PER
ANNUALIZED SQUARE FOOT LEASED SQUARE
PROPERTIES BASE RENT (3) FOOT (4) MAJOR TENANTS
---------- --------- ----- -------- -------------
3550 John Hopkins Court 2.1 62.55 62.55 Axys Pharmaceuticals, Inc. (8)
San Diego, CA Genos Biosciences, Inc. (8)
9363 Towne Centre Drive 1.2 19.21 19.21 Orincon Corporation
San Diego, CA
9373 Towne Centre Drive 1.3 23.88 23.87 Amylin Pharmaceuticals, Inc.
San Diego, CA Vical Incorporated
9393 Towne Centre Drive 1.5 26.76 26.76 Cytel Corporation
San Diego, CA
PASADENA
129/153/161 North Hill Street -- -- -- Vacant(7)
Pasadena, CA
SAN FRANCISCO BAY AREA
1201 Harbor Bay Parkway 1.2 14.93 9.80 Avigen, Inc.
Alameda, CA Lucent Technologies Inc.
1311 Harbor Bay Parkway 0.2 16.58 15.22 Berkeley Heartlab, Inc.
Alameda, CA
1401 Harbor Pay Parkway 0.7 10.85 10.51 Chiron Diagnostics
Alameda, CA
1431 Harbor Bay Parkway 1.9 20.58 16.57 U.S. Food & Drug
Alameda, CA Administration
819-863 Mitten Road & 866 3.7 18.88 16.44 Valentis, Inc.
Malcolm Road Mills Peninsula Medical Group,
Burlingame, CA Inc.
U.S. Federal Aviation
Administration
2625/2627/2631 Hanover Street 1.4 33.00 33.00 Alza Corporation
Palo Alto, CA
2425 Garcia Avenue & 4.9 36.77 36.77 Scios, Inc.
2400/2450 Bayshore Parkway Google, Inc.
Mountain View, CA
SEATTLE
7.2 27.00 25.69 Corixa Corporation
1102/1124 Columbia Street Fred Hutchinson Cancer
Seattle, WA Research Center
Swedish Medical Center
2.0 30.54 26.21 University of Washington
3000/3018 Western Avenue
Seattle, Washington
3.0 31.01 26.91 Dendreon Corporation
3005 First Avenue
Seattle, Washington
SUBURBAN WASHINGTON, D.C.
300 Professional Drive 0.6 19.68 18.85 Antex Biologics Inc.
Gaithersburg, MD
401 Professional Drive 1.4 16.55 16.55 Gillette Capital
Gaithersburg, MD Corporation(9)
25/35/45 West Watkins Mill 2.7 14.28 14.02 Genetic Therapy, Inc.(10)
Road MedImmune, Inc.
Gaithersburg, MD
708 Quince Orchard Road 2.0 29.69 18.27 Gene Logic, Inc.
Gaithersburg, MD
940 Clopper Road 0.7 13.36 11.43 Immunomatrix, Inc.
Gaithersburg, MD BHC Securities, Inc.
15
ANNUALIZED
YEAR BUILT/ RENTABLE PERCENTAGE BASE
PROPERTIES RENOVATED (1) SQUARE FEET LEASED (2) RENT (2)(3)
---------- ------------- ----------- ---------- -----------
1401 Research Boulevard 1966 48,800 100 722,904
Rockville, MD
1500 East Gude Drive 1981/1986 45,989 100 624,334
Rockville, MD
1413 Research Boulevard 1967/1996 105,000 100 1,815,917
Rockville, MD
1550 East Gude Drive 1981/1995 44,500 100 735,374
Rockville, MD
1330 Piccard Drive 1978/1994 131,511 100 1,903,653
Rockville, MD
14225 Newbrook Drive 1992 248,186 100 4,341,125
Chantilly, VA
8000/9000/10000 Virginia 1990 191,884 100 1,968,601
Manor Road
Beltsville, MD
10150 Old Columbia Road 1983/1997 75,500 100 1,087,343
Columbia, MD
19 Firstfield Road 1974 25,175 100 417,446
Gaithersburg, MD
15020 Shady Grove Road 1987 41,062 100 759,754
Gaithersburg, MD
2001 Aliceanna Street early 1950's/1995 179,397 84 862,752
Baltimore, MD
50 West Watkins Mill Road 1988 57,410 100 677,438
Gaithersburg, MD
EASTERN MASSACHUSETTS
Buildings 79 & 96 Charlestown 1880/1991 24,940 100 710,000
Navy Yard
Boston, MA
280 Pond Street 1960's 24,867 100 404,622
Randolph, MA
60 Westview Street 1975 32,000 100 832,000
Lexington, MA
377 Plantation Street 1993 92,711 100 2,185,284
Worcester, MA
620 Memorial Drive 1920's/1997 96,500 100 3,947,688
Cambridge, MA
One Innovation Drive 1991 113,571 98 2,119,665
Worcester, MA
NEW JERSEY/SUBURBAN PHILADELPHIA
215 College Road 1968/1974/ 106,036 97 1,585,807
Paramus, NJ 1984
170 Williams Drive 1982/1994 37,000 100 536,500
Ramsey, NJ
PERCENTAGE OF ANNUALIZED ANNUALIZED
AGGREGATE BASE RENT NET EFFECTIVE
PORTFOLIO PER LEASED RENT PER
ANNUALIZED SQUARE FOOT LEASED SQUARE
PROPERTIES BASE RENT (3) FOOT (4) MAJOR TENANTS
---------- --------- ----- -------- -------------
1401 Research Boulevard 1.0 14.81 14.04 U.S. Bureau of Alcohol
Rockville, MD Tobacco and Firearms
1500 East Gude Drive 0.9 13.58 12.72 bioMerieux Vitek, Inc.
Rockville, MD
1413 Research Boulevard 2.5 17.29 15.65 U.S. Army Corps of
Rockville, MD Engineers
1550 East Gude Drive 1.0 16.53 16.08 Shire Pharmaceuticals Group
Rockville, MD plc
1330 Piccard Drive 2.6 14.48 14.46 Intracel Corporation
Rockville, MD
14225 Newbrook Drive 5.7 17.49 17.49 American Medical
Chantilly, VA Laboratories, Inc.
8000/9000/10000 Virginia 2.7 10.26 10.17 Digene Corporation
Manor Road North American Vaccine, Inc.
Beltsville, MD
10150 Old Columbia Road 1.5 14.40 11.37 North American Vaccine, Inc.
Columbia, MD
19 Firstfield Road 0.6 16.58 16.58 Genetic Therapy, Inc. (10)
Gaithersburg, MD
15020 Shady Grove Road 1.0 18.50 11.25 Human Genome Sciences, Inc.
Gaithersburg, MD
2001 Aliceanna Street 1.2 5.74 5.74 Maryland Economic
Baltimore, MD Development Corporation
The National Aquarium of
Baltimore, Inc.
50 West Watkins Mill Road 0.9 11.80 11.80 Federal Express Corporation
Gaithersburg, MD
EASTERN MASSACHUSETTS
Buildings 79 & 96 Charlestown 1.0 28.47 26.34 Diacrin, Inc.
Navy Yard
Boston, MA
280 Pond Street 0.5 16.27 16.27 Ares Advanced Technology,
Randolph, MA Inc.
60 Westview Street 1.1 26.00 23.61 U.S. Environmental Protection
Lexington, MA Agency
377 Plantation Street 3.0 23.57 23.57 University of Massachusetts
Worcester, MA Phytera, Inc.
620 Memorial Drive 5.3 40.91 40.91 Pfizer, Inc.
Cambridge, MA
One Innovation Drive 2.9 19.04 19.04 AstraZeneca plc Massachusetts
Worcester, MA Biotechnology
Research Institute, Inc.
NEW JERSEY/SUBURBAN PHILADELPHIA
215 College Road 2.1 15.49 14.91 Gryphon Development, Inc.
Paramus, NJ Synaptic Pharmaceutical
Corporation
170 Williams Drive 0.7 14.50 14.49 Alteon Inc.
Ramsey, NJ
16
ANNUALIZED
YEAR BUILT/ RENTABLE PERCENTAGE BASE
PROPERTIES RENOVATED (1) SQUARE FEET LEASED (2) RENT (2)(3)
---------- ------------- ----------- ---------- -----------
100 Phillips Parkway late 1960's 74,000 -- --
Montvale, NJ
5100/5110 Campus Drive 1989 42,782 100 528,483
Plymouth Meeting, PA
702 Electronic Drive 1983/1998 40,000 100 937,527
Horsham, PA
279 Princeton Parkway 1984 42,600 100 530,182
Princeton, NJ
SOUTHEAST
100 Capitola Drive 1986 65,114 100 1,030,700
Durham, NC
800 & 801 Capitola Drive 1985 119,916 100 1,556,753
Durham, NC
150/154 Technology Parkway 1976/1985/ 37,080 100 675,560
Norcross, GA 1993
5 Triangle Drive 1981 32,120 100 486,825
Research Triangle Park, NC
Total/Weighted Average (10): 4,046,126 91.5% $73,884,319
========= ===== ===========
PERCENTAGE OF ANNUALIZED ANNUALIZED
AGGREGATE BASE RENT NET EFFECTIVE
PORTFOLIO PER LEASED RENT PER
ANNUALIZED SQUARE FOOT LEASED SQUARE
PROPERTIES BASE RENT (3) FOOT (4) MAJOR TENANTS
---------- --------- ----- -------- -------------
100 Phillips Parkway -- -- -- Vacant(7)
Montvale, NJ
5100/5110 Campus Drive 0.7 12.35 11.82 Gen Trak, Inc.
Plymouth Meeting, PA Biomol Research Laboratories,
Inc.
Magainin Pharmaceuticals Inc.
702 Electronic Drive 1.3 23.44 23.44 Cell Pathways, Inc.
Horsham, PA
279 Princeton Parkway 0.7 12.45 12.45 Coelacanth Chemical
Princeton, NJ Corporation
SOUTHEAST
100 Capitola Drive 1.4 15.83 9.99 American Social Health
Durham, NC Association, Inc.
Batelle Survey Research, Inc.
800 & 801 Capitola Drive 2.1 12.98 11.21 Triangle Laboratories, Inc.
Durham, NC Ventana Communications
Group, Inc.
150/154 Technology Parkway 0.9 18.22 18.10 CytRx Corporation
Norcross, GA Oread, Inc.
5 Triangle Drive 0.7 15.16 14.85 Mantech Environmental
Research Triangle Park, NC Technology, Inc.
City Search, Inc.
Total/Weighted Average (11): 100.0% $19.97 $18.47
====== ====== ======
- ----------
(1) Includes year in which construction was completed and, where applicable,
year of most recent major renovation.
(2) Based on all leases at the respective Property in effect as of December
31, 1999.
(3) Annualized Base Rent means the annualized fixed base rental amount in
effect as of December 31, 1999 (using rental revenue computed on a
straight-line basis in accordance with GAAP) paid by tenants under the
terms of their leases. This amount, divided by the rentable square feet
leased at the Property as of December 31, 1999, is the Annualized Base
Rent per Leased Square Foot.
(4) Annualized Net Effective Rent is the Annualized Base Rent in effect as of
December 31, 1999, less (for gross leases) real estate taxes and
insurance, common area and other operating expenses and (for all leases)
amortized tenant improvements and leasing commissions. This amount,
divided by the rentable square feet leased at the Property as of December
31, 1999, is the Annualized Net Effective Rent per Leased Square Foot.
(5) Agouron Pharmaceuticals, Inc. is a wholly owned subsidiary of
Warner-Lambert Company.
(6) Syntro Corporation is a wholly owned subsidiary of Schering-Plough
Corporation.
(7) All, or a significant portion, of this Property is currently under
renovation.
(8) The leases with Axys Pharmaceuticals, Inc. and Genos Biosciences, Inc.
terminated on December 31, 1999 and the Annualized Base Rent per Leased
Square Foot and the Annualized Net Effective Rent per Leased Square
Foot reflect the short-term nature of these leases.
(9) Gillette Capital Corporation is a wholly owned subsidiary of The Gillette
Company, the guarantor of the lessee's obligations under the lease.
(10) Genetic Therapy, Inc. is a wholly owned subsidiary of Novartis AG.
(11) Weighted Average based on a percentage of aggregate leased square feet.
17
LOCATION AND TYPE OF SPACE
The following table sets forth, as of December 31, 1999, the gross
revenues and type of space within our Properties by rentable square footage in
each of our existing markets.
GROSS REVENUES AND TYPE OF SPACE
TOTAL RENTABLE % OF TOTAL RENTABLE ANNUALIZED % OF ANNUALIZED
GEOGRAPHIC AREA SQUARE FOOTAGE SQUARE FOOTAGE BASE RENT(1) BASE RENT
- --------------- -------------- ------------------- ------------ ---------------
San Diego 657,480 16.2% $15,075,404 20.4%
Pasadena 51,980 1.3 - 0.0
San Francisco Bay Area 489,870 12.1 10,406,471 14.1
Seattle 328,221 8.1 8,956,709 12.1
Suburban Washington, D.C. 1,537,338 38.0 21,378,139 28.9
Eastern Massachusetts 384,589 9.5 10,199,259 13.8
New Jersey/Suburban Philadelphia 342,418 8.5 4,118,499 5.6
Southeast 254,230 6.3 3,749,838 5.1
--------- ------ ----------- ------
Total 4,046,126 100.0% $73,884,319 100.0%
========== ====== =========== ======
- ----------
(1) Annualized Base Rent means the annualized fixed base rental amount in
effect as of December 31, 1999 (using rental revenue computed on a
straight-line basis in accordance with GAAP) paid by tenants under the
terms of their leases.
TENANTS
Our Properties are leased principally to tenants engaged in a variety of
activities in the Life Science Industry. The following table sets forth
information regarding leases with our 20 largest tenants based upon Annualized
Base Rent as of December 31, 1999.
18
20 LARGEST TENANTS
REMAIN-
ING INI- APPROXIMATE PERCENTAGE OF
NUMBER TIAL LEASE AGGREGATE AGGREGATE
OF TERM IN RENTABLE LEASED
TENANT LEASES YEARS SQUARE FEET SQUARE FEET
------ ------ ----- ----------- -----------
American Medical
Laboratories, Inc. 1 17.0 248,186 6.7%
Pfizer, Inc. 1 12.3 96,500 2.6%
Corixa Corporation 1 5.0 69,997 1.9%
Agouron Pharmaceuticals, 2 0.8 70,506 1.9%
Inc.(3) 1.8
Scios, Inc. 1 0.1 56,332 1.5%
0.3
Dendreon Corporation 1 9.0 70,647 1.9%
Matrix Pharmaceutical, Inc. 1 11.2 67,050 1.8%
Axys Pharmaceuticals, Inc. 2 2.0 70,056 1.9%
Intracel Corporation 1 7.1 131,511 3.6%
U.S. Army Corps of 1 2.4 105,000 2.8%
Engineers
Advanced Tissue
Sciences, Inc. 2 0.7 84,524 2.3%
North American Vaccine, Inc. 2 1.2 110,531 3.0%
8.2
Gene Logic Inc. 1 7.9 49,225 1.3%
University of Washington 1 14.1 47,746 1.3%
Google, Inc. 1 4.6 42,632 1.2%
U.S. Food & Drug 1 14.1 68,711 1.9%
Administration
Fred Hutchinson Cancer 2 4.9 66,754 1.8%
Research Center
The Scripps Research 2 0.4 41,538 1.1%
Institute 1.8
MedImmune, Inc. 2 6.9 84,668 2.3%
University of Massachusetts 1 16.0 80,153 2.2%
-- ----- --------- -----
Total/Weighted Average (4) 27 6.7 1,662,267 45.0%
== ===== ========= =====
PERCENTAGE OF
PERCENTAGE OF AGGREGATE
AGGREGATE ANNUALIZED PORTFOLIO
ANNUALIZED PORTFOLIO AN- NET EFFECTIVE ANNUALIZED
BASE RENT (IN NUALIZED RENT (IN NET EFFECTIVE
TENANT THOUSANDS)(1) BASE RENT THOUSANDS)(2) RENT
------ ------------- --------- ------------- ----
American Medical
Laboratories, Inc. $4,341 5.9% $4,341 6.4%
Pfizer, Inc. 3,948 5.3% 3,948 5.9%
Corixa Corporation 2,672 3.6% 2,418 3.6%
Agouron Pharmaceuticals, 2,309 3.1% 2,233 3.3%
Inc.(3)
Scios, Inc. 2,204 3.0% 2,204 3.3%
Dendreon Corporation 2,191 3.0% 1,901 2.8%
Matrix Pharmaceutical, Inc. 2,108 2.9% 1,645 2.4%
Axys Pharmaceuticals, Inc. 1,945 2.6% 1,864 2.8%
Intracel Corporation 1,904 2.6% 1,902 2.8%
U.S. Army Corps of 1,816 2.5% 1,643 2.4%
Engineers
Advanced Tissue 1,723 2.3% 1,388 2.1%
Sciences, Inc.
North American Vaccine, Inc. 1,496 2.0% 1,267 1.9%
Gene Logic Inc. 1,462 2.0% 900 1.3%
University of Washington 1,458 2.0% 1,251 1.9%
Google, Inc. 1,436 1.9% 1,436 2.1%
U.S. Food & Drug 1,414 1.9% 1,138 1.7%
Administration
Fred Hutchinson Cancer 1,406 1.9% 1,403 2.1%
Research Center
The Scripps Research 1,376 1.9% 1,126 1.7%
Institute
MedImmune, Inc. 1,324 1.8% 1,305 1.9%
University of Massachusetts 1,315 1.8% 1,298 1.9%
--------- ----- ------ -----
Total/Weighted Average (4) $39,848 54.0% $36,611 54.3%
======= ===== ======= =====
19
- ----------
(1) Annualized Base Rent means the annualized fixed base rental amount in
effect as of December 31, 1999 (using rental revenue computed on a
straight-line basis in accordance with GAAP) paid by tenants under the
terms of their leases.
(2) Annualized Net Effective Rent is the Annualized Base Rent in effect as of
December 31, 1999 (using rental revenue computed on a straight-line basis
in accordance with GAAP), less (for gross leases) real estate taxes and
insurance, common area and other operating expenses and (for all leases)
amortized tenant improvements and leasing commissions.
(3) Agouron Pharmaceuticals, Inc. is a wholly owned subsidiary of
Warner-Lambert Company.
(4) Weighted Average based on percentage of aggregate leased square feet.
ITEM 3. LEGAL PROCEEDINGS.
To our knowledge, no litigation is pending against us, other than routine
actions and administrative proceedings, substantially all of which are expected
to be covered by liability insurance or which, in the aggregate, are not
expected to have a material adverse effect on our financial condition, results
of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of security holders in the fourth
quarter of the fiscal year ended December 31, 1999.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "ARE". On March 22, 2000, the last reported sales price per share of
our common stock was $31-1/8, and there were approximately 233 holders of
record of our common stock (excluding beneficial owners whose shares are held in
the name of Cede & Co.). The following table sets forth the quarterly high and
low sales prices per share of our common stock as reported on the NYSE and the
distributions paid by us with respect to each such period.
PER SHARE
PERIOD HIGH LOW DISTRIBUTION
- ------ ---- --- ------------
1998
First Quarter................... 34-9/16 30-7/8 $0.40
Second Quarter.................. 34-1/2 28-1/2 $0.40
Third Quarter................... 31-11/16 25-3/16 $0.40
Fourth Quarter.................. 31-15/16 25-15/16 $0.40
1999
First Quarter................... 31-9/16 25-1/8 $0.40
Second Quarter.................. 33 24-7/8 $0.43
Third Quarter................... 31-7/16 28-7/8 $0.43
Fourth Quarter.................. 32 27-3/4 $0.43
Future distributions on our common stock will be determined by our Board
of Directors and will be dependent upon a number of factors, including actual
cash available for distribution, our financial condition and capital
requirements, the annual distribution requirements under the REIT provisions of
the Internal Revenue Code and such other factors as our Board of Directors deems
relevant. To maintain our qualification as a REIT, we must make annual
distributions to stockholders of at least 95% of our taxable income for the
current taxable year, and for taxable years beginning after December 31, 2000,
we must make annual distributions to stockholders of at least 90% of our taxable
income, in each case determined without regard to deductions for dividends paid
and by excluding any net capital gains. Under certain circumstances, we may be
required to make distributions in excess of cash flow available for
distributions to meet the distribution requirements. In that case, we may borrow
funds or may raise funds through the issuance of additional debt or equity
capital. We cannot assure you that we will make any future distributions.
21
ITEM 6. SELECTED FINANCIAL DATA
The following table should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 1996 1995
-------------- --------------- --------------- ------------ ------------
OPERATING DATA:
Total revenue ....................................... $ 86,262 $ 61,016 $ 34,846 $ 17,673 $ 9,923
Total expenses ...................................... 64,209 41,613 37,643 15,498 9,057
-------------- --------------- --------------- ------------ ------------
Income (loss) from operations ....................... 22,053 19,403 (2,797) 2,175 866
Charge in lieu of taxes ............................. - - - - (105)
-------------- --------------- --------------- ------------ ------------
Net income (loss) ................................... $ 22,053 $ 19,403 $ (2,797) $ 2,175 $ 761
============== =============== =============== ============ ============
Net income (loss) per share of common stock (pro
forma for 1997, pro forma and restated for
1996 and 1995)
- Basic ........................................ $ 1.48 $ 1.60 $ (0.35) $ 0.60 $ 0.43
============== =============== =============== ============ ============
- Diluted ...................................... $ 1.46 $ 1.58 $ (0.35) $ 0.60 $ 0.43
============== =============== =============== ============ ============
Weighted average shares of common stock
outstanding (pro forma for 1997, pro forma
and restated for 1996 and 1995) (1)
- Basic ........................................ 13,525,840 12,098,959 8,075,864 3,642,131 1,765,923
============== =============== =============== ============ ============
- Diluted ...................................... 13,670,568 12,306,470 8,075,864 3,642,131 1,765,923
============== =============== =============== ============ ============
Cash dividends declared per share of common
stock (pro forma for 1997, pro forma and
restated for 1996 and 1995) ...................... $ 1.69 $ 1.60 $ 1.60 $ 0.87 $ 0.51
============== =============== =============== ============ ============
BALANCE SHEET DATA (AT YEAR END):
Rental properties - net of accumulated
depreciation...................................... $ 554,706 $ 471,907 $ 227,076 $ 146,960 $ 54,353
Total assets ........................................ $ 643,118 $ 530,296 $ 248,454 $ 160,480 $ 58,702
Mortgage loans payable and unsecured line of
credit ........................................... $ 350,512 $ 309,829 $ 70,817 $ 113,182 $ 40,894
Total liabilities ................................... $ 380,535 $ 330,527 $ 81,537 $ 120,907 $ 42,369
Mandatorily redeemable Series V preferred stock ..... $ - $ - $ - $ 25,042 $ -
Stockholders' equity ................................ $ 262,583 $ 199,769 $ 166,917 $ 14,531 $ 16,333
OTHER DATA:
Net income (loss) ................................... $ 22,053 $ 19,403 $ (2,797) $ 2,175 $ 761
Less:
Preferred dividends ................................. (2,036) - - - -
Add:
Depreciation and amortization ....................... 18,532 10,296 4,866 2,405 1,668
-------------- --------------- --------------- ------------ ------------
Funds from operations (2) ........................... $ 38,549 $ 29,699 $ 2,069 $ 4,580 $ 2,429
============== =============== =============== ============ ============
Cash flows from operating activities ................ $ 42,295 $ 26,111 $ 3,883 $ (1,646) $ 355
Cash flows from investing activities ................ $ (109,833) $ (246,753) $ (87,620) $ (94,900) $ (1,554)
Cash flows from financing activities ................ $ 69,430 $ 220,136 $ 84,101 $ 97,323 $ 927
Number of properties owned at year end .............. 58 51 22 12 4
Rentable square feet of properties owned
at year end ...................................... 4,046,126 3,588,154 1,747,837 1,031,070 313,042
Occupancy of properties owned at year end ........... 92%(3) 93%(3) 97% 97% 96%
22
(1) Pro forma shares of common stock outstanding for the years ended December
31, 1997 and 1996 include all shares outstanding after giving effect to the
initial public offering, weighted for the period beginning from the date of
the Offering, conversion of all series of preferred stock, the 1,765.923 to
1 stock split, the issuance of the stock grants and exercise of substitute
stock options. Pro forma restated shares of common stock outstanding for
the year ended December 31, 1995 also include shares outstanding after
giving effect to the 1,765.923 to 1 stock split.
(2) We compute funds from operations ("FFO") in accordance with standards
established by the Board of Governors of NAREIT in its October 1999 White
Paper ("White Paper"). The White Paper defines FFO as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from sales
of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. FFO
for 1997 has been restated to conform to the White Paper as amended in
October 1999. FFO for 1997 has been impacted by non-recurring expenses
associated with the initial public offering of $12,197,000, and the
write-off of unamortized loan costs of $2,295,000. For a more detailed
discussion of FFO, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Funds from Operations."
(3) Includes properties under renovation.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The terms "we," "our," "ours" and "us" as used in this Form 10-K
refer to Alexandria Real Estate Equities, Inc. and its subsidiaries. The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-K.
OVERVIEW
In June 1997, we completed an initial public offering of our common
stock (the "Offering"). Since the Offering, we have devoted substantially all
of our resources to the ownership, operation, management, acquisition,
conversion, retrofit, expansion and selective development and redevelopment
of high quality, strategically located properties leased principally to
tenants in the life science industry (we refer to these properties as "Life
Science Facilities").
In 1999, we:
- Sold 1,150,000 shares of common stock resulting in aggregate
proceeds of approximately $29.8 million, net of underwriting
discounts and commissions and other offering costs.
- Sold 1,543,500 shares of Series A cumulative redeemable preferred
stock resulting in aggregate proceeds of approximately $36.9
million, net of underwriters' discounts and commissions and other
offering costs.
- Acquired seven properties with an aggregate of approximately
437,000 rentable square feet. In addition, we completed the
development of one property with approximately 55,000 rentable
square feet.
Our primary source of revenue is rental income and tenant recoveries
from leases at the properties we own. Of the 58 properties we owned as of
December 31, 1999, four were acquired in calendar year 1994, eight in 1996,
10 in 1997 (the "1997 Properties"), 29 in 1998 (the "1998 Properties") and
seven in 1999. In addition, we completed the development of one property in
1999 (together with the seven properties acquired in 1999, the "1999
Properties"). As a result of our acquisition activities, there were
significant increases in total revenues and expenses for 1999 as compared to
1998.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
1998
Rental revenue increased by $19.9 million, or 41%, to $68.4 million
for 1999 compared to $48.5 million for 1998. The increase resulted primarily
from the 1998 Properties being owned for a full period and the addition of
the 1999 Properties. Rental revenue from the properties we acquired before
January 1, 1998 (the "1999 Same Properties") increased by $1.1 million, or
3.8%, due to increases in rental rates and occupancy.
Tenant recoveries increased by $5.0 million, or 44%, to $16.3
million for 1999 compared to $11.3 million for 1998. The increase resulted
primarily from the 1998 Properties being owned for a full period and the
addition of the 1999 Properties. Tenant recoveries for the 1999 Same
Properties increased by $838,000, or 11.7%, generally due to an increase in
recoverable operating expenses.
24
Interest and other income increased by $298,000, or 24%, to $1.5
million for 1999 compared to $1.2 million for 1998. The increase resulted
from an increase in storage and parking income at certain of our properties
and from the increase in interest income from our secured note receivable,
which was funded in March 1998.
Rental operating expenses increased by $5.6 million, or 42%, to
$19.0 million for 1999 compared to $13.4 million for 1998. The increase
resulted primarily from the 1998 Properties being owned for a full period and
the addition of the 1999 Properties. Operating expenses for the 1999 Same
Properties increased by $711,000, or 9.2%, primarily due to the increase in
property taxes. The increase in property taxes, substantially all of which
was recoverable from the tenants at the respective properties, was partially
offset by lower premiums on our blanket property and liability insurance
policies for all of our properties.
The following is a comparison of property operating data for the
1999 Same Properties computed under generally accepted accounting principles
("GAAP Basis") and under generally accepted accounting principles, adjusted
to exclude the effect of straight line rent adjustments required by GAAP
("Cash Basis") (in thousands, except percentage data):
FOR THE YEAR ENDED
DECEMBER 31
--------------------------
1999 1998 CHANGE
------------------------------------------
GAAP BASIS:
Revenue $37,109 $35,244 5.3%
Rental operating expenses 8,435 7,724 9.2%
------------------------------------------
Net operating income $28,674 $27,520 4.2%
==========================================
CASH BASIS (1):
Revenue $34,427 $31,839 8.1%
Rental operating expenses 7,902 7,176 10.1%
------------------------------------------
Net operating income $26,525 $24,663 7.5%
==========================================
(1) The Cash Basis presentation excludes the results for 1431 Harbor Bay
Parkway, Alameda, California. The lease for this property (which was in
place when we acquired the property in 1996) contains significant step-down
provisions that affected the cash rent paid by the tenant beginning in
January 1999. As a result, cash rent paid was reduced from $2,948,000 for
1998 to $2,128,000 for 1999. The lease, which expires in January 2014,
requires another step-down in rent beginning in January 2004 to $750,000
per year. If this property was included in the Cash Basis presentation for
1999, revenue would have increased 5.0%, rental operating expenses would
have increased 9.2% and net operating income would have increased 3.8%. On
a GAAP Basis, rental income from this property throughout 1998 and 1999 was
$1,414,000.
General and administrative expenses increased by $3.1 million, or
79%, to $7.0 million for 1999 compared to $3.9 million for 1998 due to the
continued expansion in the scope of our operations.
Interest expense increased by $5.7 million, or 40%, to $19.7 million
for 1999 compared to $14.0 million for 1998. The increase resulted primarily
from the indebtedness we incurred to acquire the 1998 Properties and the 1999
Properties.
25
Depreciation and amortization increased by $8.2 million, or 80%, to
$18.5 million for 1999 compared to $10.3 million for 1998. The increase
resulted primarily from depreciation associated with the 1998 Properties
being owned for a full period and the addition of the 1999 Properties.
As a result of the foregoing, net income was $22.1 million for 1999
compared to $19.4 million for 1998.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31,
1997
Rental revenue increased by $22.9 million, or 89%, to $48.5 million
for 1998 compared to $25.6 million for 1997. The increase resulted primarily
from the 1997 Properties being owned for a full period and the addition of
the 1998 Properties. A portion of the increase was due to $277,000 in rental
termination payments received in 1998 associated with leases at two of the
properties. Rental revenue from the properties we acquired before January 1,
1997 (the "1998 Same Properties") increased by $234,000, or 1.6%, due to
increases in rental rates and occupancy.
Tenant recoveries increased by $2.9 million, or 35%, to $11.3
million for 1998 compared to $8.4 million for 1997. The increase resulted
primarily from the 1997 Properties being owned for a full period and the
addition of the 1998 Properties. Tenant recoveries for the 1998 Same
Properties increased by $149,000, or 2.8%, generally due to the improved
identification and recovery of costs at certain properties.
Interest and other income increased by $398,000, or 48%, to $1.2
million for 1998 compared to $836,000 for 1997, resulting primarily from
$511,000 of interest income from a $6.0 million secured loan made in
connection with the acquisition of one of the 1998 Properties. This increase
was partially offset by a decrease in interest income resulting from a lower
level of cash equivalents in 1998 compared to 1997, because cash equivalents
had been used to acquire properties.
Rental operating expenses increased by $4.6 million, or 53%, to
$13.4 million for 1998 compared to $8.8 million for 1997. The increase
resulted almost entirely from the 1997 Properties being owned for a full
period and the addition of the 1998 Properties. Operating expenses for the
1998 Same Properties decreased by $145,000, or 2.5%, primarily due to lower
premiums on our blanket property and liability insurance policies.
26
The following is a comparison of property operating data computed on
a GAAP Basis and on a Cash Basis for the 1998 Same Properties (in thousands,
except percentage data):
FOR THE YEAR ENDED
DECEMBER 31
--------------------------
1998 1997 CHANGE
------------------------------------------
GAAP BASIS:
Revenue $20,878 $20,432 2.2%
Rental operating expenses 5,616 5,761 -2.5%
------------------------------------------
Net operating income $15,262 $14,671 4.0%
==========================================
CASH BASIS:
Revenue $22,401 $21,520 4.1%
Rental operating expenses 5,616 5,761 -2.5%
------------------------------------------
Net operating income $16,785 $15,759 6.5%
==========================================
General and administrative expenses increased by $1.4 million, or
57%, to $3.9 million for 1998 compared to $2.5 million for 1997 due to owning
a larger portfolio of properties in 1998 compared to 1997 and increased costs
incurred as a result of being a public company for a full year.
Interest expense increased by $7.0 million, or 100%, to $14.0
million for 1998 compared to $7.0 million for 1997. The increase resulted
from indebtedness we incurred to acquire the 1997 Properties and the 1998
Properties, offset by a reduction in ongoing interest expense due to the
payoff of $72.7 million in secured notes payable in June 1997 with proceeds
from the Offering.
We incurred $12.2 million of non-recurring expenses in 1997
associated with the Offering.
Write-off of unamortized loan costs in 1997 represents the write-off
of $2.1 million in loan costs associated with $72.7 million of secured notes
we repaid with proceeds of the Offering and $148,000 in loan costs associated
with the payoff of debt in November 1997.
Depreciation and amortization increased by $5.4 million, or 112%, to
$10.3 million for 1998 compared to $4.9 million for 1997. The increase
resulted primarily from depreciation associated with the 1997 Properties
being owned for a full period and the addition of the 1998 Properties.
As a result of the foregoing, net income was $19.4 million for 1998
compared to a net loss of $2.8 million for 1997.
27
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash provided by operating activities for 1999 increased by
$16.2 million to $42.3 million compared to $26.1 million for 1998. The
increase resulted primarily from operating cash flows from the addition of
the 1998 Properties and the 1999 Properties.
Net cash used in investing activities decreased by $137.0 million to
$109.8 million for 1999 compared to $246.8 million for 1998. The decrease was
primarily due to a lower level of property acquisitions during 1999 compared
to 1998.
Net cash provided by financing activities decreased by $150.7
million to $69.4 million for 1999 compared to $220.1 million for 1998. Cash
provided by financing activities for 1999 primarily consisted of net proceeds
from the issuance/repurchase of our common stock, issuance of preferred stock
and borrowings of secured debt, partially offset by principal reductions on
our secured debt, principal reductions on our unsecured line of credit and
distributions to stockholders. Cash provided by financing activities for 1998
primarily consisted of net proceeds from the issuance of our common stock,
borrowings under our line of credit and secured debt, partially offset by
principal reductions on our secured debt and distributions to stockholders.
COMMITMENTS
As of December 31, 1999, we were committed under the terms of
certain leases to complete the construction of buildings and certain related
improvements at a remaining aggregate cost of $33.2 million.
As of December 31, 1999, we were also committed to fund
approximately $20.9 million for the construction of tenant improvements under
the terms of various leases and for certain investments in limited
partnerships.
RESTRICTED CASH
As of December 31, 1999, we had $8.1 million in cash and cash
equivalents, including $4.7 million in restricted cash. Restricted cash
consists of the following (in thousands):
AMOUNT
----------
Funds held in trust as additional security required under
the terms of certain secured notes payable $ 2,982
Security deposit funds based on the terms of certain
lease agreements 1,699
----------
$ 4,681
==========
28
SECURED DEBT
Secured debt as of December 31, 1999 consists of the following (dollars in
thousands):
BALANCE AT STATED
DECEMBER 31, INTEREST
COLLATERAL 1999 RATE MATURITY DATE
- ---------------------------------------- ---------------------------------------------------------
One Innovation Drive,
Worcester, MA (1) $ 11,720 8.75% January 2006
100/800/801 Capitola Drive,
Durham, NC 12,435 8.68% December 2006
620 Memorial Drive,
Cambridge, MA (2) 19,842 9.125% October 2007
14225 Newbrook Drive, Chantilly,
VA and 3000/3018 Western
Avenue, Seattle, WA 35,995 7.22% May 2008
377 Plantation Street, Worcester,
MA and 6166 Nancy Ridge Road,
San Diego, CA 18,900 8.71% December 2009
1431 Harbor Bay Parkway,
Alameda, CA 7,146 7.165% January 2014
3535/3565 General Atomics Court,
San Diego, CA 17,063 9.00% December 2014
1102/1124 Columbia Street,
Seattle, WA 20,148 7.75% May 2016
381 Plantation Street,
(development project)
Worcester, MA 2,625 9.00% October 2000
1201 Clopper Road,
(development project)
Gaithersburg, MD (3) 12,638 LIBOR + 1.75% October 2001
----------------
$ 158,512
================
(1) The balance shown includes an unamortized premium of $725,000; the
effective rate of the loan is 7.25%.
(2) The balance shown includes an unamortized premium of $2,062,000; the
effective rate of the loan is 7.25%.
(3) The balance shown represents the amount drawn on a construction loan
that provides for borrowings of up to $19,000,000.
29
The following is a summary of the scheduled principal payments for our
secured debt as of December 31, 1999 (in thousands):
YEAR AMOUNT
--------