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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
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, 1998
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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.01 par value per share New York Stock Exchange
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 $338.4 million based on the closing price for
such shares on the New York Stock Exchange on March 10, 1999.
As of March 10, 1999 the Registrant had 13,736,263 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 15, 1999.
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 . . . . . . . 34
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 34
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . 35
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . 35
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . 36
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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. Words such as "believes,"
"expects," "anticipates," "intends" and similar expressions are intended to
identify some of the forward-looking statements regarding events, conditions
and financial trends that may affect our future plan of operation, business
strategy, results of operations and financial position. Forward-looking
statements are not guarantees of future performance and are subject to risks
and uncertainties. Actual results may differ materially from those included
within the forward-looking statements as a result of various factors,
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 disclaim any obligation to update
any of these factors or to announce publicly the result of any revisions to
any of the forward-looking statements.
ITEM 1. BUSINESS.
BACKGROUND
Alexandria Real Estate Equities, Inc., a Maryland corporation formed in
October 1994, is a real estate investment trust ("REIT") engaged primarily in
the acquisition, management, expansion and selective development 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"). As of December 31, 1998, we owned 51 Life Science Facilities (the
"Properties"), containing approximately 3.6 million rentable square feet of
office and laboratory space.
BUSINESS AND GROWTH STRATEGY.
We focus our operations and acquisition activities principally in:
- California (in the San Diego 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 within the Life Science Industry 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, 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 attractive returns
in our target 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 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.
ACQUISITIONS. We seek to identify and acquire high quality Life Science
Facilities in our target 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; and
- opportunities available for leasing vacant space and for retenanting
occupied space.
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.
DEVELOPMENT. We have emphasized acquisitions over development in pursuing
our growth objectives and intend to continue to do so in the future. However,
we have pursued and will continue to pursue selective 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 generic in nature and not tenant specific.
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.
2
BUSINESS RISKS
WE ARE DEPENDENT ON A SINGLE INDUSTRY FOR REVENUES FROM LEASE PAYMENTS
Our strategy is to invest primarily in properties 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.
SOME OF OUR TENANTS MUST OBTAIN REGULATORY APPROVAL OF THEIR PRODUCTS AND
MANUFACTURING PROCESSES, WHICH COULD ADVERSELY AFFECT THEIR ABILITY TO PAY US
The products and manufacturing processes of some of our Life Science
Industry tenants require governmental regulatory approval before they can be
marketed and sold or used. Any failure to obtain or any delay in obtaining
these approvals could adversely affect the ability of the tenant to market
and sell its products successfully and, therefore, its ability to make rental
payments to us. The process of obtaining these approvals is costly,
time-consuming and often unpredictable. We cannot assure you that our
tenants will be able to obtain any required approvals.
In addition, some of our tenants receive significant funding from federal,
state and local governments. If any of this funding were decreased or
discontinued, the affected tenant could 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, 1998, we had 158 leases with a total of 148 tenants.
Twenty-four of our Properties were single-tenant properties. Three of our
tenants accounted for approximately 18.4% of our aggregate Annualized Base Rent,
or approximately 7.1%, 6.4% and 4.9%, respectively. "Annualized Base Rent"
means the annualized fixed base rental amount in effect as of December 31, 1998,
using rental revenue calculated on a straight-line basis in accordance with
generally accepted accounting principles. 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.
3
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 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 cap 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 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, 1998, leases with U.S.
government tenants at our Properties accounted for approximately 8.0% 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, 1998, leases at our Properties representing
approximately 10.0% and 11.5% of the square footage of our Properties were
scheduled to expire in 1999 and 2000, respectively.
POOR ECONOMIC CONDITIONS IN OUR TARGET MARKETS COULD ADVERSELY AFFECT OUR
BUSINESS
Our Properties are located only in the following markets:
- California (in the San Diego 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.
4
WE MAY NOT HAVE SUFFICIENT FUNDS TO REFINANCE OUR DEBT
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, 1998, we had outstanding mortgage indebtedness of
approximately $115.8 million, secured by nine Properties, and outstanding debt
under our unsecured line of credit of approximately $194.0 million.
OUR LINE OF CREDIT RESTRICTS OUR ABILITY TO ENGAGE IN SOME BUSINESS ACTIVITIES
Our $250 million 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 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.
5
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 climates;
- competition from other Life Science Facilities;
- real estate conditions in our target markets;
- our ability to collect rent payments;
6
- 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. 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
cannot assure you 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
All of our Properties have been under our management for less than five
years, and we have owned a substantial majority of them for less than two years.
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.
8
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 a
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 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 one
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 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 follow-up 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 follow-up
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.
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
10
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.
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 or 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.
11
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
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 formed a Year 2000 Task Force to address the effects of the year
2000 problem on us. Our internal accounting systems have been tested and are
currently working without year 2000 or systems-related problems. Some of our
operations, however, are not currently year 2000 compliant, but we expect to be
compliant by mid-1999. We are also evaluating our significant third-party
vendors, our financial institutions and our major tenants for their year 2000
readiness.
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 are using 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. We cannot guarantee that all of our systems will be year 2000
compliant on time or that other companies on which we rely will be compliant in
a timely manner. A failure in either case could result in material adverse
effects on our financial condition and our results of 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
12
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.
As of December 31, 1998, some of our stockholders held registration rights
with respect to 1,765,923 shares of our common stock. In addition, we have
reserved for issuance to our officers, directors and employees pursuant to our
Amended and Restated 1997 Stock Award and Incentive 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 our stock option plan exceed 3,000,000 shares at
any time.
As of December 31, 1998, we had outstanding options to purchase 821,500
shares of our common stock, of which options to purchase 252,834 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, 1998, we had 29 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:
13
- 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
- Buildings 79 & 96, Charlestown Navy Yard, and 8000/9000/10000 Virginia
Manor Road, in which we own ground leasehold interests.
As of December 31, 1998, we had 158 leases with a total of 148 tenants, and
24 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,
1998:
- approximately 78% 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 17% of our leases (on a square footage basis) required
the tenants to pay a majority of operating expenses;
- approximately 83% 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 78% 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 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, 1998, we managed 41 of our Properties. The remaining
Properties were managed by third-party professional management companies. We
make all material decisions with respect to all of our Properties.
The following table sets forth pertinent information with respect to our
Properties as of December 31, 1998:
PERCENTAGE OF
AGGREGATE
ANNUALIZED PORTFOLIO
YEAR BUILT/ RENTABLE PERCENTAGE BASE ANNUALIZED
PROPERTIES RENOVATED (1) SQUARE FEET LEASED (2) RENT (2)(3) BASE RENT
- ---------- ------------- ----------- ---------- ----------- -------------
SAN DIEGO
10933 North Torrey Pines 1971/1994 107,753 100% $2,311,111 3.8%
Road
San Diego, CA
11099 North Torrey Pines 1986/1996 86,962 95 2,048,151 3.4
Road
San Diego, CA
3535 General Atomics Court 1986/1991 76,084 100 2,509,707 4.1
San Diego, CA
3565 General Atomics Court 1991 43,600 100 1,526,949 2.5
San Diego, CA
11025 Roselle Street 1983 18,173 100 387,379 0.6
San Diego, CA
4757 Nexus Centre Drive 1989 67,050 100 2,107,557 3.4
San Diego, CA
6166 Nancy Ridge Drive 1997 29,333 100 638,633 1.0
San Diego, CA
10505 Roselle Street late 1970's 16,000 38 51,120 0.1
San Diego, CA
3770 Tansy Street 1978 13,000 -- -- --
San Diego, CA
SAN FRANCISCO BAY AREA
1201 Harbor Bay Parkway 1983 61,015 74 692,660 1.1
Alameda, CA
1311 Harbor Bay Parkway 1984 27,745 66 273,057 0.4
Alameda, CA
1401 Harbor Pay Parkway 1986/1994 47,777 100 518,593 0.8
Alameda, CA
1431 Harbor Bay Parkway 1985/1994 68,711 100 1,413,968 2.3
Alameda, CA
819-863 Mitten Rd & 866 1962/1997 150,150 96 2,465,268 4.0
Malcolm Road
Burlingame, CA
SEATTLE
1102/1124 Columbia Street 1975/1997 210,163 95 5,380,147 8.8
Seattle, WA ++
3000/3018 Western Avenue 1929/1990 47,746 100 1,458,253 2.4
Seattle, Washington
3005 First Avenue 1980/1990 70,647 100 1,888,515 3.1
Seattle, Washington
SUBURBAN WASHINGTON, D.C.
300 Professional Drive 1989 47,588 51 474,523 0.8
Gaithersburg, MD
401 Professional Drive 1987 62,739 100 1,038,585 1.7
Gaithersburg, MD
25/35/45 West Watkins Mill 1989/1997 138,938 100 2,007,399 3.3
Road
Gaithersburg, MD
708 Quince Orchard Road 1982/1997 49,225 100 1,191,608 2.0
Gaithersburg, MD
940 Clopper Road 1989 44,464 84 513,769 0.8
Gaithersburg, MD
1401 Research Boulevard 1966 48,800 100 722,904 1.2
Rockville, MD
1500 East Gude Drive 1981/1986 45,989 100 624,334 1.0
Rockville, MD
3/3 1/2 Taft Court 1981/1986 24,460 15 36,602 0.1
Rockville, MD
1413 Research Boulevard 1967/1996 105,000 100 1,563,450 2.6
Rockville, MD
1550 East Gude Drive 1981/1995 44,500 100 596,006 1.0
Rockville, MD
1330 Piccard Drive 1978/1994 131,511 100 1,903,653 3.1
Rockville, MD
14225 Newbrook Drive 1992 248,186 100 4,341,125 7.1
Chantilly, VA
8000/9000/10000
Virginia Manor Road 1990 188,379 87 1,718,394 2.8
Beltsville, MD
10150 Old Columbia Road 1983/1997 75,500 100 1,087,002 1.8
Columbia, MD
19 Firstfield Road 1974 25,175 100 417,446 0.7
Gaithersburg, MD
15020 Shady Grove Road 1987 41,062 100 706,188 1.2
Gaithersburg, MD
2001 Aliceanna Street early 1950's 179,397 84 863,564 1.4
Baltimore, MD
50 West Watkins Mill Road 1988 57,410 100 677,438 1.1
Gaithersburg, MD
EASTERN MASSACHUSETTS
Buildings 79 & 96
Charlestown Navy Yard 1880/1991 24,940 100 710,000 1.2
Boston, MA
280 Pond Street 1960's 24,867 100 401,295 0.7
Randolph, MA
60 Westview Street 1975 39,909 100 480,000 0.8
Lexington, MA
377 Plantation Street 1993 92,711 100 2,185,284 3.6
Worcester, MA
620 Memorial Drive 1920's/1997 96,500 100 3,947,688 6.5
Cambridge, MA
NEW JERSEY/SUBURBAN
PHILADELPHIA
215 College Road 1968/1974/ 1984 110,666 100 1,253,463 2.1
Paramus, NJ
170 Williams Drive 1982/1994 37,000 100 536,500 0.9
Ramsey, NJ
100 Phillips Parkway late 1960's 80,000 -- -- --
Montvale, NJ
5100/5110 Campus Drive 1989 42,782 100 509,090 0.8
Plymouth Meeting, PA
702 Electronic Drive 1983/1998 40,000 100 937,527 1.5
Horsham, PA
279 Princeton Parkway 1984 42,600 100 260,320 0.4
Princeton, NJ
SOUTHEAST
100 Capitola Drive 1986 66,861 97 1,019,490 1.7
Durham, NC
800 & 801 Capitola Drive 1985 119,916 100 1,479,246 2.4
Durham, NC
150/154 Technology Parkway 1976/1993/ 37,080 100 675,560 1.1
Norcross, GA 1985
5 Triangle Drive 1981 32,120 100 486,825 0.8
Research Triangle Park, NC
Total/Weighted Average (14): 3,588,154 92.9% $61,037,346
ANNUALIZED
ANNUALIZED NET
BASE RENT EFFECTIVE
PER LEASED RENT PER
SQUARE FOOT LEASED SQUARE
PROPERTIES (3) FOOT (4) MAJOR TENANTS
- ---------- ----------- ------------- -------------
SAN DIEGO
10933 North Torrey Pines $21.45 15.93 The Scripps Research
Road Institute
San Diego, CA Advanced Tissue Sciences,
Inc.
11099 North Torrey Pines 24.84 23.04 Agouron Pharmaceuticals,
Road Inc. (5)
San Diego, CA Axys Pharmaceuticals, Inc.
3535 General Atomics Court 32.99 32.02 The Scripps Research
San Diego, CA Institute
R.W. Johnson Pharmaceutical
Research
Institute(6)
Syntro Corporation(7)
3565 General Atomics Court 35.02 35.02 Agouron Pharmaceuticals,
San Diego, CA Inc. (5)
11025 Roselle Street 21.32 18.68 Collateral Therapeutics, Inc.
San Diego, CA Ciblex Corporation
14
4757 Nexus Centre Drive 31.43 24.52 Matrix Pharmaceutical, Inc.
San Diego, CA
6166 Nancy Ridge Drive 21.77 19.78 Arena Pharmaceuticals, Inc.
San Diego, CA
10505 Roselle Street 8.52 8.52 Robert Prater Associates(8)
San Diego, CA
3770 Tansy Street -- -- Vacant(9)
San Diego, CA
SAN FRANCISCO BAY AREA
1201 Harbor Bay Parkway 15.27 8.45 Avigen, Inc.
Alameda, CA Ascend Communications, Inc.
1311 Harbor Bay Parkway 14.95 14.31 Chiron Corporation
Alameda, CA Therasense, Inc.
1401 Harbor Pay Parkway 10.85 10.54 Chiron Diagnostics
Alameda, CA
1431 Harbor Bay Parkway 20.58 16.57 U.S. Food & Drug
Alameda, CA Administration
819-863 Mitten Rd & 866 17.03 14.96 Megabios Corp.
Malcolm Road Mills Peninsula Medical Group,
Burlingame, CA Inc.
SEATTLE
1102/1124 Columbia Street 26.97 26.30 Corixa Corporation
Seattle, WA ++ Fred Hutchinson Cancer
Research Center
Swedish Medical Center
3000/3018 Western Avenue 30.54 25.35 University of Washington
Seattle, Washington
3005 First Avenue 26.73 26.01 Dendreon Corporation
Seattle, Washington
SUBURBAN WASHINGTON, D.C.
300 Professional Drive 19.64 19.57 Antex Biologics Inc.
Gaithersburg, MD
401 Professional Drive 16.55 16.55 Gillette Capital
Gaithersburg, MD Corporation(10)
25/35/45 West Watkins Mill 14.45 14.26 Genetic Therapy, Inc.(11)
Road MedImmune, Inc.
Gaithersburg, MD
708 Quince Orchard Road 24.21 15.08 Gene Logic, Inc.
Gaithersburg, MD
940 Clopper Road 13.69 12.86 Immunomatrix, Inc.
Gaithersburg, MD Lockheed Martin
Federal Systems, Inc.
1401 Research Boulevard 14.81 14.05 U.S. Bureau of Alcohol
Rockville, MD Tobacco and Firearms
1500 East Gude Drive 16.29 16.02 bioMerieux Vitek, Inc.
Rockville, MD
3/3 1/2 Taft Court 9.68 9.68 bioMerieux Vitek, Inc.(12)
Rockville, MD
1413 Research Boulevard 14.89 13.32 U.S. Army Corps of
Rockville, MD Engineers
1550 East Gude Drive $13.39 $13.39 Shire Pharmaceuticals Group
Rockville, MD plc(13)
15
1330 Piccard Drive 14.48 14.47 Intracel Corporation
Rockville, MD
14225 Newbrook Drive 17.49 17.49 American Medical
Chantilly, VA Laboratories, Inc.
8000/9000/10000
Virginia Manor Road 10.54 10.53 Digene Corporation
Beltsville, MD North American Vaccine, Inc.
10150 Old Columbia Road 14.40 13.48 North American Vaccine, Inc.
Columbia, MD
19 Firstfield Road 16.58 16.58 Genetic Therapy, Inc. (11)
Gaithersburg, MD
15020 Shady Grove Road 17.20 7.87 Human Genome Sciences
Gaithersburg, MD
2001 Aliceanna Street 5.74 5.74 Maryland Economic
Baltimore, MD Development Corporation
The National Aquarium of
Baltimore, Inc.
50 West Watkins Mill Road 11.80 11.80 Federal Express Corporation
Gaithersburg, MD
EASTERN MASSACHUSETTS
Buildings 79 & 96
Charlestown Navy Yard 28.47 26.35 Diacrin, Inc.
Boston, MA
280 Pond Street 16.14 16.14 Ares Advanced Technology,
Randolph, MA Inc.
60 Westview Street 12.03 11.03 U.S. Environmental Protection
Lexington, MA Agency
377 Plantation Street 23.57 23.57 University of Massachusetts Phytera, Inc.
Worcester, MA
620 Memorial Drive 40.91 40.91 Pfizer, Inc.
Cambridge, MA
NEW JERSEY/SUBURBAN
PHILADELPHIA
215 College Road 11.33 11.10 Playtex Products, Inc.
Paramus, NJ Synaptic Pharmaceutical
Corporation
170 Williams Drive 14.50 14.50 Alteon Inc.
Ramsey, NJ
100 Phillips Parkway -- -- Vacant(9)
Montvale, NJ
5100/5110 Campus Drive 11.90 11.87 Gen Trak, Inc.
Plymouth Meeting, PA Biomol Research Laboratories, Inc.
Magainin Pharmaceuticals Inc.
702 Electronic Drive 23.44 23.44 Cell Pathways, Inc.
Horsham, PA
279 Princeton Parkway 6.11 6.11 Coelacanth Corporation
Princeton, NJ
16
SOUTHEAST
100 Capitola Drive 15.77 10.38 American Social Health Association, Inc.
Durham, NC Batelle Survey Research, Inc.
800 & 801 Capitola Drive 12.34 11.05 Triangle Laboratories, Inc.
Durham, NC Ventana Communications Group, Inc.
150/154 Technology Parkway 18.22 18.10 CytRx Corporation
Norcross, GA Oread, Inc.
5 Triangle Drive 15.16 14.85 Mantech Environmental
Research Triangle Park, NC Technology, Inc.
City Search, Inc.
Total/Weighted Average (14): $18.32 $16.96
++ Gross revenues from this Property for the year ended December 31, 1998
represent in excess of 10% of the aggregate gross revenues of the Company
for such period.
(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,
1998.
(3) Annualized Base Rent means the annualized fixed base rental amount in
effect as of December 31, 1998 (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, 1998, 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, 1998, 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, 1998, is the
Annualized Net Effective Rent per Leased Square Foot.
(5) Agouron Pharmaceuticals, Inc. and Warner-Lambert Company have entered into
a merger agreement. The closing of the merger is subject to certain
conditions, including the approval of the common stockholders of Agouron
Pharmaceuticals, Inc. and the receipt of customary antitrust clearance. If
approved, Agouron Pharmaceuticals, Inc. will become a wholly owned
subsidiary of Warner-Lambert Company.
(6) The R.W. Johnson Pharmaceutical Research Institute is a wholly owned
subsidiary of Johnson & Johnson.
(7) Syntro Corporation is a wholly owned subsidiary of Schering-Plough
Corporation.
(8) Robert Prater Associates will vacate the Property on or before April 1999,
and the entire Property will be renovated.
(9) This Property is currently under renovation.
(10) Gillette Capital Corporation is a wholly owned subsidiary of The Gillette
Company, the guarantor of the lessee's obligations under the lease.
(11) Genetic Therapy, Inc. is a wholly owned subsidiary of Novartis AG.
(12) The unleased portion of this Property is currently under renovation.
(13) Shire Pharmaceuticals, plc subleases its space from Quest Diagnostics, Inc.
(14) 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, 1998, 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 457,955 12.8% $11,580,607 19.0%
San Francisco Bay Area 355,398 9.9 5,363,546 8.8
Seattle 328,556 9.2 8,726,915 14.3
Suburban Washington, D.C. 1,558,293 43.4 20,483,989 33.6
Eastern Massachusetts 278,927 7.8 7,724,267 12.6
New Jersey/Suburban Philadelphia 353,048 9.8 3,496,900 5.7
Southeast 255,977 7.1 3,661,122 6.0
--------- ----- ----------- -----
Total 3,588,154 100.0% $61,037,346 100.0%
--------- ----- ----------- -----
--------- ----- ----------- -----
- -------------
(1) Annualized Base Rent means the annualized fixed base rental amount in
effect as of December 31, 1998 (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, 1998.
18
20 LARGEST TENANTS
REMAIN- PERCENTAGE OF
ING PERCENTAGE AGGREGATE
INITIAL APPROXIMATE PERCENTAGE OF AGGREGATE ANNUALIZED PORTFOLIO
NUMBER LEASE AGGREGATE OF AGGREGATE ANNUALIZED PORTFOLIO NET EFFECTIVE ANNUALIZED
OF TERM IN RENTABLE LEASED BASE RENT (IN ANNUALIZED RENT (IN NET EFFECTIVE
TENANT LEASES YEARS SQUARE FEET SQUARE FEET THOUSANDS)(1) BASE RENT THOUSANDS)(2) RENT
------ ------ ------- ----------- ------------ ------------- ------------ -------------- -------------
American Medical
Laboratories, Inc. 1 18.0 248,186 7.4% $4,341 7.1% $4,341 7.7%
Pfizer, Inc. 1 13.3 96,500 2.9% 3,948 6.4% 3,948 7.0%
Corixa Corporation(3) 2 1.0 83,534 2.5% 3,049 4.9% 2,917 5.2%
1.4
7.7
Agouron Pharmaceuticals, 2 1.8 70,506 2.1% 2,309 3.8% 2,232 4.0%
Inc.(4) 2.8
Matrix Pharmaceutical, 1 12.3 67,050 2.0% 2,108 3.5% 1,644 2.9%
Inc.
Intracel Corporation 1 8.1 131,511 3.9% 1,904 3.1% 1,903 3.4%
Dendreon Corporation 1 10.0 70,647 2.1% 1,889 3.1% 1,837 3.3%
Advanced Tissue
Sciences, Inc. 2 1.7 84,524 2.5% 1,723 2.8% 1,390 2.5%
U.S. Army Corps of 1 0.4 105,000 3.2% 1,563 2.6% 1,399 2.5%
Engineers(5) 2.8
North American Vaccine, Inc. 2 3.8 110,531 3.3% 1,496 2.5% 1,427 2.5%
9.3
University of Washington 1 9.1 47,746 1.4% 1,458 2.4% 1,210 2.1%
U.S. Food & Drug
Administration 1 15.1 68,711 2.1% 1,414 2.3% 1,138 2.0%
Fred Hutchinson Cancer
Research Center 2 5.9 66,754 2.0% 1,395 2.3% 1,394 2.5%
MedImmune, Inc. 2 7.9 84,668 2.5% 1,348 2.2% 1,338 2.4%
R.W. Johnson Pharmaceutical
Research Institute(6) 1 0.1 44,997 1.4% 1,334 2.2% 1,261 2.2%
The Scripps Research 2 1.4 41,538 1.2% 1,334 2.2% 1,072 1.9%
Institute 2.7
Axys Pharmaceuticals, Inc. 1 3.0 55,548 1.7% 1,266 2.1% 1,194 2.1%
Gene Logic Inc. 1 8.9 49,225 1.5% 1,192 2.0% 742 1.3%
Gillette Capital
Corporation(7) 1 7.3 62,739 1.9% 1,039 1.7% 1,039 1.8%
University of Massachusetts 1 4.3 33,244 1.0% 997 1.6% 997 1.8%
--- ---- --------- ----- ------- ----- ------ -----
Total/Weighted Average(8) 27 8.2 1,623,159 48.6% $37,107 60.8% 34,423 61.1%
--- ---- --------- ----- ------- ----- ------ -----
--- ---- --------- ----- ------- ----- ------ -----
19
(1) Annualized Base Rent means the annualized fixed base rental amount in
effect as of December 31, 1998 (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, 1998 (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) Of the 83,534 rentable square feet leased to Corixa Corporation, portions
of their leases with respect to 1,232 square feet, 12,305 square feet and
69,997 square feet are subject to expiration in May 1999, December 1999 and
January 2005, respectively.
(4) Agouron Pharmaceuticals, Inc. and Warner-Lambert Company have entered into
a merger agreement. The closing of the merger is subject to certain
conditions, including the approval of the common stockholders of Agouron
Pharmaceuticals, Inc. and the receipt of customary antitrust clearance. If
approved, Agouron Pharmaceuticals, Inc. will become a wholly owned
subsidiary of Warner-Lambert Company.
(5) Of the 105,000 rentable square feet leased to the U.S. Army Corps of
Engineers, portions of their lease with respect to 30,000 square feet and
with respect to 75,000 square feet are subject to expiration in 1999 and
2001, respectively.
(6) The R.W. Johnson Pharmaceutical Research Institute is a wholly owned
subsidiary of Johnson & Johnson.
(7) Gillette Capital Corporation is a wholly owned subsidiary of The Gillette
Company, the guarantor of the lessee's obligations under the lease.
(8) Weighted Average based on percentage of aggregate leased square feet.
ITEM 3. LEGAL PROCEEDINGS.
On August 10, 1998, we filed a demand for arbitration against Mr. Alan
Gold, our former President, alleging various claims arising from his
employment relationship and seeking declaratory relief. On October 8, 1998,
Mr. Gold filed a response and alleged claims against us, arising from his
employment relationship, which we also expect to be resolved in the
arbitration. The arbitration is scheduled to take place April 19, 1999
through April 23, 1999.
To our knowledge, no other 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, 1998.
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 10, 1999, the last reported sales price per share
of our common stock was $28-5/8, and there were approximately 127 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(1) High Low Distribution
--------- --------- -------- --------------
1997
----
May 28, 1997 to June 30, 1997 22-1/4 20-5/8 $0.1275(2)
Third Quarter 28-9/16 21-5/8 $0.40
Fourth Quarter 31-7/8 26-5/8 $0.40
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
- --------------
(1) Period commencing on the date our common stock began trading on the NYSE
and ending on December 31, 1998. Prior to our initial public offering in
June 1997 and the 1,765.923 to 1 stock split in connection therewith, we
paid the following dividends on our common stock during 1997: (1) February
3, 1997, $1,549.82 per share; (2) March 31, 1997, $750.01 per share; and
(3) June 5, 1997, $475.00 per share.
(2) We paid a distribution of $0.1275 per share of our common stock on July 18,
1997 for the period May 28, 1997 through June 30, 1997, which is
approximately equivalent to a quarterly distribution of $0.40 per share for
the full calendar quarter.
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,
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.
For the Period
October 27,
1994
(inception)
Year ended December 31 through
------------------------------------------------- December 31,
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Total revenue................................................ $ 61,016 $ 34,846 $ 17,673 $ 9,923 $ 1,011
Total expenses............................................... 41,613 37,643 15,498 9,057 1,659
----------- ---------- ---------- ---------- ----------
Income (loss) from operations................................ 19,403 (2,797) 2,175 866 (648)
Charge in lieu of taxes...................................... -- -- -- (105) --
----------- ---------- ---------- ---------- ----------
Net income (loss)............................................ $ 19,403 $ (2,797) $ 2,175 $ 761 $ (648)
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Net income (loss) per share of common stock (pro forma
for 1997, pro forma and restated for 1996, 1995 and
1994)
- Basic.................................................. $ 1.60 $ (0.35) $ 0.60 $ 0.43 $ (0.37)
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
- Diluted................................................ $ 1.58 $ (0.35) $ 0.60 $ 0.43 $ (0.37)
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Weighted average shares of common stock outstanding
(pro forma for 1997, pro forma and restated for 1996,
1995 and 1994)(1)
- Basic.................................................. 12,098,959 8,075,864 3,642,131 1,765,923 1,765,923
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
- Diluted................................................ 12,306,470 8,075,864 3,642,131 1,765,923 1,765,923
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Cash dividends declared per share of common stock (pro
forma for 1997, pro forma and restated for 1996 and
1995....................................................... $ 1.60 $ 1.60 $ 0.87 $ 0.51 $ --
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA (AT PERIOD END):
Rental properties - net of accumulated depreciation.......... $ 471,907 $ 227,076 $ 146,960 $ 54,353 $ 54,366
Total assets................................................. $ 530,296 $ 248,454 $ 160,480 $ 58,702 $ 58,600
Mortgage loans payable and unsecured line of credit.......... $ 309,829 $ 70,817 $ 113,182 $ 40,894 $ 39,164
Total liabilities............................................ $ 330,527 $ 81,537 $ 120,907 $ 42,369 $ 40,119
Mandatorily redeemable Series V Preferred Stock.............. $ -- $ -- $ 25,042 $ -- $ --
Stockholders' equity......................................... $ 199,769 $ 166,917 $ 14,531 $ 16,333 $ 16,481
OTHER DATA:
Net income (loss)............................................ $ 19,403 $ (2,797) $ 2,175 $ 761 $ (648)
Add:
Special bonus(2)............................................. -- 353 -- -- --
Stock compensation(3)........................................ -- 4,239 -- -- --
Post-retirement benefit(4)................................... -- 632 438 -- --
Acquisition LLC financing costs(5)........................... -- 6,973 -- -- --
Write-off of unamortized loan costs(6)....................... -- 2,295 -- -- --
Depreciation and amortization................................ 10,296 4,866 2,405 1,668 63
----------- ---------- ---------- ---------- ----------
Funds from operations(7)..................................... $ 29,699 $ 16,561 $ 5,018 $ 2,429 $ (585)
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Cash flows from operating activities......................... $ 26,143 $ 3,883 $ (1,646) $ 355 $ (1,024)
Cash flows from investing activities......................... $ (246,753) $ (87,620) $ (94,900) $ (1,554) $ (29,924)
Cash flows from financing activities......................... $ 220,104 $ 84,101 $ 97,323 $ 927 $ 32,139
Number of properties owned at period end..................... 51 22 12 4 4
Rentable square feet of properties owned
at period end.............................................. 3,588,154 1,747,837 1,031,070 313,042 313,042
Occupancy of properties owned at period end.................. 93% 97% 97% 96% 88%
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
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
periods ended December 31, 1995 and 1994 also include shares outstanding
after giving effect to the 1,765,923 to 1 stock split.
(2) Represents a $353,000 special bonus we paid to an officer of Alexandria in
1997 in connection with the Offering.
(3) Represents an accrual for $4,239,000 of non-recurring, non-cash
compensation expense in 1997 relating to the issuance of stock options and
stock grants. In connection with the Offering, the holders of options
previously granted by Holdings under its 1994 stock option plans received
options to purchase shares of our common stock in substitution for the
Holdings options. These substitute options were exercised in connection
with the Offering.
(4) This adjustment relates solely to the non-cash accrual of a one-time post-
retirement benefit for an officer of Alexandria in 1997.
(5) In connection with the Offering, we acquired the membership interests in
the Acquisition LLC for $58,844,000. The purchase price we paid for the
Acquisition LLC exceeded the cost incurred by the Acquisition LLC to
purchase the properties it owned by $6,973,000. This difference was
accounted for as a financing cost.
(6) Of this amount, $2,147,000 represents the write-off of costs associated
with debt we paid off in connection with the Offering, and $148,000
represents the write-off of costs associated with debt paid off in November
1997.
(7) We compute funds from operations ("FFO") in accordance with standards
established by the Board of Governors of NAREIT in its March 1995 White
Paper ("White Paper"). The White Paper defines FFO as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, and excluding amounts for
extraordinary and non-recurring items, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. 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."
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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"). We issued 7,762,500 shares of our common stock in
connection with the Offering (including shares issued in the related exercise
of the underwriters' overallotment option) and raised $138.9 million, net of
underwriting discounts and commissions, advisory fees and offering costs.
Since the Offering, we have continued to devote substantially all of our
resources to the acquisition, selective development and management 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 1998, we:
- Sold 1,150,000 shares of our common stock in May to PaineWebber
Incorporated for inclusion in the PaineWebber Equity Trust REIT Series
I, a unit investment trust. We received aggregate proceeds from this
transaction, net of underwriting discounts and commissions, advisory
fees and offering costs, of approximately $32.7 million.
- Increased our borrowing capacity under our line of credit from $150
million to $250 million in August, thereby providing additional
flexibility in pursuing acquisitions and funding tenant improvements
and capital expenditures.
- Acquired a total of 29 properties with approximately 1.8 million in
rentable square feet, including two properties aggregating
approximately 105,000 rentable square feet that will undergo major
renovation.
Our primary source of revenue is rental income and tenant recoveries from
leases at the properties we own. Of the 51 properties we owned as of
December 31, 1998, four were acquired in calendar year 1994, eight in 1996 (the
"1996 Acquired Properties"), 10 in 1997 (the "1997 Acquired Properties") and 29
in 1998 (the "1998 Acquired Properties"). As a result of our acquisition
activities, there were significant increases in total revenues and expenses for
1998 as compared to 1997.
RESULTS OF OPERATIONS
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 Acquired Properties being owned for a full period and the
addition of the 1998 Acquired 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 "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 Acquired Properties being owned for a full period and the
addition of the 1998 Acquired Properties. Tenant recoveries for the Same
Properties increased by $149,000, or 2.8%, generally due to the improved
identification and recovery of costs at certain properties.
24
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 Acquired 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 52%, to $13.4
million for 1998 compared to $8.8 million for 1997. The increase resulted
almost entirely from the 1997 Acquired Properties being owned for a full
period and the addition of the 1998 Acquired Properties. Operating expenses
for the Same Properties decreased by $145,000, or 2.5%, primarily due to
lower premiums on our blanket property and liability insurance policies.
The following is a comparison of property operating data 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") for the 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 (1):
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%
-------- -------- -----
-------- -------- -----
- --------------
(1) Revenue and operating expenses are computed in accordance with GAAP,
except that revenue excludes the effect of straight line rent
adjustments.
General and administrative expenses increased by $1.4 million, or 56%,
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 incurred to acquire the 1997 Acquired Properties and the 1998
Acquired 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.
Special bonus of $353,000 in 1997 reflects a bonus we paid to an officer
of Alexandria in connection with the Offering. Post retirement benefit
expense of $632,000 in 1997 reflects an adjustment for the non-cash accrual
associated with a one-time post retirement benefit for an officer of
Alexandria. Stock compensation expense of $4.2 million was recorded in 1997
for the non-recurring, non-cash expense related to the stock grants and
options we issued to our officers, directors and certain employees,
principally in connection with the Offering.
25
Acquisition LLC financing costs of $7.0 million in 1997 represent the
portion of the purchase price of the membership interests in ARE
Acquisitions, LLC (the "Acquisition LLC") in excess of the cost incurred by
the Acquisition LLC to acquire its three Life Science Facilities.
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 110%, to
$10.3 million for 1998 compared to $4.9 million for 1997. The increase
resulted primarily from depreciation associated with the 1997 Acquired
Properties being owned for a full period and the addition of the 1998
Acquired 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.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
Rental revenue increased by $12.7 million, or 98%, to $25.6 million for
1997 compared to $12.9 million for 1996. The increase resulted primarily
from the 1996 Acquired Properties being owned for a full period and the
addition of the 1997 Acquired Properties. Rental revenue from the properties
we acquired before January 1, 1996 (the "1997 Same Properties") increased by
$180,000, or 2%. This increase resulted primarily from the conversion of
19,310 square feet of storage space to higher rent laboratory space at 10933
North Torrey Pines Road in October 1996.
Tenant recoveries increased by $4.2 million, or 100%, to $8.4 million
for 1997 compared to $4.2 million for 1996. The increase resulted primarily
from the 1996 Acquired Properties being owned for a full period and the
addition of the 1997 Acquired Properties. Tenant recoveries for the 1997
Same Properties increased by $416,000, or 19%, due to an increase in
operating expenses (particularly utilities) being passed through to the
tenants.
Interest and other income increased by $273,000, or 48%, to $836,000 for
1997 compared to $563,000 for 1996, resulting from an increase in interest
income due to the investment of excess funds from the Offering and increased
amounts in capital improvement reserve accounts.
Rental operating expenses increased by $4.4 million, or 100%, to $8.8
million for 1997 compared to $4.4 million for 1996. The increase resulted
almost entirely from the 1996 Acquired Properties being owned for a full
period and the addition of the 1997 Acquired Properties. Operating expenses
for the 1997 Same Properties increased by $401,000, or 17%, primarily due to
increased utility expenses (due to greater usage) which were passed through
to the tenants.
General and administrative expenses increased by $504,000, or 26%, to
$2.5 million for 1997 compared to $2.0 million for 1996 due to our larger
scope of operations and increased costs incurred as a result of being a
public company.
Interest expense increased by $716,000, or 11%, to $7.0 million for 1997
compared to $6.3 million for 1996. The increase resulted from indebtedness
incurred to acquire the 1996 Acquired Properties and the 1997 Acquired
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.
The amounts shown for special bonus, post-retirement benefit expense,
stock compensation expense, Acquisition LLC financing costs and write-off
unamortized loan costs in 1997 relate primarily to transactions associated
with the Offering. We have described them in the prior section under " -
Comparison of the Year Ended December 31, 1998 to the Year Ended December 31,
1997."
26
Depreciation and amortization increased by $2.5 million, or 104%, to
$4.9 million for 1997 compared to $2.4 million for 1996. The increase
resulted primarily from depreciation associated with the 1996 Acquired
Properties being owned for a full period and the addition of the 1997
Acquired Properties.
As a result of the foregoing, the net loss was $2.8 million for 1997
compared to net income of $2.2 million for 1996.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash provided by operating activities for 1998 increased by $22.2
million to $26.1 million compared to $3.9 million for 1997. The increase
resulted primarily from operating cash flows from the addition of the 1997
Acquired Properties and the 1998 Acquired Properties.
Net cash used in investing activities increased by $159.2 million to
$(246.8) million for 1998 compared to $(87.6) million for 1997. The increase
resulted from $200.6 million used for the acquisition of the 1998 Acquired
Properties, $21.2 million used for additions to rental properties, $18.9
million used for additions to land under development and $6.0 million used
for the addition of a note receivable made in connection with the acquisition
of one of the 1998 Acquired Properties.
Net cash provided by financing activities increased by $136.0 million to
$220.1 million for 1998 compared to $84.1 million for 1997. This increase
resulted from $35.2 million in net proceeds from secured debt, $171.0 million
in borrowings under our unsecured line of credit, $32.7 million in net
proceeds from the issuance of our common stock and $386,000 in net proceeds
from the exercise of stock options, partially offset by payments of $19.2
million in dividends payable on our common stock.
COMMITMENTS
We are committed to complete the construction of a building and certain
related improvements in San Diego, California at a remaining cost of
approximately $4.9 million under the terms of two leases. In addition, we
are committed to complete the construction of a building and certain related
improvements in Gaithersburg, Maryland at a remaining cost of between $7.8
million and $16.8 million (depending on the level of improvements to the
facility elected by the tenant) under the terms of a lease. Under the terms
of the lease, the tenant's rental rate will be adjusted depending on the
ultimate cost of the improvements.
We are also committed to fund approximately $11.1 million for
investments in limited partnerships and rental properties, including the
construction of tenant improvements under the terms of various leases. Of
this amount, approximately $3.2 million has been set aside in restricted cash
accounts to complete the conversion of existing space into higher rent
generic laboratory space (as well as certain related improvements) at
1102/1124 Columbia Street and 3000/3018 Western Avenue.
27
RESTRICTED CASH
As of December 31, 1998, we had $9.9 million in cash and cash
equivalents, including $7.5 million in restricted cash. Restricted cash
consists of the following (in thousands):
Amount
----------
Reserve for tenant improvements established
pursuant to leases at two of our properties (1) $ 3,220
Funds held in trust as additional security
required under the terms of two of our
secured notes payable 3,360
Security deposit funds based on the terms
of certain lease agreements 911
---------
$ 7,491
---------
---------
- --------------
(1) Of this amount, $2.1 million was returned to us in January 1999 upon
the completion of tenant improvements at 3000/3018 Western Avenue.
SECURED DEBT
Secured debt as of December 31, 1998 consists of the following (dollars
in thousands):
BALANCE AT STATED INTEREST MATURITY
COLLATERAL DECEMBER 31, 1998 RATE DATE
- --------------------------------------------------------------------------------------------------------------------------
3535/3565 General Atomics Court, $ 17,578 9.00% December 2014
San Diego, CA
1431 Harbor Bay Parkway, 8,500 7.165% January 2014
Alameda, CA
1102/1124 Columbia Street, 20,729 7.75% May 2016
Seattle, WA
100/800/801 Capitola Drive, 12,547 8.68% December 2006
Durham, NC
14225 Newbrook Drive, Chantilly, 36,326 7.22% May 2008
VA and 3000/3018 Western Avenue,
Seattle, WA
620 Memorial Drive, 20,149 9.125% May 20