ALEXANDRIA REAL ESTATE EQUITIES, INC.
(Exact name of registrant as specified in its charter)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 1-12993
ALEXANDRIA REAL ESTATE EQUITIES, INC.
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(626) 578-0777
N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ],
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [ ],
As of August 5, 2004, 19,398,842 shares of common stock, par value $.01 per share, were outstanding.
TABLE OF CONTENTS
| PART I. Financial Information | Page No. |
| Item 1. Financial Statements (unaudited): |
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Condensed Consolidated Balance Sheets of Alexandria Real Estate Equities, Inc. and Subsidiaries as of June 30, 2004 and December 31, 2003 |
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Condensed Consolidated Income Statements of Alexandria Real Estate Equities, Inc. and Subsidiaries for the three months and six months ended June 30, 2004 and 2003 |
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Condensed Consolidated Statements of Cash Flows of Alexandria Real Estate Equities, Inc. and Subsidiaries for the six months ended June 30, 2004 and 2003 |
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| Notes to Condensed Consolidated Financial Statements |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| Item 4. Controls and Procedures |
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| PART II. Other Information |
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| Item 5. Other Information |
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| Item 6. Exhibits and Reports on Form 8-K |
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| Signatures |
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(DOLLARS IN THOUSANDS)
June 30, December 31,
2004 2003
------------ ------------
Assets
Rental properties, net $1,068,493 $982,297
Properties under development 161,890 153,379
Cash and cash equivalents 3,030 4,985
Tenant security deposits and other restricted cash 13,259 11,057
Tenant receivables 2,097 1,969
Deferred rent 37,386 31,503
Investments 50,622 47,126
Other assets 42,967 40,261
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Total assets $1,379,744 $1,272,577
============ ============
Liabilities and Stockholders' Equity
Secured notes payable $360,486 $320,007
Unsecured line of credit and unsecured term loan 324,000 389,000
Accounts payable, accrued expenses and
tenant security deposits 38,090 43,408
Preferred stock redemption liability 38,588 -
Dividends payable 13,934 13,027
------------ ------------
Total liabilities 775,098 765,442
Stockholders' equity:
Series A preferred stock - 38,588
Series B preferred stock 57,500 57,500
Series C preferred stock 129,638 -
Common stock 194 193
Additional paid-in capital 410,932 409,926
Deferred compensation (1,085) (2,232)
Retained earnings 7,826 8,635
Accumulated other comprehensive loss (359) (5,475)
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Total stockholders' equity 604,646 507,135
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Total liabilities and stockholders' equity $1,379,744 $1,272,577
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See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
See accompanying notes. Alexandria Real Estate Equities, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements 1. Background and Basis of Presentation Background Alexandria Real Estate Equities, Inc. is a real estate investment trust
("REIT") formed in 1994. We are engaged primarily in the ownership, operation,
management, acquisition, expansion and selective redevelopment and development
of properties containing a combination of office and laboratory space. We refer
to these properties as "life science properties". Our life science properties
are designed and improved for lease primarily to pharmaceutical, biotechnology,
life science research, product, service, defense, educational and translational
medicine companies/entities/institutions, as well as related government
agencies. As of June 30, 2004, our portfolio consisted of 94 properties in nine
states with approximately 6.0 million rentable square feet. We have prepared the accompanying interim financial statements in accordance
with accounting principles generally accepted in the United States and in
conformity with the rules and regulations of the Securities and Exchange
Commission. In our opinion, the interim financial statements presented herein
reflect all adjustments, consisting solely of normal and recurring adjustments,
which are necessary to fairly present the interim financial statements. The
results of operations for the interim period are not necessarily indicative of
the results that may be expected for the year ending December 31, 2004.
These financial statements should be read in conjunction with the financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2003. Basis of Presentation and Significant Accounting
Policies The accompanying condensed consolidated financial statements include the
accounts of Alexandria Real Estate Equities, Inc. and its subsidiaries. All
significant intercompany balances and transactions have been eliminated. Reclassifications Certain prior year amounts have been reclassified to
conform to the current year presentation. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss consists of the
following (in thousands): The following table provides a reconciliation of
comprehensive income (in thousands): 2. Rental Properties, Net Rental properties, net consist of the following (in
thousands):
During the second quarter of 2004, we acquired two properties aggregating
approximately 90,000 square feet in the Eastern Massachusetts market for
approximately $13.8 million. We assumed a $9.5 million loan secured by the
properties and paid the balance in cash. We also acquired one property in the
Suburban Washington D.C. market containing approximately 92,000 square feet for
approximately $25.6 million in cash. We also acquired two properties
aggregating approximately 35,000 square feet in the Seattle, Washington market
for approximately $5.5 million in cash. Also during the second quarter of 2004,
we completed the acquisition of one property in the San Francisco Bay market for
approximately $25.3 million in cash. 3. Investments We hold equity investments in certain publicly-traded companies and
privately-held entities primarily involved in the life science industry. All of
our investments in publicly-traded companies are considered "available for sale"
under the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The
following table summarizes our available-for-sale securities (in thousands): Investments in privately-held entities as of June 30, 2004 and December 31,
2003, totaled $46,839,000 and $45,045,000, respectively. Of these totals,
$45,918,000 and $42,331,000 are accounted for under the cost method. The
remainder ($921,000 and $2,714,000 as of June 30, 2004 and December 31, 2003,
respectively) is accounted for under the equity method in accordance with
Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock" and Emerging Issues Task Force Topic ("EITF") D-46,
"Accounting for Limited Partnership Investments". For all of our investments, if a decline in the fair value of an investment
below its carrying value is determined to be other than temporary, such
investment is written down to its estimated fair value with a non-cash
impairment charge to current earnings. 4. Unsecured Line of Credit and Unsecured Term Loan We have an unsecured line of credit that provides for borrowings of up to
$440 million and an unsecured term loan for $150 million. Borrowings under our
unsecured line of credit and our unsecured term loan, as amended, bear interest
at a floating rate based on our election of either a LIBOR-based rate or a rate
related to the higher of the bank's reference rate and the Federal Funds rate.
For each LIBOR-based advance, we must elect a LIBOR period of one, two, three or
six months. Our unsecured line of credit and our unsecured term loan contain financial
covenants, including, among other things, maintenance of minimum net worth, a
total liabilities to gross asset value ratio and a fixed charge coverage ratio.
In addition, the terms of the unsecured line of credit and unsecured term loan
restrict, among other things, certain investments, indebtedness, distributions
and mergers. The unsecured line of credit expires November 2006 and may be
extended at our sole option for an additional one-year period. As of June 30,
2004, borrowings outstanding on the unsecured line of credit carried a weighted
average interest rate of 2.75%. The unsecured term loan expires in November
2008. As of June 30, 2004, the unsecured term loan carried a weighted average
interest rate of 2.76%. Aggregate borrowings under the unsecured line of credit and unsecured term
loan may be limited to an amount based on the net operating income derived from
a pool of unencumbered properties. Accordingly, as we acquire or complete the
development or redevelopment of additional unencumbered properties, aggregate
borrowings available under the unsecured line of credit and unsecured term loan
will increase up to a maximum of $590 million. Under these provisions, as of
June 30, 2004, aggregate borrowings under our unsecured line of credit and
unsecured term loan were limited to $510 million. We utilize interest rate swap agreements to hedge a portion of our exposure
to variable interest rates associated with our unsecured line of credit and
unsecured term loan. These agreements involve an exchange of fixed and floating
interest payments without the exchange of the underlying principal amount (the
"notional amount"). Interest received under all of our swap agreements is based
on the one-month LIBOR rate. The net difference between the interest paid and
the interest received is reflected as an adjustment to interest expense. The following table summarizes our interest rate swap agreements as of June
30, 2004 (dollars in thousands): 5. Stockholders' Equity In June 2004, we elected to redeem all 1,543,500 outstanding shares of our
9.50% Series A cumulative redeemable preferred stock ("Series A preferred
stock"). The redemption occurred in July 2004 at a redemption price of $25.00
per share plus $0.5409722 per share representing accumulated and unpaid
dividends to the redemption date. In accordance with Emerging Issues Task Force
Topic D-42, "The Effect on the Calculation of Earnings Per Share for the
Redemption or Induced Conversion of Preferred Stock", the original cost of
issuance of our Series A preferred stock has been recorded as a charge to net
income available to common stockholders at the date we elected to redeem all
shares. Therefore, during the second quarter of 2004, a charge of approximately
$1,876,000 was recorded for costs related to the redemption of the Series A
preferred stock. The preferred stock redemption liability on the balance sheet
as of June 30, 2004 reflects the Series A preferred stock at its redemption
amount excluding the portion relating to accrued dividends. Accrued dividends
relating to the Series A preferred stock as of June 30, 2004 have been included
in dividends payable in the accompanying balance sheet. In June 2004, we declared a cash dividend on our common stock aggregating
$12,020,000 In June 2004, we completed a public offering of 5,185,500 shares of our
8.375% Series C cumulative redeemable preferred stock ("Series C preferred
stock") (including the shares issued upon exercise of the underwriters' over-
allotment option). The shares were issued at a price of $25.00 per share,
resulting in aggregate proceeds of approximately $124.2 million (after deducting
underwriters' discounts and other offering costs). The proceeds were used to
redeem our 9.50% Series A preferred stock with the remaining portion used to pay
down our unsecured line of credit. The dividends on our Series C preferred
stock are cumulative and accrue from the date of original issuance. We pay
dividends quarterly in arrears at an annual rate of $2.09375 per share. Our
Series C preferred stock has no stated maturity, is not subject to any sinking
fund or mandatory redemption and is not redeemable prior to June 29, 2009,
except in order to preserve our status as a REIT. Investors in our Series C
preferred stock generally have no voting rights. On or after June 29, 2009, we
may, at our option, redeem our Series C preferred stock, in whole in part, at
any time for cash at a redemption price of $25.00 per share, plus accrued and
unpaid dividends. 6. Stock Option Plan For 2002 and all prior years, we elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for our employee and non-employee director
stock options, stock grants and stock appreciation rights. Under APB 25,
because the exercise price of the options we granted equals the market price of
the underlying stock on the date of grant, no compensation expense had been
recognized. In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-
Transition and Disclosure" ("SFAS 148"), which addresses alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. Effective January 1, 2003,
we adopted the fair value recognition provisions ofStatement of Financial Accounting
Standard No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), prospectively to all employee awards granted,
modified or settled after January 1, 2003. There have been no options issued
since January 1, 2003. The following table provides pro forma disclosures of the estimated fair
value of the options amortized to expense over the options' vesting periods as
if we had accounted for our stock options under the fair value method under SFAS
123 since the date they were granted (in thousands, except per share
information): 7. Net Income Per Share The following table shows the computation of net income per share of our
common stock outstanding (dollars in thousands, except per share amounts): 8. Discontinued Operations On January 1, 2002, Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144") became effective. SFAS 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. Under SFAS 144, a
property is classified as "held for sale" when all of the following criteria for
a plan of sale have been met: 1) management, having the authority to approve the
action, commits to a plan to sell the property, 2) the property is available for
immediate sale in its present condition, subject only to the terms that are
usual and customary, 3) an active program to locate a buyer, and other actions
required to complete the plan to sell, have been initiated, 4) the sale of the
property is probable and is expected to be completed within one year, 5) the
property is being actively marketed for sale at a price that is reasonable in
relation to its current fair value, and 6) actions necessary to complete the
plan of sale indicate that it is unlikely that significant changes to the plan
will be made or that the plan will be withdrawn. When all of these criteria
have been met, the property is classified as "held for sale" and its operations
are classified as discontinued operations in our consolidated statements of
income. When a property is designated as "held for sale", amounts for all prior
periods presented are reclassified from continuing operations to discontinued
operations. A loss is recognized for any initial adjustment of the asset's
carrying amount to fair value less costs to sell in the period the asset
qualifies as "held for sale". Depreciation of assets ceases commencing
on the date they are designated as "held for sale". The accompanying statements
have been presented in compliance with SFAS 144. Income from discontinued operations, net includes the results of
operations for three properties we sold during 2003 and one property we sold
during the first quarter of 2004 under the provisions of SFAS 144. During the
first quarter of 2004, we sold one property located in the Suburban Washington
D.C. market that had been designated as "held for sale" during the fourth
quarter of 2003. The total sale price for the property was approximately $5.7
million. In connection with the sale, we recorded a gain on sale of property of
approximately $1.6 million. During the first quarter of 2003, we sold one
property located in the San Francisco Bay market which could not be redeveloped
pursuant to our original strategic objectives and that had been designated as
"held for sale" as of December 31, 2002. The total sale price for the
property was approximately $6.8 million. In connection with this sale, we
recorded a loss on sale of property of approximately $455,000 in 2003.
Gain/loss on sales of these properties are included on the income statement in
income from discontinued operations. No properties have been designated as "held for sale" as of June 30,
2004. The following is a summary of discontinued operations (in thousands): Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF Certain information and statements included in this Quarterly Report on Form
10-Q, including, without limitation, statements containing the words "believes",
"expects", "may", "will", "should", "seeks", "approximately", "intends",
"plans", "estimates" or "anticipates", or the negative of these words or similar
words, constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements involve inherent
risks and uncertainties regarding events, conditions and financial trends that
may affect our future plans of operation, business strategy, results of
operations and financial position. A number of important factors could cause
actual results to differ materially from those included within or contemplated
by the forward-looking statements, including, but not limited to, those
described below in this report and under the headings "Business Risks" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-K for the year ended December 31,
2003. We do not take any responsibility to update any of these factors or to
announce publicly any revisions to any of the forward-looking statements
contained in this or any other document, whether as a result of new information,
future events or otherwise. Readers of this Form 10-Q should also read our
Securities and Exchange Commission and other publicly filed documents for
further discussion regarding such factors. As used in this Form 10-Q, "we", "our", "ours" and "us" refer to Alexandria
Real Estate Equities, Inc. and its subsidiaries. The following discussion should be read in conjunction with the financial
statements and notes appearing elsewhere in this report. Overview Since our formation in October 1994, we have devoted substantially all of our
resources to the ownership, operation, management, acquisition, expansion and
selective redevelopment and development of high quality, strategically located
properties containing a combination of office and laboratory space leased
principally to tenants in the life science industry. We refer to these
properties as "life science properties". As of June 30, 2004, our portfolio consisted of 94 properties containing
approximately 6.0 million rentable square feet of office/laboratory space. As
of that date, our properties were approximately 94% leased, excluding those
properties in our redevelopment program. Our primary source of revenue is
rental income and tenant recoveries from leases at the properties we own. The
comparability of financial data from period to period is affected by the timing
of our property acquisition, development and redevelopment activities. Results of Operations Comparison of Three Months Ended June 30, 2004 ("Second Quarter 2004") to
Three Months Ended June 30, 2003 ("Second Quarter 2003") Rental revenue increased by $3.2 million, or 10%, to $34.5 million for
Second Quarter 2004 compared to $31.2 million for Second Quarter 2003. The
increase resulted primarily from rental revenue from properties acquired, placed
in service or redeveloped after April 1, 2003. Rental revenue from the
properties operating continuously since April 1, 2003 (the "Second Quarter Same
Properties") increased by $461,000, or 1.7%, primarily due to increases in
rental rates. The occupancy level of the Second Quarter Same Properties as of
June 30, 2004 was 96.4%, compared to 96.2% as of June 30, 2003. Tenant recoveries increased by $596,000, or 8%, to
$8.4 million for Second Quarter 2004 compared to $7.8 million for Second Quarter
2003. The increase resulted primarily from tenant recoveries from properties
acquired, placed in service or redeveloped after April 1, 2003. Tenant
recoveries for the Second Quarter Same Properties were virtually unchanged,
decreasing by $30,000, or 0.4%. Other income increased by $230,000, or 61%, to $608,000 for Second Quarter
2004 compared to $378,000 for Second Quarter 2003. The increase resulted
primarily due to a general increase in miscellaneous sources of income. Rental operating expenses increased by $672,000, or 8%, to $8.8
million for Second Quarter 2004 compared to $8.1 million for Second Quarter
2003. The increase resulted primarily from rental operating expenses from
properties acquired, placed in service or redeveloped after April 1, 2003.
Operating expenses for the Second Quarter Same Properties decreased by $41,000,
or 1%, primarily due to a decrease in property taxes from successful appeals at
certain properties and a decrease in repairs and maintenance expenses, offset by
an increase in utility expenses, substantially all of which are recoverable from
our tenants through tenant recoveries. General and administrative expenses increased by $270,000, or 8%, to $3.8
million for Second Quarter 2004 compared to $3.5 million for Second Quarter 2003
primarily due to general increases in administrative costs, primarily payroll
and related expenses. Interest expense increased by $414,000, or 6%, to $6.9 million for Second
Quarter 2004 compared to $6.5 million for Second Quarter 2003. The increase
resulted from an increase in indebtedness on our secured notes payable offset by
principal reductions on our unsecured line of credit and a reduction in the
floating interest rates on our unsecured line of credit and unsecured term loan.
The weighted average interest rate on borrowings outstanding on our unsecured
line of credit and unsecured term loan (excluding the effect of swap agreements)
decreased from 2.84% as of June 30, 2003 to 2.75% as of June 30, 2004. Depreciation and amortization increased by $410,000, or 4%, to $10.1
million for Second Quarter 2004 compared to $9.7 million for Second Quarter
2003. The increase resulted primarily from depreciation associated with the
properties acquired, placed in service or redeveloped after April 1, 2003. Income from discontinued operations, net was none and $963,000 for Second
Quarter 2004 and Second Quarter 2003, respectively. It reflects the results of
operations of three properties we sold during 2003 and one property we sold
during the first quarter of 2004. As a result of the foregoing, net income was $13.9 million for Second Quarter
2004 compared to $12.5 million for Second Quarter 2003. Comparison of Six Months Ended June 30, 2004 ("Six Months 2004") to Six
Months Ended June 30, 2003 ("Six Months 2003") Rental revenue increased by $5.8 million, or 9%, to $68.3 million for
Six Months 2004 compared to $62.5 million for Six Months 2003. The increase
resulted primarily from rental revenue from properties acquired, placed in
service or redeveloped after January 1, 2003. Rental revenue from the
properties operating continuously since January 1, 2003 (the "Six Months Same
Properties") increased by $1.2 million, or 2.3%, primarily due to increases in
rental rates. The occupancy level of the Six Months Same Properties as of June
30, 2004 was 96.2%, compared to 96.3% as of June 30, 2003. Tenant recoveries increased by $431,000, or 3%, to
$16.7 million for Six Months 2004 compared to $16.3 million for Six Months 2003.
The increase resulted primarily from properties acquired, placed in service or
redeveloped after January 1, 2003. Tenant recoveries for the Six Months Same
Properties decreased by $530,000, or 3.8%, primarily due to decreases in certain
recoverable operating expenses during Six Months 2004. Other income increased by $579,000, or 81%, to $1.3 million for Six Months
2004 compared to $716,000 for Six Months 2003. The increase resulted primarily
due to a general increase in miscellaneous sources of income. Rental operating expenses increased by $831,000, or 5%, to $17.5
million for Six Months 2004 compared to $16.7 million for Six Months 2003. The
increase resulted primarily from rental operating expenses from properties
acquired, placed in service or redeveloped after January 1, 2003. Operating
expenses for the Six Months Same Properties decreased by $278,000, or 2.0%,
primarily due to a decrease in property taxes from successful appeals at certain
properties and a decrease in repairs and maintenance expenses offset by an
increase in utility expenses, substantially all of which are recoverable from
our tenants through tenant recoveries. General and administrative expenses increased by $357,000, or 5%, to $7.5
million for Six Months 2004 compared to $7.1 million for Six Months 2003
primarily due to general increases in administrative costs, primarily payroll
and related expenses. Interest expense increased by $252,000, or 2%, to $13.6 million for Six
Months 2004 compared to $13.4 million for Six Months 2003. The increase
resulted primarily from an increase in indebtedness on our secured notes payable
offset by principal reductions on our unsecured line of credit and unsecured
term loan and a reduction in the floating interest rates on our unsecured line
of credit and unsecured term loan. The weighted average interest rate on
borrowings outstanding on our unsecured line of credit and unsecured term loan
(excluding the effect of swap agreements) decreased from 2.84% as of June 30,
2003 to 2.75% as of June 30, 2004. Depreciation and amortization increased by $1.0 million, or 5%, to
$20.1 million for Six Months 2004 compared to $19.1 million for Six Months 2003.
The increase resulted primarily from depreciation associated with the properties
acquired, placed in service or redeveloped after January 1, 2003. Income from discontinued operations, net was $1.6 million and $1.4 million
for Six Months 2004 and Six Months 2003, respectively. It reflects the results
of operations of three properties we sold during 2003 and one property we sold
during the first quarter of 2004. As a result of the foregoing, net income was $29.2 million for Six Months
2004 compared to $24.7 million for Six Months 2003. Liquidity and Capital Resources Cash flows Net cash provided by operating activities for Six
Months 2004 decreased by $5.0 million to $34.9 million for Six Months 2004
compared to $39.9 million for Six Months 2003. The decrease resulted primarily
from an increase in other assets. Net cash used in investing activities increased by $22.6 million to $103.9
million for Six Months 2004 compared to $81.3 million for Six Months 2003. This
increase was primarily due to the higher level of property acquisitions for Six
Months 2004 compared to Six Months 2003. Net cash provided by financing activities increased by $25.5 million to $67.0
million for Six Months 2004 compared to $41.5 million for Six Months 2003. Cash
provided by financing activities for Six Months 2004 primarily consisted of net
proceeds from our preferred stock offering, offset by principal reductions to
our unsecured line of credit and distributions to stockholders. Contractual obligations and commitments Contractual obligations as of June 30, 2004, consist of the following
(dollars in thousands): Secured notes payable as of June 30, 2004 include 17 notes secured by 44
properties. Ground lease obligations as of June 30, 2004 include leases at six of our
properties and one land development parcel. These lease obligations have
remaining lease terms of 29 to 51 years, exclusive of extension options. In addition to the above, we were committed under the terms of construction
contracts to complete the construction of properties under development at a
remaining aggregate cost of $11.8 million. As of June 30, 2004, we were also committed to fund approximately $15.5
million for the construction of building infrastructure improvements under the
terms of leases and/or construction contracts and approximately $20.0 million
for certain investments. Tenant security deposits and other restricted cash Tenant security deposits and other restricted cash as of June 30, 2004
consist of the following (in thousands): Secured debt
Condensed Consolidated Income Statements
(Unaudited)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
June 30, June 30,
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2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues
Rental $34,489 $31,248 $68,263 $62,471
Tenant recoveries 8,426 7,830 16,740 16,309
Other income 608 378 1,295 716
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43,523 39,456 86,298 79,496
Expenses
Rental operations 8,808 8,136 17,543 16,712
General and administrative 3,814 3,544 7,450 7,093
Interest 6,926 6,512 13,635 13,383
Depreciation and amortization 10,088 9,678 20,069 19,052
----------- ----------- ----------- -----------
29,636 27,870 58,697 56,240
----------- ----------- ----------- -----------
Income from continuing operations 13,887 11,586 27,601 23,256
Income from discontinued operations, net - 963 1,626 1,442
----------- ----------- ----------- -----------
Net income $13,887 $12,549 $29,227 $24,698
=========== =========== =========== ===========
Dividends on preferred stock 2,284 2,225 4,509 4,450
Preferred stock redemption charge 1,876 - 1,876 -
----------- ----------- ----------- -----------
Net income available to common stockhold $9,727 $10,324 $22,842 $20,248
=========== =========== =========== ===========
Basic income per common share:
Income from continuing operations $0.72 $0.61 $1.43 $1.23
=========== =========== =========== ===========
Income from discontinued operations, net - $0.05 $0.08 $0.08
=========== =========== =========== ===========
Net income $0.72 $0.66 $1.52 $1.31
=========== =========== =========== ===========
Net income available to common stockholders $0.50 $0.54 $1.19 $1.07
=========== =========== =========== ===========
Diluted income per common share:
Income from continuing operations $0.71 $0.60 $1.41 $1.21
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Income from discontinued operations, net - $0.05 $0.08 $0.08
=========== =========== =========== ===========
Net income $0.71 $0.65 $1.49 $1.29
=========== =========== =========== ===========
Net income available to common stockholders $0.50 $0.54 $1.17 $1.06
=========== =========== =========== ===========
weighted average shares of common stock outstanding:
-Basic 19,284,631 18,952,445 19,245,792 18,924,290
=========== =========== =========== ===========
-Diluted 19,608,854 19,190,472 19,595,337 19,160,395
=========== =========== =========== ===========
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(DOLLARS IN THOUSANDS)
Six Months Ended
June 30,
----------------------
2004 2003
---------- ----------
Operating Activities
Net income $29,227 $24,698
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) loss on sales of property (1,627) 455
Depreciation and amortization 20,069 19,221
Amortization of loan fees and costs 1,141 979
Amortization of premiums on secured notes (62) (185)
Stock compensation expense 1,579 1,337
Changes in operating assets and liabilties:
Tenant security deposits and other restricted cash (2,202) (1,947)
Tenant receivables (128) 171
Deferred rent (5,891) (3,400)
Other assets (6,640) (2,351)
Accounts payable, accrued expenses and tenant
security deposits (521) 958
---------- ----------
Net cash provided by operating activities 34,945 39,936
---------- ----------
Investing Activities
Purchase of properties (62,272) (38,377)
Proceeds from sales of property 5,454 6,558
Additions to rental properties (32,554) (24,296)
Additions to properties under development (11,139) (20,477)
Additions to investments, net (3,391) (4,677)
---------- ----------
Net cash used in investing activities (103,902) (81,269)
---------- ----------
Financing Activities
Proceeds from secured notes payable 38,000 34,667
Proceeds from exercise of stock options 4,032 1,819
Proceeds from issuance of preferred stock 124,209 -
Principal (reductions to) borrowings from unsecured
line of credit and unsecured term loan (65,000) 32,000
Principal reductions of secured notes payable (6,986) (2,932)
Dividends paid on common stock (22,803) (19,563)
Dividends paid on preferred stock (4,450) (4,450)
---------- ----------
Net cash provided by financing activities 67,002 41,541
---------- ----------
Net (decrease) increase in cash and cash equivalents (1,955) 208
Cash and cash equivalents at beginning of period 4,985 3,790
---------- ----------
Cash and cash equivalents at end of period $3,030 $3,998
========== ==========
(Unaudited)
June 30, December 31,
2004 2003
------------ ------------
Unrealized gain on
marketable securities $929 $824
Unrealized loss on intere
rate swap agreements (1,288) (6,299)
------------ ------------
($359) ($5,475)
============ ============
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income $13,887 $12,549 $29,227 $24,698
Unrealized (loss) gain on
marketable securities (240) 515 105 521
Unrealized gain (loss) on
interest rate swap agreements 6,900 (545) 5,011 (400)
--------- --------- --------- ---------
Comprehensive income $20,547 $12,519 $34,343 $24,819
========= ========= ========= =========
June 30, December 31,
2004 2003
----------- -----------
Land $161,269 $147,425
Buildings and improvements 935,512 854,152
Tenant and other improvements 129,374 122,280
----------- -----------
1,226,155 1,123,857
Less accumulated depreciation (157,662) (141,560)
----------- -----------
$1,068,493 $982,297
=========== ===========
June 30, December 31,
2004 2003
----------- -----------
Adjusted cost of available-for-sale
securities $ 2,854 $ 1,257
Gross unrealized gains 1,118 837
Gross unrealized losses (189) (13)
----------- -------------
Fair value of
available-for-sale securities $ 3,783 $ 2,081
=========== =============
Effective
Notional at Interest Fair
Transaction Dates Effective Dates Amounts June 30, 2004 Pay Rates Termination Dates Values
- ------------------ --------------- ------------ ------------ -------- ---------------- --------
Hedges for Unsecured Line of Credit
March 2002 December 31, 2002 $ 50,000 $ 50,000 5.364% December 31, 2004 $(882)
July 2002 January 1, 2003 $ 25,000 $ 25,000 3.855% June 30, 2005 (368)
July 2002 January 1, 2003 $ 25,000 $ 25,000 3.865% June 30, 2005 (371)
December 2002 January 2, 2003 $ 25,000 $ 25,000 3.285% June 30, 2006 (147)
December 2002 January 2, 2003 $ 25,000 $ 25,000 3.285% June 30, 2006 (147)
November 2002 June 1, 2003 $ 25,000 $ 25,000 3.115% December 31, 2005 (156)
November 2002 June 1, 2003 $ 25,000 $ 25,000 3.155% December 31, 2005 (171)
March 2004 December 31, 2004 $ 25,000 $ - 2.956% December 31, 2006 310
March 2004 December 31, 2004 $ 25,000 $ - 2.956% December 31, 2006 310
June 2004 June 30, 2005 $ 50,000 $ - 4.343% June 30, 2007 (271)
------------
$ 200,000
Hedges for Unsecured Term Loan
December 2003 December 31, 2003 $ 50,000 $ 50,000 1.530% December 31, 2004 89
December 2003 December 31, 2004 $ 50,000 $ - 3.000% December 30, 2005 57
December 2003 December 30, 2005 $ 50,000 $ - 4.150% December 29, 2006 (26)
December 2003 December 29, 2006 $ 50,000 $ - 5.090% October 31, 2008 (78)
April 2004 April 30, 2004 $ 50,000 $ 50,000 1.550% April 29, 2005 279
April 2004 April 29, 2005 $ 50,000 $ - 3.140% April 28, 2006 156
April 2004 April 28, 2006 $ 50,000 $ - 4.230% April 30, 2007 74
April 2004 April 30, 2007 $ 50,000 $ - 4.850% April 30, 2008 54
------------ --------
$ 100,000 $(1,288)
Total Interest Rate Swap Agreements in Effect ------------ ========
at June 30, 2004 $ 300,000
============
($ 0.62 per share) for the calendar quarter ended June 30, 2004. In June 2004,
we also declared a cash dividend on our Series B preferred stock aggregating
$1,308,000 ($0.56875 per share) for the period April 15, 2004 through July 14,
2004. We paid these dividends on July 15, 2004. Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income available to common
stockholders, as reported $9,727 $10,324 $22,842 $20,248
Add: Stock-based employee compensation
expense included in reported net income - - - -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (187) (333) (377) (668)
-------- -------- -------- --------
Pro forma net income available to
common stockholders $9,540 $9,991 $22,465 $19,580
======== ======== ======== ========
Earnings per share:
Basic - as reported $0.50 $0.54 $1.19 $1.07
======== ======== ======== ========
Basic - pro forma $0.49 $0.53 $1.17 $1.03
======== ======== ======== ========
Diluted - as reported $0.50 $0.54 $1.17 $1.06
======== ======== ======== ========
Diluted - pro forma $0.49 $0.52 $1.15 $1.02
======== ======== ======== ========
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income available to common
stockholders $9,727 $10,324 $22,842 $20,248
=========== =========== =========== ===========
Weighted average shares of
common stock outstanding - basic 19,284,631 18,952,445 19,245,792 18,924,290
Add: dilutive effect of
stock options and stock grants 324,223 238,027 349,545 236,105
----------- ----------- ----------- -----------
Weighted average shares of
common stock outstanding - diluted 19,608,854 19,190,472 19,595,337 19,160,395
=========== =========== =========== ===========
Net income per common share:
- Basic $0.50 $0.54 $1.19 $1.07
=========== =========== =========== ===========
- Diluted $0.50 $0.54 $1.17 $1.06
=========== =========== =========== ===========
Common dividends declared per share $0.62 $0.53 $1.22 $1.06
=========== =========== =========== ===========
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenue $ - $1,793 $14 $3,576
Operating expenses - 386 15 809
---------- ---------- ---------- ----------
Revenue less operating expenses - 1,407 (1) 2,767
Interest - 362 701
Depreciation - 82 - 169
Income before gain/loss on ---------- ---------- ---------- ----------
sales of property - 963 (1) 1,897
Gain (loss) on sales of property - - 1,627 (455)
Income from discontinued ---------- ---------- ---------- ----------
operations $ - $963 $1,626 $1,442
========== ========== ========== ==========
June 30, December 31,
2004 2003
---------- ----------
Properties held for sale, net $ - $3,518
Tenant security deposits and other
restricted cash - 6
Tenant receivables - 82
Deferred rent - 8
Other assets - 66
---------- ----------
Total assets $ - $3,680
========== ==========
Accounts payable, accrued expenses
and tenant security deposits $ - 79
---------- ----------
Total liabilities - 79
---------- ----------
Net assets of discontinued operation $ - $3,601
========== ==========
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Payments by Period
--------------------------------------------
Total 2004 2005-2006 2007-2008 Thereafter
------------- -------- --------- --------- ----------
Contractual Obligations
Secured notes payable (1) $ 360,296 $ 3,057 $ 55,199 $ 54,556 $ 247,484
Ground lease obligations 64,588 834 3,529 3,631 56,594
Other obligations 502 260 242 - -
------------- -------- --------- --------- ----------
Total $ 425,386 $ 4,151 $ 58,970 $ 58,187 $ 304,078
============= ======== ========= ========= ==========
Amount
---------
Funds held in trust under the terms of certain
secured notes payable $10,857
Security deposit funds based on the terms of certain
lease agreements 2,035
Other funds held in escrow 367
---------
$13,259
=========
Secured debt as of June 30, 2004 consists of the following (dollars in thousands):
Balance at Stated
June 30, Interest
Location of Collateral 2004 Rates Maturity Dates
- ------------------------------------------ ------------ ------------ --------------
San Francisco, CA (two properties) $22,370 LIBOR + 1.70% January 2005 (1)
Worcester, MA (2) 9,444 8.75% January 2006
Durham, NC (two properties) 11,796 8.68% December 2006
Gaithersburg, MA (three properties) 9,644 8.25% August 2007
Chantilly, VA and Seattle, WA 34,180 7.22% May 2008
San Diego, CA (four properties) 39,680 6.95% July 2009
Worcester, MA and San Diego, CA 18,320 8.71% January 2010
Worcester, MA (two properties) 9,496 5.35% September 2010
Gaithersburg, MD (two properties) 24,023 8.33% November 2010
San Diego, CA (six properties) 23,526 7.75% July 2011
Gaithersburg, MD (three properties) 27,648 7.40% January 2012
Alameda, CA (three properties) and San Diego, CA 33,261 6.21% March 2013
Rockville, MD (two properties) and Beltsville, MD 29,736 6.36% September 2013
Alameda, CA 1,412 7.165% January 2014
Charlestown, MA, Lexington, MA, Montvale, NJ and
Plymouth Meeting, PA 37,870 5.82% April 2016
Seattle, WA (two properties) 16,898 7.75% June 2016
San Diego, CA 11,182 7.50% August 2021
------------
$360,486
============
_________
The following is a summary of the scheduled principal payments for our secured debt and the weighted average interest rates as of June 30, 2004 (in thousands):
Weighted
Average
Year Amount Interest Rate
---------------------- ----------- -----------
2004 $3,057 6.87%
2005 28,863 (1) 7.13%(1)
2006 26,336 7.12%(1)
2007 15,891 7.06%
2008 38,665 7.02%
Thereafter 247,484 7.01%
----------- -----------
Subtotal 360,296 7.03%
Unamortized Premium 190 ===========
-----------
Total $360,486
===========
(1) Of this amount, $22,370,000 represents the outstanding balance on a loan which has a maturity date of 2005 and currently carries interest at 2.92% per annum, and may be extended for an additional year. If we extend the maturity date of this loan to 2006, the weighted average interest rates for 2005 and 2006 would be 6.87% and 7.12%, respectively.
Unsecured line of credit and unsecured term loan
We have an unsecured line of credit that provides for borrowings of up to $440 million and an unsecured term loan for $150 million. Borrowings under our unsecured line of credit and our unsecured term loan, as amended, bear interest at a floating rate based on our election of either a LIBOR-based rate or a rate related to the higher of the bank's reference rate and the Federal Funds rate. For each LIBOR-based advance, we must elect a LIBOR period of one, two, three or six months.
Our unsecured line of credit and our unsecured term loan contain financial covenants, including, among other things, maintenance of minimum net worth, a total liabilities to gross asset value ratio and a fixed charge coverage ratio. In addition, the terms of the unsecured line of credit and unsecured term loan restrict, among other things, certain investments, indebtedness, distributions and mergers. The unsecured line of credit expires November 2006 and may be extended at our sole option for an additional one-year period. As of June 30, 2004, borrowings outstanding on the unsecured line of credit carried a weighted average interest rate of 2.75%. The unsecured term loan expires in November 2008. As of June 30, 2004, the unsecured term loan carried a weighted average interest rate of 2.76%.
Aggregate borrowings under the unsecured line of credit and unsecured term loan may be limited to an amount based on the net operating income derived from a pool of unencumbered properties. Accordingly, as we acquire or complete the development or redevelopment of additional unencumbered properties, aggregate borrowings available under the unsecured line of credit and unsecured term loan will increase up to a maximum of $590 million. Under these provisions, as of June 30, 2004, aggregate borrowings under our unsecured line of credit and unsecured term loan were limited to $510 million.
We utilize interest rate swap agreements to hedge a portion of our exposure to variable interest rates associated with our unsecured line of credit and unsecured term loan. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one-month LIBOR rate. The net difference between the interest paid and the interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements as of June 30, 2004 (dollars in thousands):
Effective
Notional at Interest Fair
Transaction Dates Effective Dates Amounts June 30, 2004 Pay Rates Termination Dates Values
- ------------------ --------------- ------------ ------------ -------- ---------------- --------
Hedges for Unsecured Line of Credit
March 2002 December 31, 2002 $ 50,000 $ 50,000 5.364% December 31, 2004 $ (882)
July 2002 January 1, 2003 $ 25,000 $ 25,000 3.855% June 30, 2005 (368)
July 2002 January 1, 2003 $ 25,000 $ 25,000 3.865% June 30, 2005 (371)
December 2002 January 2, 2003 $ 25,000 $ 25,000 3.285% June 30, 2006 (147)
December 2002 January 2, 2003 $ 25,000 $ 25,000 3.285% June 30, 2006 (147)
November 2002 June 1, 2003 $ 25,000 $ 25,000 3.115% December 31, 2005 (156)
November 2002 June 1, 2003 $ 25,000 $ 25,000 3.155% December 31, 2005 (171)
March 2004 December 31, 2004 $ 25,000 $ - 2.956% December 31, 2006 310
March 2004 December 31, 2004 $ 25,000 $ - 2.956% December 31, 2006 310
June 2004 June 30, 2005 $ 50,000 $ - 4.343% June 30, 2007 (271)
------------
$ 200,000
Hedges for Unsecured Term Loan
December 2003 December 31, 2003 $ 50,000 $ 50,000 1.530% December 31, 2004 89
December 2003 December 31, 2004 $ 50,000 $ - 3.000% December 30, 2005 57
December 2003 December 30, 2005 $ 50,000 $ - 4.150% December 29, 2006 (26)
December 2003 December 29, 2006 $ 50,000 $ - 5.090% October 31, 2008 (78)
April 2004 April 30, 2004 $ 50,000 $ 50,000 1.550% April 29, 2005 279
April 2004 April 29, 2005 $ 50,000 $ - 3.140% April 28, 2006 156
April 2004 April 28, 2006 $ 50,000 $ - 4.230% April 30, 2007 74
April 2004 April 30, 2007 $ 50,000 $ - 4.850% April 30, 2008 54
------------ --------
$ 100,000 $(1,288)
Total Interest Rate Swap Agreements in Effect ------------ ========
at June 30, 2004 $ 300,000
============
We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate swap agreements as the counterparties are established, well-capitalized financial institutions.
Other resources and liquidity requirements
We expect to continue meeting our short-term liquidity and capital requirements generally by using our working capital and net cash provided by operating activities. We believe that net cash provided by operating activities will continue to be sufficient to make the distributions necessary to enable us to continue qualifying as a REIT. We also believe that net cash provided by operations will be sufficient to fund recurring capital expenditures and leasing commissions.
We expect to meet certain long-term liquidity requirements, such as for property acquisitions, property development and redevelopment activities, scheduled debt maturities, expansions and other non- recurring capital improvements, through net cash provided by operating activities, long-term secured and unsecured indebtedness, including borrowings under our unsecured line of credit and unsecured term loan, and the issuance of additional debt and/or equity securities.
Capital Expenditures and Leasing Costs
The following provides additional information with respect to capital expenditures and leasing costs incurred during the six months ended June 30, 2004 (dollars in thousands):
|
Property-related capital expenditures (1) |
$ 1,481 |
|
Leasing costs (2) |
$ 493 |
|
Property-related redevelopment costs (3) |
$ 35,549 |
|
Property-related development costs |
$ 11,139 |
_______
Inflation
Approximately 88% of our leases (on a square footage basis) are triple net leases that require tenants to pay substantially all real estate taxes and insurance and common area and other operating expenses, including increases therein. In addition, approximately 7% of our leases (on a square footage basis) require the tenants to pay a majority of operating expenses. Approximately 94% of our leases (on a square footage basis) contain effective annual rent escalations that are either fixed (generally ranging from 3% to 3.5%) or indexed based on the consumer price index or another index. Accordingly, we do not believe that our earnings or cash flow from real estate operations are subject to any significant risk from inflation. An increase in inflation, however, could result in an increase in the cost of our variable rate borrowings, including our unsecured line of credit and unsecured term loan.
Funds from Operations
GAAP basis accounting for real estate assets utilizes historical cost accounting and assumes real estate values diminish over time. In an effort to overcome the miscorrelation between real estate values and historical cost accounting for real estate assets, the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") established the measurement tool of funds from operations ("FFO"). Since its introduction, FFO has become a widely used non-GAAP financial measure by REITs. We believe that FFO is helpful to investors as an additional measure of the performance of an equity REIT. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its April 2002 White Paper (the "White Paper") and related implementation guidance, which may differ from the methodology for calculating FFO utilized by other equity REITs, and, accordingly, may not be comparable to such other REITs. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. While FFO is a relevant and widely used measure of operating performance for REITs, it should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions. (See "Cash Flows" for information regarding these measures of cash flow.) We believe that net income is the most directly comparable GAAP financial measure to FFO.
The following table presents our FFO for the three months and six months ended June 30, 2004 and 2003 and a reconciliation of GAAP net income to FFO (in thousands):
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------- ------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income $13,887 $12,549 $29,227 $24,698
Add
Depreciation and amortization (1) 10,088 9,760 20,069 19,221
Subtract
Dividends on preferred stock (2,284) (2,225) (4,509) (4,450)
Preferred stock redemption charge (2) (1,876) - (1,876) -
(Gain) loss on sales of property (3) - - (1,627) 455
----------- ----------- ----------- -----------
Funds from operations (FFO) $19,815 $20,084 $41,284 $39,924
=========== =========== =========== ===========
Property and Lease Information
The following table is a summary of our property portfolio as of June 30, 2004 (dollars in thousands):
Rentable Annualized
Number of Square Base Occupancy
Properties Feet Rent Percentage
----------- ----------- ---------- -----------
Markets
California - Pasadena 1 31,343 $525 63.3% (1)
California - San Diego 20 920,273 25,873 95.2%
California - San Francisco Bay 10 642,578 19,918 100.0%
Eastern Massachusetts 12 730,633 21,934 88.0%
New Jersey/Suburban Philadelphia 4 267,319 5,424 100.0%
Southeast 5 259,414 3,860 77.8% (1)
Suburban Washington D.C. 18 1,473,261 25,638 93.4%
Washington - Seattle 7 593,269 21,693 100.0%
----------- ----------- ---------- -----------
Total 77 4,918,090 $124,865 93.9% (2)
=========== =========== ========== ===========
________
The following table provides information with respect to the lease expirations at our properties as of June 30, 2004:
Square Percentage of Annualized Base
Year of Number of Footage of Aggregate Rent of Expiring
Lease Expiring Expiring Portfolio Leased Leases (per
Expiration Leases Leases Square Footage square foot)
- ----------- -------------- -------------- ---------------- ----------------
2004 52 (1) 272,539 5.4% $25.98
2005 31 327,707 6.5% $27.48
2006 41 870,651 17.2% $24.46
2007 17 314,735 6.2% $23.64
2008 15 346,492 6.8% $26.92
Thereafter 60 2,932,946 57.9% $28.16
_________
(1) Includes 22 month-to-month leases for approximately 63,000 square feet.
The following table is a summary of our lease activity for the three months ended June 30, 2004 computed on a Cash Basis and on a GAAP Basis:
Rental TI's/Lease Average
Number Square Expiring New Rate Commissions Lease
of Leases Footage Rates Rates Changes Per Foot Terms
--------- --------- --------- --------- -------- ------------ ---------
Leasing Activity
Lease Expirations
Cash Basis 37 248,360 $23.67 -- -- -- --
GAAP Basis 37 248,360 $25.27 -- -- -- --
Renewed / Releasable Space Leased
Cash Basis 13 159,461 $23.54 $26.63 13.1% $1.02 5.9 Years
GAAP Basis 13 159,461 $26.27 $28.95 10.2% $1.02 5.9 Years
Month-to-Month Leases In Effect
Cash Basis 22 62,967 $22.63 $22.65 0.1% -- --
GAAP Basis 22 62,967 $22.63 $22.65 0.1% -- --
Redeveloped/Developed/
Vacant Space Leased
Cash Basis 9 87,066 -- $28.48 -- $6.98 10.3 Years
GAAP Basis 9 87,066 -- $34.28 -- $6.98 10.3 Years
Leasing Activity Summary
Excluding Month-to-Month Leases
Cash Basis 22 246,527 -- $27.28 -- $3.12 7.5 Years
GAAP Basis 22 246,527 -- $30.83 -- $3.12 7.5 Years
Including Month-to-Month Leases
Cash Basis 44 309,494 -- $26.34 -- -- --
GAAP Basis 44 309,494 -- $29.17 -- -- --
The following table is a summary of our lease activity for the six months ended June 30, 2004 computed on a Cash Basis and on a GAAP Basis:
Rental TI's/Lease Average
Number Square Expiring New Rate Commission Lease
of Leases Footage Rates Rates Changes Per Foot Terms
-------- -------- -------- -------- -------- --------- ---------
Leasing Activity
Lease Expirations
Cash Basis 56 681,258 $21.86 -- -- -- --
GAAP Basis 56 681,258 $22.80 -- -- -- --
Renewed / Releasable Space Leased
Cash Basis 23 315,155 $22.54 $24.00 6.5% $2.70 5.4 Years
GAAP Basis 23 315,155 $23.88 $26.16 9.5% $2.70 5.4 Years
Month-to-Month Leases In Effect
Cash Basis 22 62,967 $22.53 $22.65 0.5% -- --
GAAP Basis 22 62,967 $22.50 $22.65 0.7% -- --
Redeveloped/Developed/
Vacant Space Leased
Cash Basis 18 220,005 -- $23.10 -- $19.42 9.6 Years
GAAP Basis 18 220,005 -- $30.92 -- $19.42 9.6 Years
Leasing Activity Summary
Excluding Month-to-Month Leases
Cash Basis 41 535,160 -- $23.63 -- $9.57 7.1 Years
GAAP Basis 41 535,160 -- $28.12 -- $9.57 7.1 Years
Including Month-to-Month Leases
Cash Basis 63 598,127 -- $23.53 -- -- --
GAAP Basis 63 598,127 -- $27.54 -- -- --
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we believe we are exposed is interest rate risk, which may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates carries additional risks, such as counter-party credit risk and the legal enforceability of hedging contracts.
Our future earnings, cash flows and fair values relating to financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBOR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. Based on interest rates at, and our swap agreements in effect on June 30, 2004, we estimate that a 1% increase in interest rates on our unsecured line of credit and unsecured term loan, after considering the effect of our interest rate swap agreements, would decrease annual future earnings and cash flows by approximately $240,000. We further estimate that a 1% decrease in interest rates on our unsecured line of credit and unsecured term loan, after considering the effect of our interest rate swap agreements in effect June 30, 2004, would increase annual future earnings and cash flows by approximately $240,000. A 1% increase in interest rates on our secured debt and interest rate swap agreements would decrease their aggregate fair value by approximately $25.2 million. A 1% decrease in interest rates on our secured debt and interest rate swap agreements would increase their aggregate fair value by approximately $26.4 million.
These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate swap agreements in effect on June 30, 2004. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.
We have exposure to equity price market risk because of our equity investments in certain publicly-traded companies and privately-held entities. We classify investments in publicly-traded companies as available-for-sale and, consequently, record them on our balance sheet at fair value with unrealized gains or losses reported as a component of comprehensive income or loss. Investments in privately-held entities are generally accounted for under the cost method because we do not influence any of the operating or financial policies of the entities in which we invest. For all investments, we recognize other than temporary declines in value against earnings in the same period the decline in value was deemed to have occurred. There is no assurance that future declines in values will not have a material adverse impact on our future results of operations. By way of example, a 10% decrease in the fair value of our equity investments as of June 30, 2004 would decrease their fair value by approximately $5.1 million.
Item 4. CONTROLS AND PROCEDURES
As of June 30, 2004, we performed an evaluation, under the supervision of our chief executive officer ("CEO") and chief financial officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2004. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to June 30, 2004.
PART II - OTHER INFORMATION
Item 5. OTHER INFORMATION
Updating our previous disclosure, Peter J. Nelson will be stepping down from the position of Chief Financial Officer and Treasurer effective after August 10, 2004. Dean Shigenaga, Vice President has been appointed Acting Chief Financial Officer and Etsuko Mason, Vice President has been appointed Treasurer, both effective after August 10, 2004. Mr. Nelson will be continuing as Senior Vice President - Operations through October 20, 2004, and will be terminating his full-time employment as of such date. Mr. Nelson will be continuing as Corporate Secretary and as a senior financial advisor to management of the Company and its Board of Directors through at least April 30, 2007.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.3* Bylaws (amended as of May 12, 2004) (filed as an exhibit to Alexandria's current report on Form 8-K filed with the Commission on June 21, 2004).
10.1 First Amendment to Fourth Amended and Restated Revolving Loan Agreement, dated as of June 30, 2004, among Alexandria Real Estate Equities, Inc., Alexandria Real Estate Equities, L.P., ARE-QRS Corp., ARE Acquisitions, LLC, the other borrowers then and thereafter a party thereto, the banks therein named, the other banks which may become parties thereto, Fleet National Bank, as Administrative Agent, Fleet Securities, Inc. and JP Morgan Securities, Inc., as Co-Lead Arrangers, JP Morgan Securities, Inc. and Societe Generale, as Co- Syndication Agents, CommerzBank AG, New York and Grand Cayman Branches, and KeyBank National Association, as Co-Documentation Agents and Eurohypo AG, New York Branch, as Senior Managing Agent.
10.2 First Amendment to Term Loan Agreement, dated as of June 30, 2004, among Alexandria, the Operating Partnership, ARE-QRS Corp., ARE Acquisitions, LLC, the Other Borrowers Then or Thereafter a Party Thereto, the Banks therein named, the Other Banks Which May Become Parties Thereto, Fleet National Bank, as Managing Agent, and Fleet Securities, Inc., as Arranger.
12.1 Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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(*) Incorporated by reference
(b) Reports on Form 8-K
We filed a current report on Form 8-K on April 28, 2004, in which we provided certain additional information regarding our fees billed by Ernst & Young LLP for 2003.
We filed a current report on Form 8-K on May 3, 2004, pursuant to which we furnished to the Securities and Exchange Commission our earnings release dated May 3, 2004, regarding our quarter ended March 31, 2004 financial results.
We filed a current report on Form 8-Kon June 2, 2004, in which we reported our intention to redeem all of our outstanding shares of 9.50% Series A Cumulative Redeemable Preferred Stock.
We filed a current report on Form 8-K on June 21, 2004, in which we reported our entering of an underwriting agreement for the sale of 5,185,500 shares of our 8.375% Series C Cumulative Redeemable Preferred Stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 9, 2004.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
/s/ Joel S. Marcus
Joel S. Marcus
Chief Executive Officer
(Principal Executive Officer)
/s/ Peter J. Nelson
Peter J. Nelson
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)