Item 1. Business
General
Alexandria Real Estate Equities, Inc. is a Maryland corporation formed in October 1994 that has elected to be taxed as a real estate investment trust ("REIT") for federal income tax purposes. We are engaged primarily in the ownership, operation, management, acquisition, expansion and selective redevelopment and development of high quality, strategically located properties containing office and laboratory space designed and improved for lease principally to pharmaceutical, biotechnology, life science product and services companies, not-for-profit scientific research institutions, universities 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. We call such properties "life science facilities." As of December 31, 2001, we owned 82 properties (collectively, the "properties"), containing approximately 5.3 million rentable square feet of office and laboratory space.
Business and Growth Strategy
We focus our property operations and investment activities principally in the following life science markets:
California (in the San Diego, Pasadena and San Francisco Bay areas);
Seattle;
suburban Washington, D.C. (including Maryland and Virginia);
eastern Massachusetts;
New Jersey and suburban Philadelphia; and
the Southeast (including North Carolina and Georgia).
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.
Item 2. Properties.
General.
Our properties range in size from approximately 15,000 to 248,000 square feet, are built to accommodate single or multiple tenants and are generally one or two story concrete tilt-up, block and/or 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 being specific to a particular tenant. As a result, we believe that the improvements have long-term value and utility and are 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;
enhanced environmental control technology;
significantly upgraded electrical, gas and plumbing infrastructure; and
laboratory benches.
We own fee simple title in each of our properties, except with respect to:
1311, 1401 and 1431 Harbor Bay Parkway, in which we own a commercial condominium interest, together with an undivided interest in the common areas of the project of which the property is a part; and
2425 Garcia Avenue, 2400/2450 Bayshore Parkway, 2625/2627/2631 Hanover Street, 108 Alexander Road, Buildings 79 & 96, Charlestown Navy Yard, and 8000/9000/10000 Virginia Manor Road, in which we own ground leasehold interests.
As of December 31, 2001, we had 194 leases with a total of 167 tenants, and 45 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 initial terms of 10 to 20 years. As of December 31, 2001:
approximately 82% 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, and, in addition to our triple net leases, approximately 13% of our leases (on a square footage basis) required the tenants to pay a majority of operating expenses;
approximately 92% of our leases (on a square footage basis) contained effective annual rent escalations that are either fixed (generally ranging from 3% to 4%) or indexed based on a consumer price index or other index; and
approximately 87% of our leases (on a square footage basis) provided for the recapture of certain capital expenditures (such as HVAC systems maintenance and/or replacement, roof replacement and parking lot resurfacing), which we believe would typically be borne by the landlord in traditional office leases.
Our leases also typically give us the right to review and approve tenant alterations to the property. Generally, tenant-installed improvements to the facilities remain our property after termination of the lease at our election. 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, 2001, we managed all of our properties.
The following table sets forth information with respect to our properties as of December 31, 2001:
Annualized PercentageAnnualized Net of Base Effective Aggregate Rent Per Rent Per Rentable Annualized Portfolio Leased Leased Year Built/ Square Percentage Base Annualized Square Square Properties Renovated (1) Feet Leased (2) Rent (2) (3) Base Rent Foot (3) Foot (4) Major Tenants -------------------------------------------- ---------- ---------- ------------ --------- --------- --------- --------------------------------------- San Diego
North Torrey Pines Road #1 1971/1994 107,753 100% $2,718,696 2.5% $25.23 $23.41 The Scripps Research Institute San Diego, CA Advanced Tissue Sciences, Inc.
Science Park Road 2000 74,557 100% 2,309,771 2.1% 30.98 23.30 IDEC Pharmaceuticals Corporation San Diego, CA
North Torrey Pines Road #2 1986/1996 86,962 100% 3,201,087 2.9% 36.81 33.55 Pfizer, Inc. San Diego, CA Senomyx, Inc.
General Atomics Court #1 1986/1991 76,084 100% 2,683,633 2.5% 35.27 34.28 Merck & Co., Inc. San Diego, CA
General Atomics Court #2 1991 43,600 100% 1,758,141 1.6% 40.32 40.30 Pfizer, Inc. San Diego, CA
Roselle Street #1 1983/1998 18,173 100% 401,568 0.4% 22.10 16.78 Collateral Therapeutics, Inc. (5) San Diego, CA
Nexus Centre Drive 1989 67,050 100% 2,107,557 1.9% 31.43 24.53 Matrix Pharmaceutical, Inc. (6) San Diego, CA
Nancy Ridge Drive #1 1997 29,333 100% 638,606 0.6% 21.77 15.44 Arena Pharmaceuticals, Inc. San Diego, CA
Roselle Street #2 late 17,603 100% 476,944 0.4% 27.09 21.84 Structural GenomiX, Inc. San Diego, CA 1970's/1999
Tansy Street 1978/1999 15,410 100% 409,171 0.4% 26.55 20.81 Structural GenomiX, Inc. San Diego, CA
John Hopkins Court #1 2000 34,723 100% 671,101 0.6% 19.33 16.81 Merck & Co., Inc. San Diego, CA
John Hopkins Court #2 1999 55,200 100% 1,096,769 1.0% 19.87 18.37 Merck & Co., Inc. San Diego, CA
Towne Centre Drive #1 1987 45,030 100% 864,871 0.8% 19.21 19.16 Orincon Industries, Inc. San Diego, CA Amylin Pharmaceuticals, Inc.
Towne Centre Drive #2 1987/2000 52,228 100% 1,354,580 1.2% 25.94 22.35 Amylin Pharmaceuticals, Inc. San Diego, CA Vical Incorporated
Towne Centre Drive #3 1987/2000 41,554 100% 1,093,390 1.0% 26.31 16.36 Conforma Therapeutics, Inc. San Diego, CA Nereus Pharmaceuticals, Inc.
Roselle Street #3 1981 18,193 100% 463,922 0.4% 25.50 25.38 Selective Genetics, Inc. San Diego, CA
Roselle Street #4 1981/1998 30,147 100% 741,901 0.7% 24.61 24.53 Integra Life Science Holdings Corporation San Diego, CA Universal Preservation Technologies, Inc.
Roselle Street #5 1981/1995 22,577 100% 639,241 0.6% 28.31 27.62 Cell Geneysys, Inc. San Diego, CA
Roselle Street #6 1981/1999 17,433 100% 234,822 0.2% 13.47 13.47 Biosite Incorporated San Diego, CA
Roselle Street #7 1981/1995 24,208 100% 685,421 0.6% 28.31 27.63 Cell Geneysys, Inc. San Diego, CA
Nancy Ridge Drive #2 early 1980's 21,940 52% 330,177 0.3% 29.20 21.34 GeneOhm Sciences, Inc. San Diego, CA
Campus Point Drive 1986/1992/ 71,510 100% 2,390,948 2.2% 33.44 33.44 LION Bioscience AG San Diego, CA 1998
Pasadena
North Hill Avenue 1940's/2001 31,343 25% 202,035 0.2% 25.51 23.18 Biocatalytics, Inc. Pasadena, CA Starbucks Corporation
San Francisco Bay Area
Harbor Bay Parkway #1 1983/1999 61,015 100% 1,003,690 0.9% 16.45 12.43 Avigen, Inc. Alameda, CA Lucent Technologies Inc.
Harbor Bay Parkway #2 1984/2000 27,745 100% 654,910 0.6% 23.60 18.18 Berkeley HeartLab, Inc. Alameda, CA Applera Corporation
Harbor Bay Parkway #3 1986/1994 47,777 100% 757,820 0.7% 15.86 14.74 Applera Corporation Alameda, CA
Harbor Bay Parkway #4 1985/1994 68,711 100% 1,413,968 1.3% 20.58 19.65 U.S. Food & Drug Administration Alameda, CA
Mitten Road & Malcolm Road 1962/1997 153,837 84% 2,991,508 2.7% 23.21 17.41 Valentis, Inc. Burlingame, CA Berkeley HeartLab, Inc. U.S. Federal Aviation Administration
Hanover Street 1968/1985/ 32,074 79% 1,609,040 1.5% 63.80 56.48 Xenoport, Inc. Palo Alto, CA 2000
Garcia Avenue & Bayshore 1980/2000 98,964 100% 4,001,119 3.7% 40.43 36.19 Equinix, Inc. Parkway Google Inc. Mountain View, CA
Oyster Point Boulevard #1 2001 53,980 100% 2,812,914 2.6% 52.11 43.36 Sunesis Pharmaceuticals, Inc. S. San Francisco, CA
Oyster Point Boulevard #2 2001 53,980 100% 1,740,891 1.6% 32.25 31.20 ViroLogic, Inc. S. San Francisco, CA
Durant Avenue 1930 25,000 - - - - - Vacant (7) Berkeley, CA
Seattle
Columbia Street 1975/1997 209,361 88% 5,541,794 5.1% 30.08 25.93 Corixa Corporation Seattle, WA Primal, Inc.
Western Avenue 1929/1990/ 47,746 100% 1,576,856 1.4% 33.03 28.41 University of Washington Seattle, Washington 2000
First Avenue 1980/1990/ 70,647 100% 2,532,667 2.3% 35.85 29.45 Dendreon Corporation Seattle, Washington 2000
Suburban Washington, D.C.
Professional Drive #1 1989/1999 47,558 100% 1,084,349 1.0% 22.80 17.57 Antex Biologics Inc. Gaithersburg, MD Wisor Telecom, Inc.
Professional Drive #2 1987 62,739 100% 1,038,585 1.0% 16.55 16.54 The Gillette Company Gaithersburg, MD
West Watkins Mill Road #1 1989/1997 138,938 100% 1,984,161 1.8% 14.28 13.08 MedImmune, Inc. Gaithersburg, MD Genetic Therapy, Inc.(8)
Quince Orchard Road #1 1982/1997 49,225 100% 1,461,699 1.3% 29.69 18.33 Gene Logic Inc. Gaithersburg, MD
Clopper Road #1 1989 44,464 100% 693,317 0.6% 15.59 12.59 Advancis Pharmaceuticals, Inc. Gaithersburg, MD Fiserv Securities, Inc.
Research Boulevard #1 1966 48,800 100% 837,340 0.8% 17.16 16.39 U.S. Bureau of Alcohol Tobacco and Rockville, MD Firearms
East Gude Drive #1 1981/1986 45,989 100% 662,570 0.6% 14.41 13.04 bioMerieux SA Rockville, MD MacroGenics, Inc.
Research Boulevard #2 1967/1996/ 105,000 100% 1,815,917 1.7% 17.29 15.71 U.S. Army Corps of Engineers Rockville, MD 2000
East Gude Drive #2 1981/1995 44,500 100% 735,374 0.7% 16.53 16.07 Shire Pharmaceuticals Group plc Rockville, MD
Piccard Drive 1978/1994 131,511 34% 1,037,771 1.0% 23.12 16.79 Advanced Bioscience Laboratories, Inc. Rockville, MD Tibotec, Inc.
Newbrook Drive 1992 248,186 100% 4,341,125 4.0% 17.49 17.49 American Medical Laboratories, Inc. (9) Chantilly, VA
Virginia Manor Road 1990 191,884 90% 2,052,126 1.9% 11.88 11.15 Baxter International Inc. Beltsville, MD Bank of America
Old Columbia Road 1983/1997 75,500 100% 1,087,343 1.0% 14.40 11.37 Baxter International Inc. Columbia, MD
Firstfield Road #1 1974/2000 25,175 100% 626,102 0.6% 24.87 21.28 Psychiatric Genomics, Inc. Gaithersburg, MD Avalon Pharmaceuticals, Inc.
Shady Grove Road 1987 41,062 100% 773,683 0.7% 18.84 11.57 Human Genome Sciences, Inc. Gaithersburg, MD
Aliceanna Street early 179,397 91% 918,192 0.8% 5.63 5.57 Maryland Economic Development Baltimore, MD 1950's/1995 Corporation The National Aquarium of Baltimore, Inc.
West Watkins Mill Road #2 1988/2000 57,410 100% 875,452 0.8% 15.25 12.79 Gene Logic Inc. Gaithersburg, MD
Clopper Road #2 2000 92,990 100% 2,634,285 2.4% 28.33 17.21 Digene Corporation (10) Gaithersburg, MD
Firstfield Road #2 1980/2001 53,416 90% 1,001,455 0.9% 20.93 17.15 IOMAI Corporation Gaithersburg, MD Surgi-Vision, Inc.
Firstfield Road #3 1980 53,595 50% 537,208 0.5% 20.05 15.19 Provident Bank of Maryland Gaithersburg, MD Gene Logic Inc.
Quince Orchard Road #2 1981 54,874 100% 812,584 0.7% 14.81 14.77 Montgomery County, Maryland Gaithersburg, MD
Clopper Road #3 1989/1992 59,838 100% 813,334 0.7% 13.59 11.12 Pro-Virus, Inc. Gaithersburg, MD
Research Place 1972 58,632 - - - - - Vacant (7) Rockville, MD
Eastern Massachusetts
Charlestown Navy Yard 1880/1991 24,940 100% 710,000 0.7% 28.47 28.47 Diacrin, Inc. Boston, MA
Pond Street 1965/1990 24,867 100% 434,368 0.4% 17.47 17.36 Ares Advanced Technology, Inc. Randolph, MA
Westview Street 1975 40,000 - - - - - Vacant (7) Lexington, MA
Plantation Street #1 1993 92,711 100% 2,224,331 2.0% 23.99 23.95 University of Massachusetts Worcester, MA Athena Diagnostics, Inc.
Memorial Drive 1920's/1997/ 96,500 100% 3,950,048 3.6% 40.93 40.89 Pfizer, Inc. Cambridge, MA 1999
Innovation Drive 1991 113,956 100% 2,394,026 2.2% 21.01 19.57 AstraZeneca plc Worcester, MA ViaCell, Inc.
Plantation Street #2 2000 92,423 87% 2,028,757 1.9% 25.23 12.54 Abbott Laboratories, Inc. Worcester, MA Hypnion, Inc.
Arsenal Street #1 1978/1984/ 92,500 100% 4,346,481 4.0% 46.99 45.89 Enanta Pharmaceuticals, Inc. Watertown, MA 2001 Acusphere, Inc.
Hartwell Avenue 1972/1996-199 59,000 - - - - - Vacant (7) Lexington, MA
Arsenal Street #2 1980 96,150 - - - - - Vacant (7) Watertown, MA
New Jersey/Suburban Philadelphia
College Road 1968/1974/ 106,036 100% 1,704,824 1.6% 16.08 14.55 Synaptic Pharmaceutical Corporation Paramus, NJ 1984 Gryphon Development, Inc.
Williams Drive 1982/1994 37,000 100% 536,500 0.5% 14.50 14.47 Alteon Inc. Ramsey, NJ
Phillips Parkway late 1960's/ 75,972 100% 1,680,900 1.5% 22.13 14.44 Memory Pharmaceuticals Corp. Montvale, NJ 1999 Ferolie Corporation
Campus Drive 1989 42,782 100% 586,948 0.5% 13.72 12.67 Genaera Corporation Plymouth Meeting, PA Pharmerica, Inc.
Electronic Drive 1983/1998 40,000 100% 937,527 0.9% 23.44 15.86 Cell Pathways, Inc. Horsham, PA
Princeton Road 1984/1999 42,600 100% 530,182 0.5% 12.45 8.44 Lexicon Genetics, Inc. Princeton, NJ
Southeast
Capitola Drive #1 1986 65,114 93% 967,847 0.9% 16.10 11.36 American Social Health Association, Inc. Durham, NC Batelle Survey Research, Inc.
Capitola Drive #2 1985 119,916 79% 1,404,425 1.3% 14.86 12.26 Integrated Laboratory Systems, Inc. Durham, NC Artecel Sciences, Inc.
Technology Parkway 1976/1985/ 37,080 60% 288,896 0.3% 12.97 11.89 CytRx Corporation Norcross, GA 1993 Atherogenics, Inc.
Triangle Drive 1981 32,120 100% 490,239 0.5% 15.26 15.03 Mantech Environmental Technology, Inc. Research Triangle Park, NC City Search, Inc.
Alexander Road 2000 86,239 100% 1,849,188 1.7% 21.44 19.78 Paradigm Genetics, Inc. Research Triangle Park, NC
Kit Creek Road 1995 37,908 37% 272,461 0.3% 19.49 13.52 AM Pappas & Associates, L.L.C. Research Triangle Park, NC Biogen, Inc. ---------- ---------- ------------ --------- --------- --------- Total/Weighted Average (11): 5,319,945 89% 109,273,449 100% $23.18 $20.16 ========== ========== ============ ========= ========= =========
________________
Includes year in which construction was completed and, where applicable, year of most recent major renovation.
Based on all leases at the respective property in effect as of December 31, 2001.
Annualized base rent means the annualized fixed base rental amount in effect as of December 31, 2001 (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, 2001, is the annualized base rent per leased square foot.
Annualized net effective rent is the annualized base rent in effect as of December 31, 2001 (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) amortization of tenant improvements and leasing commissions. This amount, divided by the rentable square feet leased at the property as of December 31, 2001, is the annualized net effective rent per leased square foot.
In March 2002, Schering AG announced an agreement to acquire Collateral Therapeutics, Inc. in a transaction expected to close in 2002.
In January 2002, Chiron Corporation announced an agreement to acquire Matrix Pharmaceutical, Inc. in a transaction expected to close in 2002.
All or a significant portion of this property is currently under redevelopment.
Genetic Therapy, Inc. is a wholly owned subsidiary of Novartis AG.
In February 2002, Quest Diagnostics, Inc. announced an agreement to acquire American Medical Laboratories, Inc. in a transaction expected to close in 2002.
In February 2002, Cytyc Corporation announced an agreement to acquire Digene Corporation in a transaction expected to close in 2002.
Weighted average based on a percentage of aggregate leased square feet.
Location of Properties
The following table sets forth, as of December 31, 2001, the total rentable square footage and annualized base rent of our properties in each of our existing markets.
Total Rentable % of Total Rentable Annualized % of Annualized Geographic Area Square Footage Square Footage Base Rent (1) Base Rent --------------- -------------- ------------------- -------------- ----------------
San Diego 971,268 18.3% $27,272,316 25.0%
Pasadena 31,343 0.5% 202,035 0.2%
San Francisco Bay Area 623,083 11.7% 16,985,859 15.5%
Seattle 327,754 6.2% 9,651,318 8.8%
Suburban Washington, D.C 1,910,683 35.9% 27,823,972 25.5%
Eastern Massachusetts 733,047 13.8% 16,088,012 14.7%
New Jersey/Suburban Philadelphi 344,390 6.5% 5,976,880 5.5%
Southeast 378,377 7.1% 5,273,057 4.8% -------------- ------------------- -------------- ---------------- Total 5,319,945 100.0% $109,273,449 100.0% ============== =================== ============== ================
________________
Annualized base rent means the annualized fixed base rental amount in effect as of December 31, 2001 (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 in a broad spectrum of sectors within 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, 2001. 20 Largest Tenants
Remaining Percentage Initial Percentage of Aggregate Lease Approximate Percentage of Aggregate Annualized Portfolio Number Term Aggregate of Aggregate Annualized Portfolio Net Effective Annualized of 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 ---------------------------------------- -------- ------------ ------------ -------------- ------------ -------------- -------------
Pfizer, Inc. 3 10.3 167,006 3.5% $6,589 6.0% $6,583 6.9% 4.8 0.8
Merck & Co., Inc. 3 8.8 166,007 3.5% 4,452 4.1% 4,206 4.4%
American Medical Laboratories, 1 15.0 248,186 5.3% 4,341 4.0% 4,341 4.6% Inc. (3)
Corixa Corporation 3 3.0 86,887 1.8% 3,139 2.9% 2,797 2.9% 0.5
Sunesis Pharmaceuticals, Inc. 1 11.5 53,980 1.1% 2,813 2.6% 2,340 2.5%
Digene Corporation (4) 1 8.0 92,990 2.0% 2,634 2.4% 1,600 1.7%
Equinix, Inc. 2 5.3 56,332 1.2% 2,565 2.3% 2,261 2.4%
Dendreon Corporation 1 7.0 70,647 1.5% 2,533 2.3% 2,081 2.2%
Gene Logic, Inc. 3 9.0 112,271 2.4% 2,435 2.2% 1,735 1.8% 5.9
LION Bioscience AG 1 6.3 71,510 1.5% 2,391 2.2% 2,391 2.5%
Acusphere, Inc. 1 10.0 47,500 1.0% 2,340 2.1% 2,293 2.4%
Senomyx, Inc. 1 5.0 60,056 1.3% 2,320 2.1% 2,037 2.1%
IDEC Pharmaceuticals 1 8.5 74,557 1.6% 2,310 2.1% 1,737 1.8% Corporation
Matrix Pharmaceutical, Inc.(5) 1 9.2 67,050 1.4% 2,108 1.9% 1,644 1.7%
Baxter International, Inc. 2 9.7 145,881 3.1% 2,078 1.9% 1,810 1.9% 6.2
Advanced Tissue Sciences, Inc. 2 4.0 84,524 1.8% 2,039 1.9% 1,854 2.0%
Enanta Phamaceuticals, Inc. 1 9.8 45,000 1.0% 2,006 1.8% 1,952 2.1%
Paradigm Genetics, Inc. 2 8.8 86,239 1.8% 1,849 1.7% 1,706 1.8%
U.S. Army Corps of Engineers 1 5.4 105,000 2.2% 1,816 1.7% 1,649 1.7%
ViroLogic, Inc. 1 9.5 53,980 1.1% 1,741 1.6% 1,684 1.8%
------- -------- ------------ ------------ -------------- ------------ -------------- ------------- Total/Weighted Average (6): 32 8.4 1,895,603 40.1% $54,499 49.8% $48,701 51.2% ======= ======== ============ ============ ============== ============ ============== =============
________________
Annualized base rent means the annualized fixed base rental amount in effect as of December 31, 2001 (using rental revenue computed on a straight-line basis in accordance with GAAP) paid by tenants under the terms of their leases.
Annualized net effective rent is the annualized base rent in effect as of December 31, 2001 (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) amortization of tenant improvements and leasing commissions.
In February 2002, Quest Diagnostics, Inc. announced an agreement to acquire American Medical Laboratories, Inc. in a transaction expected to close in 2002.
In February 2002, Cytyc Corporation annuounced an agreement to acquire Digene Corporation in a transaction expected to close in 2002.
In January 2002, Chiron Corporation announced an agreement to acquire Matrix Pharmaceutical, Inc. in a transaction expected to close in 2002.
Weighted average based on percentage of aggregate leased square feet.
Item 3.
Item 3. Legal Proceedings
To our knowledge, no litigation is pending against us, other than routine actions and administrative proceedings, substantially all of which are expected to be covered by liability insurance or which, in the aggregate, are not expected to have a material adverse effect on our financial condition, results of operations or cash flows.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of our security holders in the fourth quarter of the fiscal year ended December 31, 2001.
PART II
Item 5.
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 27, 2002, the last reported sales price per share of our common stock was $44.18, and there were approximately 233 holders of record of our common stock (excluding beneficial owners whose shares are held in the name of CEDE & Co.). The following table sets forth the quarterly high and low sales prices per share of our common stock as reported on the NYSE and the distributions paid by us with respect to each such period.
Per Share Period High Low Disribution ------ ------ ------ ------------ First Quarter......................... $32.00 $29.00 $0.43 Second Quarter........................ $34.88 $30.00 $0.43 Third Quarter......................... $37.13 $31.50 $0.43 Fourth Quarter........................ $38.56 $33.13 $0.43
First Quarter......................... $37.43 $34.19 $0.46 Second Quarter........................ $38.44 $34.64 $0.46 Third Quarter......................... $41.00 $36.16 $0.46 Fourth Quarter........................ $41.53 $36.93 $0.46
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 90% of our taxable income for the current taxable year, determined without regard to deductions for dividends paid and 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 these distribution requirements. In such a 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.
Item 6.
Item 6. Selected Financial Data
The following table should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K.
Year Ended December 31, --------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- (Dollars in thousands, except per share amounts) Operating Data: Total revenue ........................................ $ $127,790 $ $106,910 $ $86,262 $ $61,016 $ $34,846 Total expenses ....................................... 97,513 80,901 64,209 41,613 37,643 ----------- ----------- ----------- ----------- ----------- Net income (loss)..................................... $ 30,277 $ 26,009 $ 22,053 $ 19,403 $ (2,797) =========== =========== =========== =========== =========== Net income (loss) per share of common stock (pro forma for 1997) - Basic ......................................... $ 1.67 $ 1.55 $ 1.48 $ 1.60 $ (0.35) =========== =========== =========== =========== =========== - Diluted ....................................... $ 1.64 $ 1.52 $ 1.46 $ 1.58 $ (0.35) =========== =========== =========== =========== =========== Weighted average shares of common stock outstanding (pro forma for 1997) (1) - Basic ......................................... 15,953,459 14,460,711 13,525,840 12,098,959 8,075,864 =========== =========== =========== =========== =========== - Diluted ....................................... 16,208,178 14,699,478 13,670,568 12,306,470 8,075,864 =========== =========== =========== =========== =========== Cash dividends declared per share of common stock (pro forma for 1997)......................... $ 1.84 $ 1.72 $ 1.69 $ 1.60 $ 1.60 =========== =========== =========== =========== =========== Balance Sheet Data (at year end): Rental properties - net of accumulated depreciation... $ 796,626 679,653 554,706 471,907 227,076 Total assets ......................................... $ 962,146 780,984 643,118 530,296 248,454 Secured notes payable, unsecured line of credit and term loan ..................................... $ 573,161 431,256 350,512 309,829 70,817 Total liabilities .................................... $ 629,508 461,832 380,535 330,527 81,537 Stockholders' equity ................................. $ 332,638 319,152 262,583 199,769 166,917
Other Data: Net income (loss) .................................... $ 30,277 26,009 22,053 19,403 (2,797) Less: Dividends on preferred stock ......................... (3,666) (3,666) (2,036) - - Add: Depreciation and amortization ........................ 30,578 24,251 18,532 10,296 4,866 ----------- ------------ ------------ ------------ ----------- Funds from operations (2) ............................ $ 57,189 46,594 38,549 29,699 2,069 =========== ============ ============ ============ =========== Cash flows from operating activities ................. $ 60,340 32,931 46,011 26,111 3,883 Cash flows from investing activities ................. $ (192,179) (132,480) (113,549) (246,753) (87,620) Cash flows from financing activities ................. $ 131,439 98,879 69,430 220,136 84,101 Number of properties owned at year end ............... 82 75 58 51 22 Rentable square feet of properties owned at year end ....................................... 5,319,945 4,856,650 4,046,126 3,588,154 1,747,837 Occupancy of properties owned at year end ............ 89% (3) 91% (3) 92% (3) 93% (3) 97%
Pro forma shares of common stock outstanding for the year ended December 31, 1997, includes all shares outstanding after giving effect to the initial public offering (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.
We compute funds from operations ("FFO") in accordance with standards established by the Board of Governors of NAREIT in its October 1999 White Paper ("White Paper"). The White Paper defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. FFO for 1997 has been restated to conform to the White Paper as amended in October 1999. FFO for 1997 has been impacted by non-recurring expenses associated with the Offering of $12,197,000, and the write-off of unamortized loan costs of $2,295,000. For a more detailed discussion of FFO, see "Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The terms "we," "our," "ours" and "us" as used in this Form 10-K refer to Alexandria Real Estate Equities, Inc. and its subsidiaries. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K.
Overview
We are a publicly traded real estate operating company focused principally on the ownership, operation, management, acquisition, expansion and selective redevelopment and development of high quality, strategically located properties containing office/laboratory space leased principally to tenants in the life science industry (we refer to these properties as "life science facilities").
In 2001, we:
Sold 500,000 shares of common stock in one transaction, resulting in aggregate proceeds of approximately $16.8 million, net of underwriting discounts and commissions and other offering costs.
Expanded our borrowings by obtaining an unsecured $50 million term loan.
Acquired five properties with an aggregate of approximately 345,000 rentable square feet. In addition, we completed the development of two properties with approximately 108,000 rentable square feet.
Our primary source of revenue is rental income and tenant recoveries from leases at the properties we own. Of the 82 properties we owned as of December 31, 2001, four were acquired in 1994, eight in 1996, ten in 1997, 29 in 1998 (the "1998 Properties"), six in 1999, 12 in 2000 and five in 2001. In addition, we completed the development of one property in 1999 (together with the six properties acquired in 1999, the "1999 Properties"), five properties in 2000 (together with the 12 properties acquired in 2000, the "2000 Properties") and two properties in 2001 (together with the five properties acquired in 2001, the "2001 Properties"). As a result of these acquisition and development activities, there have been significant continuing increases in total revenues and expenses, including significant increases in total revenues and expenses for 2001 as compared to 2000, and for 2000 as compared to 1999.
Results of Operations
Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000
Rental revenue increased by $16.7 million, or 20%, to $99.2 million for 2001 compared to $82.5 million for 2000. The increase resulted primarily from the 2000 Properties being owned for a full period and the addition of the 2001 Properties. Rental revenue from properties operating for a full year during 2000 and 2001 (the "2001 Same Properties") increased by $3.7 million, or 6.4%, due to increases in rental rates and occupancy.
Tenant recoveries increased by $4.5 million, or 21%, to $25.4 million for 2001 compared to $20.9 million for 2000. The increase resulted primarily from the 2000 Properties being owned for a full period and the addition of the 2001 Properties. Tenant recoveries for the 2001 Same Properties increased by $516,000, or 3.2%, primarily due to increases in certain recoverable operating expenses.
Interest and other income decreased by $238,000, or 7%, to $3.3 million for 2001 compared to $3.5 million for 2000, primarily due to a decrease in interest income resulting from a decline in interest rates and a decline in service fee income.
Rental operating expenses increased by $4.2 million, or 19%, to $26.1 million for 2001 compared to $21.9 million for 2000. The increase resulted primarily from the 2000 Properties being owned for a full period and the addition of the 2001 Properties. Operating expenses for the 2001 Same Properties increased by $983,000, or 5.9%, primarily due to an increase in utilities and tenant related expenses (substantially all of which are recoverable from our tenants through tenant recoveries).
The following is a comparison of property operating data for the 2001 Same Properties computed under generally accepted accounting principles ("GAAP Basis") and under generally accepted accounting principles, adjusted to exclude the effect of straight-line rent adjustments required by GAAP ("Cash Basis") (dollars in thousands):
Year Ended December 31, ---------------------- 2001 2000 Change ---------- ---------- ---------- GAAP Basis: Revenue $ 79,400 $ 75,600 5.0% Rental operating expenses 17,693 16,710 5.9% ---------- ---------- ---------- Net operating income $ 61,707 $ 58,890 4.8% ========== ========== ========== Cash Basis: Revenue $ 78,155 $ 73,945 5.7% Rental operating expenses 17,693 16,710 5.9% ---------- ---------- ---------- Net operating income $ 60,462 $ 57,235 5.6% ========== ========== ==========
General and administrative expenses increased by $2.7 million, or 30%, to $11.7 million for 2001 compared to $9.0 million for 2000 due to the continued increase in the scope of our operations.
Interest expense increased by $3.3 million, or 13%, to $29.1 million for 2001 compared to $25.8 million for 2000. The increase resulted from (a) indebtedness incurred to acquire the 2000 and 2001 Properties and (b) indebtedness incurred to finance the development and redevelopment of properties which have now been completed. The increase in interest expense caused by these factors was partially offset by a decrease in the floating interest rate on our unsecured line of credit. The weighted average interest rate on our borrowings (not including the effect of swap agreements) decreased from 8.32% as of December 31, 2000 to 3.92% as of December 31, 2001. We have entered into certain swap agreements to hedge our borrowings at variable interest rates (see "Liquidity and Capital Resources - Unsecured Line of Credit and Unsecured Term Loan").
Depreciation and amortization increased by $6.3 million, or 26%, to $30.6 million for 2001 compared to $24.3 million for 2000. The increase resulted primarily from depreciation associated with the 2000 Properties being owned for a full period and the addition of the 2001 Properties.
As a result of the foregoing, net income was $30.3 million for 2001 compared to $26.0 million for 2000.
Comparison of the Year Ended December 31, 2000 to the Year Ended December 31, 1999
Rental revenue increased by $14.1 million, or 21%, to $82.5 million for 2000 compared to $68.4 million for 1999. The increase resulted primarily from the 1999 Properties being owned for a full period and the addition of the 2000 Properties. Rental revenue from properties operating for a full year during 1999 and 2000 (the "2000 Same Properties") increased by $1.7 million, or 3.0%, due to increases in rental rates and occupancy.
Tenant recoveries increased by $4.6 million, or 28%, to $20.9 million for 2000 compared to $16.3 million for 1999. The increase resulted primarily from the 1999 Properties being owned for a full period and the addition of the 2000 Properties. Tenant recoveries for the 2000 Same Properties increased by $2.3 million, or 17.1%, generally due to an increase in certain recoverable operating expenses.
Interest and other income increased by $2.0 million, or 129%, to $3.5 million for 2000 compared to $1.5 million for 1999, resulting primarily from $1.4 million of investment income and $424,000 in service fee income.
Rental operating expenses increased by $2.9 million, or 15%, to $21.9 million for 2000 compared to $19.0 million for 1999. The increase resulted primarily from the 1999 Properties being owned for a full period and the addition of the 2000 Properties. Operating expenses for the 2000 Same Properties increased by $1.0 million, or 5.9%, primarily due to the increase in tenant related expenses (substantially all of which are recoverable from our tenants through tenant recoveries) partially offset by the fact that third party management fees are no longer incurred at certain properties.
The following is a comparison of property operating data computed on a GAAP Basis and on a Cash Basis for the 2000 Same Properties (dollars in thousands):
Year Ended December 31, ---------------------- 2000 1999 Change ---------- ---------- ---------- GAAP Basis: Revenue $ 74,620 $ 70,210 6.3% Rental operating expenses 17,070 16,116 5.9% ---------- ---------- ---------- Net operating income $ 57,550 $ 54,094 6.4% ========== ========== ========== Cash Basis: Revenue $ 73,097 $ 68,065 7.4% Rental operating expenses 17,070 16,116 5.9% ---------- ---------- ---------- Net operating income $ 56,027 $ 51,949 7.9% ========== ========== ==========
General and administrative expenses increased by $2.0 million, or 29%, to $9.0 million for 2000 compared to $7.0 million for 1999 due to the continued increase in the scope of our operations.
Interest expense increased by $6.1 million, or 31%, to $25.8 million for 2000 compared to $19.7 million for 1999. The increase resulted primarily from (a) indebtedness we incurred to acquire the 1999 and 2000 Properties, (b) indebtedness incurred to finance the development of properties which have been completed and (c) an increase in the floating interest rate on our line of credit. The weighted average effective interest rate on our borrowings (not including the effect of swap agreements) increased from 7.33% as of December 31, 1999 to 8.32% as of December 31, 2000.
Depreciation and amortization increased by $5.8 million, or 31%, to $24.3 million for 2000 compared to $18.5 million for 1999. The increase resulted primarily from depreciation associated with the 1999 Properties being owned for a full period and the addition of the 2000 Properties.
As a result of the foregoing, net income was $26.0 million for 2000 compared to $22.1 million for 1999.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities for 2001 increased by $27.4 million to $60.3 million compared to $32.9 million for 2000. The increase resulted primarily from increases in cash flows from operating life science facilities, an increase in accrued liabilities related to construction costs and the liability associated with our interest rate swap agreements.
Net cash used in investing activities increased by $59.7 million to $192.2 million for 2001 compared to $132.5 million for 2000. This increase was due to a higher level of property development and redevelopment costs incurred, as well as a higher level of property acquisition costs.
Net cash provided by financing activities increased by $32.5 million to $131.4 million for 2001 compared to $98.9 million for 2000. Cash provided by financing activities for 2001 and 2000 primarily consisted of net proceeds from our unsecured line of credit, unsecured term loan, secured debt and issuances of common stock and exercise of stock options, partially offset by principal reductions on our secured debt and distributions to stockholders.
Commitments
As of December 31, 2001, we were committed under the terms of certain leases to complete the construction of buildings and certain related improvements at a remaining aggregate cost of $12.9 million.
As of December 31, 2001, we were also committed to fund an aggregate of approximately $39.1 million for the construction of building infrastructure improvements under the terms of various leases and for certain investments.
Restricted Cash
	Restricted cash consists of the following (in thousands):
December 31, ---------------------- 2001 2000 ---------- ---------- Funds held in trust as additional security required under the terms of certain secured notes payable $ 5,583 $ 5,103
Security deposit funds based on the terms of certain lease agreements 1,647 1,892
Funds held in escrow to complete the development of an office/laboratory facility 4,298 - ---------- ---------- $ 11,528 $ 6,995 ========== ==========
Secured Debt
Secured debt as of December 31, 2001, consists of the following (dollars in thousands):
Balance at Stated December 31, Interest Collateral 2001 Rate Maturity Date ------------------------------------ ------------ ------------- ---------------
Worcester, MA (1) $10,799 8.75% January 2006
Durham, NC (two properties) 12,182 8.68% December 2006
Gaithersburg, MD (three properties) 9,907 8.25% August 2007
Cambridge, MA (2) 19,158 9.125% October 2007
Chantilly, VA and Seattle, WA 35,264 7.22% May 2008
Worcester, MA and San Diego, CA 18,676 8.71% January 2010
Gaithersburg, MD (two properties) 24,508 8.33% November 2010
San Diego, CA (six properties) 24,030 7.75% July 2011
San Diego, CA 11,912 7.50% August 2011
Gaithersburg, MD (three properties) 28,250 7.40% January 2012
Alameda, CA 4,811 7.165% January 2014
San Diego, CA (two properties) 7,882 9.00% December 2014
Seattle, WA 18,842 7.75% June 2016
San Francisco, CA (two properties) (3 18,940 LIBOR + 1.70% June 2003 ------------ $245,161 ============
__________
(1) The balance shown includes an unamortized premium of $494,000; the effective rate of the loan is 7.25%. (2) The balance shown includes an unamortized premium of $1,619,000; the effective rate of the loan is 7.25%.
(3) The balance shown represents the amount drawn on a construction loan that provides for borrowings of up to $25,175,000.
The following is a summary of the scheduled principal payments for our secured debt as of December 31, 2001 (in thousands):
Year Amount ----------------------- -----------
2002 $ 5,638 2003 25,062 2004 5,901 2005 5,713 2006 24,764 Thereafter 175,970 ----------- Subtotal 243,048 Unamortized premium 2,113 ----------- $ 245,161 ===========
Unsecured Line of Credit and Unsecured Term Loan
We have an unsecured line of credit that provides for borrowings of up to $325 million. Borrowings under the line of credit bear interest at a floating rate based on our election of either a LIBOR based rate or the higher of the bank's reference rate and the Federal Funds rate plus 0.5%. For each LIBOR based advance, we must elect to fix the rate for a period of one, two, three or six months.
The line of credit contains financial covenants, including, among other things, maintenance of minimum net worth, a total liabilities to gross asset value ratio and a fixed charge coverage ratio. In addition, the terms of the line of credit restrict, among other things, certain investments, indebtedness, distributions and mergers. The line of credit expires February 2003 and provides for an extension (provided there is no default) for an additional one-year period upon notice by the company and consent of the participating banks. As of December 31, 2001, borrowings under the line of credit carried a weighted average interest rate of 3.92%.
In October 2001, we obtained a $50 million unsecured term loan which bears interest at a floating rate based on our election of either a LIBOR based rate or the higher of the bank's reference rate and the Federal Funds rate plus 0.5%. For each LIBOR based advance, we must elect to fix the rate for a period of one, two, three or six months. The term loan contains financial covenants substantially similar to those on our line of credit. As of December 31, 2001, the term loan carried a weighted average interest rate of 3.98%.
Aggregate borrowings under the line of credit and the term loan are limited to an amount based on the net operating income derived from a pool of unencumbered assets. Accordingly, as we acquire or complete the development or redevelopment of additional unencumbered properties, aggregate borrowings available under the line of credit and the term loan will increase up to the maximum of $375 million. Under these provisions, as of December 31, 2001, aggregate borrowings under the line of credit and the term loan were limited to $360 million.
We utilize interest rate swap agreements to hedge 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 (dollars in thousands):
Notional Interest Termination Transaction Date Effective Date Amount Pay Rate Date Fair Value ---------------- ---------------- ------------- -------- ---------------- ---------- April 2000 May 20, 2000 $ 50,000 6.995% January 2, 2003 $ (2,385)
July 2000 May 31, 2001 50,000 7.070% May 31, 2003 (3,033)
January 2001 January 31, 2001 50,000 6.350% December 31, 2002 (2,035) ----------- $ (7,453) ===========
Effective January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," as amended by Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 133, as amended, establishes accounting and reporting standards for derivative financial instruments such as our interest rate swap agreements. Specifically, SFAS 133 requires us to reflect our interest rate swap agreements on the balance sheet at their estimated fair value. We use a variety of methods and assumptions based on market conditions and risks existing at each balance sheet date to determine the fair values of our interest rate swap agreements. These methods of assessing fair value result in a general approximation of value, and such value may never be realized. As of January 1, 2001, the adoption of SFAS 133, as amended, resulted in qualifying interest rate swap agreements reported on the balance sheet as a liability of approximately $3.5 million, with a corresponding reduction to accumulated other comprehensive income, a separate component of stockholders' equity.
All of our interest rate swap agreements meet the criteria to be deemed "effective" under SFAS 133 in reducing our exposure to variable interest rates. Accordingly, we have categorized these instruments as cash flow hedges. While we intend to continue to meet the conditions for hedge accounting, if hedges did not qualify as highly effective, the changes in the fair value of the derivatives used as hedges would be reflected in earnings.
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. In addition, we have entered into master derivative agreements to minimize those risks.
On January 22, 2001, we terminated an interest rate swap agreement with a notional amount of $50 million, an interest pay rate of 7.25% and a maturity of December 31, 2001. The terminated interest rate swap agreement was replaced with the 6.350% interest rate swap agreement as shown in the table above. The fair value of the terminated interest rate swap agreement at the date of termination (a liability of $950,000) was transferred to the replacement 6.350% interest rate swap agreement. During 2001, approximately $475,000 was reclassified from other comprehensive income to interest expense. Approximately $475,000 will be credited against interest expense during 2002. These adjustments result in an effective interest pay rate for the 6.350% interest rate swap agreement of 7.30% for 2001 and 5.40% for 2002.
As of December 31, 2001, our interest rate swap agreements have been reported in the accompanying balance sheet at their fair value as other liabilities of approximately $7.5 million. The offsetting adjustments were reflected as deferred losses in accumulated other comprehensive income of $7.0 million. Balances in accumulated other comprehensive income are recognized in earnings as swap payments are made.
Valuation of Investments
	We hold equity investments in certain publicly traded companies and privately held entities. In determining if and when a decline in the market value of these investments below amortized cost is other than temporary, we evaluate the market conditions, offering prices, trends of earnings and other key measures. When such a decline in value is deemed to be other than temporary, we recognize an impairment loss in the current period operating results to the extent of the decline.
Other Resources and Liquidity Requirements
In April 2001, we sold 500,000 shares of common stock to institutional investors. The shares were issued at a price of $36.44 per share, resulting in aggregate proceeds of approximately $16.8 million, net of offering costs.
We expect to continue meeting our short-term liquidity and capital requirements generally through our working capital and net cash provided by operating activities. We believe that the net cash provided by operating activities will continue to be sufficient to enable us to make distributions necessary to continue qualifying as a REIT. We also believe that net cash provided by operating activities will be sufficient to fund our recurring non-revenue enhancing capital expenditures, tenant improvements and leasing commissions.
We expect to meet certain long-term liquidity requirements, such as property acquisitions, property development and redevelopment activities, scheduled debt maturities, expansions and other non-recurring capital improvements, through excess net cash provided by operating activities, long-term secured and unsecured borrowings, including borrowings under the line of credit and the issuance of additional debt and/or equity securities.
Exposure to Environmental Liabilities
In connection with the acquisition of all of our properties, we have obtained Phase I environmental assessments to ascertain the existence of any environmental liabilities or other issues. The Phase I environmental assessments of our properties have not revealed any environmental liabilities that we believe would have a material adverse effect on our financial condition or results of operations taken as a whole, nor are we aware of any material environmental liabilities that have occurred since the Phase I environmental assessments were completed. In addition, we carry a policy of pollution legal liability insurance covering exposure to certain environmental losses at all of our properties.
Capital Expenditures, Tenant Improvements and Leasing Costs
The following table shows total and weighted average per square foot capital expenditures, tenant improvements and leasing costs (all of which are added to the basis of the properties) related to our life science facilities (excluding capital expenditures and tenant improvements that are recoverable from tenants, revenue-enhancing or related to properties that have undergone redevelopment) for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, attributable to leases that commenced at our properties after our acquisition.
Total/ Weighted Average 2001 2000 1999 1998 1997 ----------- ----------- ---------- ---------- ---------- ---------- Capital expenditures: Weighted average square feet in portfolio 17,637,461 5,131,176 4,448,916 3,823,290 2,891,863 1,342,216 Property related capital expenditures $ 3,374,000 $ 1,230,000 $ 778,000 $ 478,000 $ 341,000 $ 547,000 Per weighted average square foot in portfolio $ 0.19 $ 0.24 $ 0.17 $ 0.13 $ 0.12 $ 0.41
Tenant improvements and leasing costs: Retenanted space (1) Retenanted square feet 612,978 151,161 112,286 220,397 88,181 40,953 Tenant improvements and leasing costs $ 3,358,000 $ 466,000 $ 796,000 $1,454,000 $ 478,000 $ 164,000 Per square foot leased $ 5.48 $ 3.08 $ 7.09 $ 6.60 $ 5.42 $ 4.00
Renewal space Renewal square feet 837,671 432,717 233,017 93,667 77,038 1,232 Tenant improvements and leasing costs $ 793,000 $ 451,000 $ 124,000 $ 149,000 $ 69,000 $ - Per square foot leased $ 0.95 $ 1.04 $ 0.53 $ 1.59 $ 0.90 $ -
Excludes space that has undergone redevelopment before retenanting. If redevelopment space was included as retenanted space, retenanted square feet for 2001 and 2000 would be 221,778 and 266,163, respectively, tenant improvements and leasing costs would be $2,507,000 and $5,375,000, respectively, and costs per square foot would be $11.30 and $20.19, respectively.
Capital expenditures fluctuate in any given period due to the nature, extent and timing of improvements required and the extent to which they are recoverable from our tenants. Approximately 87% of our leases provide for the recapture of certain capital expenditures (such as HVAC systems maintenance and/or replacement, roof replacement and parking lot resurfacing). In addition, we maintain an active preventative maintenance program at each of our properties to minimize capital expenditures required.
Tenant improvements and leasing costs also fluctuate in any given year depending upon factors such as the timing and extent of vacancies, property characteristics, the type of lease (renewal tenant or retenanted space), the involvement of external leasing agents and overall competitive market conditions.
Inflation
As of December 31, 2001, approximately 82% 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, approximately 13% of our leases (on a square footage basis) required the tenants to pay a majority of operating expenses. Approximately 92% of our leases (on a square footage basis) contain effective annual rent escalations that are either fixed (generally ranging from 3% to 4%) or indexed based on 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 of 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
We believe that funds from operations ("FFO") is helpful to investors as an additional measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors with an understanding of our ability to incur and service debt, to make capital expenditures and to make distributions. We compute FFO in accordance with standards established by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") in its October 1999 White Paper (the "White Paper"), which may differ from the methodology for calculating FFO utilized by other equity REITs, and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for our discretionary use because a portion of FFO is needed for capital replacement or expansion, debt service obligations or other commitments and uncertainties. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions. (See "Cash Flows" for information regarding these measures of cash flow.)
	The following table presents our FFO for the years ended December 31, 2001, 2000 and 1999 (in thousands):
Year Ended December 31, ---------------------------------- 2001 2000 1999 ---------- ---------- ----------
Net income $30,277 $26,009 $22,053 Less: Dividends on preferred stock (3,666) (3,666) (2,036) Add: Depreciation and amortization 30,578 24,251 18,532 ---------- ---------- ---------- Funds from operations $57,189 $46,594 $38,549 ========== ========== ==========
Property and Lease Information
The following table is a summary of our property portfolio as of December 31, 2001 (dollars in thousands):
Rentable Annualized Number of Square Base Occupancy Properties Feet Rent Percentage ---------- ----------- --------- -----------
Suburban Washington, D.C. 19 1,613,529 $ 25,248 97.8%(1) California - San Diego 21 949,328 26,942 100.0% California - San Francisco Bay 7 412,172 12,385 100.0% Southeast 3 183,473 3,307 97.5%(1) New Jersey/Suburban Philadelphia 6 344,390 5,977 100.0% Eastern Massachusetts 6 445,474 14,059 100.0% Washington - Seattle 2 118,393 4,110 100.0% ---------- ----------- --------- ----------- Subtotal 64 4,066,759 92,028 99.0% Redevelopment Properties 18 1,253,186 17,246 54.9% ---------- ----------- --------- ----------- Total 82 5,319,945 $ 109,274 88.6% ========== =========== ========= ===========
(1) Substantially all of the vacant space is office or warehouse space.
The following table shows certain information with respect to the lease expirations of our properties as of December 31, 2001:
Square Square Footage Annualized Base Year of Number of Footage of as a Percentage Rent of Expiring Lease Expiring Expiring of Leased Leases (Per Expiration Leases Leases Portfolio Square Foot) ---------- ----------- ---------- -------------- ---------------
2002 52 476,422 10.1% $21.45 2003 27 483,343 10.3% $19.03 2004 25 423,550 9.0% $21.01 2005 16 319,426 6.8% $25.90 2006 29 665,796 14.1% $22.51 Thereafter 45 2,346,596 49.7% $24.59
The following table is a summary of our lease activity for the year ended December 31, 2001, computed on a GAAP Basis and on a Cash Basis:
Rental TI's/Lease Average Number Square Expiring New Rate Commissions Lease of Leases Footage Rate Rate Increase Per Foot Term ----------- --------- --------- --------- --------- ------------ ----------- Lease Activity - Expired Leases
Lease Expirations Cash Rent 61 964,329 $19.21 - - - - GAAP Rent 61 964,329 $19.07 - - - - Renewed / Released Space Cash Rent 40 654,495 $21.05 $22.85 8.6% $4.52 4.1 Years GAAP Rent 40 654,495 $20.86 $24.05 15.3% $4.52 4.1 Years Month-to-Month Leases Cash Rent 14 72,599 $12.16 $16.79 38.1% - - GAAP Rent 14 72,599 $11.88 $16.79 41.3% - - Total Leasing Cash Rent 54 727,094 $20.16 $22.24 10.3% - - GAAP Rent 54 727,094 $19.96 $23.32 16.8% - -
Vacant Space Leased Cash Rent 27 287,235 - $27.45 - $21.02 6.4 Years GAAP Rent 27 287,235 - $30.96 - $21.02 6.4 Years
All Lease Activity Cash Rent 81 1,014,329 - $23.72 - - - GAAP Rent 81 1,014,329 - $25.49 - - -
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is sensitive to 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 characteristics of our outstanding debt and limit the effects of interest rates on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks such as counter-party credit risk and the legal enforceability of hedging contracts.
Our future earnings, cash flows and fair values relating to financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBOR. However, due to the purchase of our interest rate swap agreements, the current effects of interest rate changes are reduced. Based on interest rates at, and our swap agreements in effect on, December 31, 2001, a 1% increase in interest rates on our line of credit and term loan would decrease annual future earnings and cash flows, after considering the effect of our interest rate swap agreements, by approximately $1.8 million. A 1% decrease in interest rates on our line of credit and term loan would increase annual future earnings and cash flows, after considering the effect of our interest rate swap agreements, by approximately $1.8 million. A 1% increase in interest rates on our secured debt and interest rate swap agreements would decrease their fair value by approximately $16.9 million. A 1% decrease in interest rates on our secured debt and interest rate swap agreements would increase their fair value by approximately $18.1 million. A 1% increase or decrease in interest rates on our secured note receivable would not have a material impact on its fair value.
These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate swap agreements. 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.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data required by Regulation S-X are included in this Report on Form 10-K beginning on page.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 is incorporated by reference from the section entitled "Board of Directors, Executive Officers and Senior Management" contained in our definitive proxy statement to be mailed in connection with our annual meeting of stockholders to be held on April 29, 2002 (the "2002 Proxy Statement").
Item 11.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference from the section entitled "Board of Directors, Executive Officers and Senior Management - Executive Compensation" contained in our 2002 Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated by reference from the section entitled "Security Ownership of Management and Principal Stockholders" contained in our 2002 Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14.
Item 14. Exhibits, Consolidated Financial Statements Schedules and Reports on Form 8-K
(a)	Consolidated Financial Statements and Schedules
The following consolidated financial information is included as a separate section of this Annual Report on Form 10- K:
Page
Report of Independent Auditors
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income for the Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2001, 2000 and 1999
Schedule III - Consolidated Financial Statement of Rental Properties
(b)	Reports on Form 8-K
Alexandria did not file any reports on Form 8-K during the fourth quarter of the fiscal year ended December 31, 2001.
(c)	Exhibits.
Exhibit Number
Exhibit Title
3.1 *
Articles of Amendment and Restatement of Alexandria, filed as an exhibit to Alexandria's quarterly report on Form 10- Q filed with the Commission on August 14, 1997
3.2 *
Certificate of Correction of Alexandria, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on August 14, 1997
3.3*
Bylaws of Alexandria (as amended, adopted February 4, 2000; effective February 16, 2000), filed as an exhibit to Alexandria's current report on Form 8-K filed with the Commission on February 10, 2000
3.4 *
Articles Supplementary, dated February 10, 2000, relating to the election to be subject to Subtitle 8 of Title 3 of the Maryland General Corporation Law, filed as an exhibit to Alexandria's current report on Form 8-K filed with the Commission on February 10, 2000
3.5 *
Articles Supplementary, dated February 10, 2000, relating to the Series A Junior Participating Preferred Stock , filed as an exhibit to Alexandria's current report on Form 8-K filed with the Commission on February 10, 2000
3.6 *
Articles Supplementary, dated June 9, 1999, relating to the 9.50% Series A Cumulative Redeemable Preferred Stock, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on August 13, 1999
3.7 *
Articles Supplementary, dated January 28, 2002, relating to the 9.10% Series B Cumulative Redeemable Preferred Stock, filed as an exhibit to Alexandria's current report on Form 8-A filed with the Commission on February 17, 2002
4.1 *
Rights Agreement, dated as of February 10, 2000, between the Company and American Stock Transfer & Trust Company, as Rights Agent, including the forms of Articles Supplementary setting forth the terms of the Series A Junior Participating Preferred Stock, par value $.01 per share, Rights Certificate and the Summary of Rights to Purchase Preferred Stock attached as exhibits to the Rights Agreement. Pursuant to the Rights Agreement, printed Rights Certificates will not be mailed until after the Distribution Date (as defined in the Rights Agreement), filed as an exhibit to Alexandria's current report on Form 8-K filed with the Commission on February 10, 2000
4.2 *
Specimen certificate representing shares of Common Stock, Specimen certificate representing shares of Common Stock, filed as an exhibit to Alexandria's Registration Statement on Form S-11 (No. 333-23545)
4.3 *
Specimen certificate representing shares of 9.50% Series A Cumulative Redeemable Preferred Stock, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on August 13, 1999
4.4 *
Specimen certificate representing shares of 9.10% Series B Cumulative Redeemable Preferred Stock, filed as an exhibit to Alexandria's current report on Form 8-A filed with the Commission on February 17, 2002
10.1 *
Second Amendment to Executive Employment Agreement and General and Special Release by and between Alexandria and Jerry M. Sudarsky, dated May 30, 1997, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 31, 1998
10.2 *
Amended and Restated Executive Employment Agreement between Alexandria and Joel S. Marcus, dated January 5, 1994, and amended as of March 28, 1997, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 31,
10.3 *
Executive Employment Agreement between Alexandria and James H. Richardson, dated July 31, 1997, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 14, 1997
10.4 *
Amended and Restated Executive Employment Agreement between Alexandria and Peter J. Nelson, dated May 20, 1998, filed as an exhibit to Alexandria's quarterly report on Form 10-Q/A filed with the Commission on August 18, 1998
10.5 *
Amendment to Amended and Restated Executive Employment Agreement between Alexandria and Peter J. Nelson, dated August 31, 1999, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 15, 1999
10.6 *
Executive Employment Agreement between Alexandria and Vincent R. Ciruzzi, dated April 20, 1998, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 15, 1999
10.7 *
Amendment to Executive Employment Agreement between Alexandria and Vincent R. Ciruzzi, dated August 31, 1999, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 15, 1999
10.8 *
Employment Letter Agreement between Alexandria and Tom Andrews, dated June 1, 1999, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 15, 1999
10.9
Amended and Restated 1997 Stock Award and Incentive Plan of Alexandria, dated December 29, 2000
10.10 *
Form of Non-Employee Director Stock Option Agreement for use in connection with options issued pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's Registration Statement on Form S-11 (No. 333-23545)
10.11 *
Form of Incentive Stock Option Agreement for use in connection with options issued pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's Registration Statement on Form S-11 (No. 333-23545)
10.12 *
Form of Nonqualified Stock Option Agreement for use in connection with options issued pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's Registration Statement on Form S-11 (No. 333-23545)
10.13 *
Form of Employee Restricted Stock Agreement for use in connection with shares of restricted stock issued to employees pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 15, 1999
10.14 *
Form of Independent Contractor Restricted Stock Agreement for use in connection with shares of restricted stock issued to independent contractors pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 15, 1999
10.15 *
Second Amended and Restated Revolving Loan Agreement 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, BankBoston, N.A., as Managing Agent, The Chase Manhattan Bank, as Syndication Agent, and First Union National Bank, as Documentation Agent, dated February 11, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 29, 2000
10.16 *
Form of International Swap Dealers Association, Inc. Master Agreement and related Schedule and Confirmation between BankBoston, N.A. and Alexandria, dated as of August 31, 1998, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 15, 1999
10.17 *
Amendment to Amended and Restated Executive Employment Agreement between Alexandria and Joel S. Marcus, dated September 4, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 30, 2001
10.18 *
Amendment to Executive Employment Agreement between Alexandria and James H. Richardson, dated September 4, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 30, 2001
10.19 *
Second Amendment to Amended and Restated Executive Employment Agreement between Alexandria and Peter J. Nelson, dated September 4, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 30,
10.20 *
Amended and Restated Executive Employment Agreement between Alexandria and Vincent R. Ciruzzi, dated June 27, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 30, 2001
10.21
Term Loan Agreement 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, dated October 17, 2001
10.22
Alexandria's 2000 Deferred Compensation Plans, effective December 1, 2000
12.1
Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
21.1
List of Subsidiaries of Alexandria
23.1
Consent of Ernst & Young LLP
___________________
(*) Incorporated by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KNOW ALL THOSE BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jerry M. Sudarsky, Joel S. Marcus and Peter J. Nelson, and each of them, as his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, if any, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents of their substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JERRY M. SUDARSKY
Jerry M. Sudarsky
Chairman of the Board of Directors
March 27, 2002
/s/ JOEL S. MARCUS
Joel S. Marcus
Chief Executive Officer (Principal Executive Officer) and Director
March 29, 2002
/s/ JAMES H. RICHARSON
James H. Richardson
President and Director
March 27, 2002
/s/ PETER J. NELSON
Peter J. Nelson
Chief Financial Officer, Senior Vice President, Treasurer and Secretary (Principal Financial and Accounting Officer)
March 29, 2002
/s/ RICHARD B. JENNINGS
Richard B. Jennings
Director
March 25, 2002
/s/ DAVID M. PETRONE
David M. Petrone
Director
March 26, 2002
/s/ ANTHONY M. SOLOMON
Anthony M. Solomon
Director
March 28, 2002
/s/ ALAN G. WALTON
Alan G. Walton
Director
March 27, 2002
Report of Independent Auditors
To the Board of Directors and Stockholders of
Alexandria Real Estate Equities, Inc.
We have audited the accompanying consolidated balance sheets of Alexandria Real Estate Equities, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the index at item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alexandria Real Estate Equities, Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California
January 25, 2002
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands, Except Per Share Amounts)
December 31, -------------------- 2001 2000 --------- --------- Assets Rental properties, net $ 796,626 $ 679,653 Property under development 65,250 26,092 Cash and cash equivalents 2,376 2,776 Tenant security deposits and other restricted cash 11,528 6,995 Secured note receivable 6,000 6,000 Tenant receivables 3,123 2,835 Deferred rent 20,593 14,945 Other assets 56,650 41,688 --------- --------- Total assets $ 962,146 $ 780,984 ========= =========
Liabilities and Stockholders' Equity Secured notes payable $ 245,161 $ 200,256 Unsecured line of credit and unsecured term loan 328,000 231,000 Accounts payable, accrued expenses and tenant security deposits 48,057 23,123 Dividends payable 8,290 7,453 --------- --------- 629,508 461,832
Commitments and contingencies
Stockholders' equity: 9.50% Series A cumulative redeemable preferred stock, $0.01 par value per share, 1,610,000 shares authorized; 1,543,500 shares issued and outstanding at December 31, 2001 and 2000; $25.00 liquidation value 38,588 38,588 Common stock, $0.01 par value per share, 100,000,000 shares authorized; 16,354,541 and 15,548,356 shares issued and outstanding at December 31, 2001 and 2000, respectively 163 155 Additional paid-in capital 301,818 278,868 Deferred compensation (1,782) (296) Retained earnings - - Accumulated other comprehensive income (6,149) 1,837 --------- --------- Total stockholders' equity 332,638 319,152 --------- --------- Total liabilities and stockholders' equity $ 962,146 $ 780,984 ========= =========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars In Thousands, Except Per Share Amounts)
Year Ended December 31, ------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Revenues Rental $ 99,171 $ 82,499 $ 68,425 Tenant recoveries 25,351 20,905 16,305 Interest and other income 3,268 3,506 1,532 ----------- ----------- ----------- 127,790 106,910 86,262 Expenses Rental operations 26,115 21,873 19,003 General and administrative 11,694 8,986 6,977 Interest 29,126 25,791 19,697 Depreciation and amortization 30,578 24,251 18,532 ----------- ----------- ----------- 97,513 80,901 64,209 ----------- ----------- ----------- Net income $ 30,277 $ 26,009 $ 22,053 =========== =========== ===========
Dividends on preferred stock $ 3,666 $ 3,666 $ 2,036 =========== =========== =========== Net income allocated to common stockholders $ 26,611 $ 22,343 $ 20,017 =========== =========== =========== Net income per share of common stock: - Basic $ 1.67 $ 1.55 $ 1.48 =========== =========== =========== - Diluted $ 1.64 $ 1.52 $ 1.46 =========== =========== =========== Weighted average shares of common stock outstanding: - Basic 15,953,459 14,460,711 13,525,840 =========== =========== =========== - Diluted 16,208,178 14,699,478 13,670,568 =========== =========== ===========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars In Thousands)
Accumulated Series A Number of Additional Other Preferred Common Common Paid-In Deferred Retained Comprehensive Stock Shares Stock Capital Compensation Earnings Income Total ---------- ----------- ------- --------- ----------- ----------- ------------ ---------- Balance at December 31, 1998 $ - 12,586,263 $ 126 $ 199,643 $ - $ - $ - $ 199,769 Net income - - - - - 22,053 - 22,053 Unrealized gain on marketable securities - - - - - - 172 172 ---------- Comprehensive income - - - - - - - 22,225 Issuance of common stock, net of offering costs - 1,150,000 11 29,818 - - - 29,829 Repurchase of common stock - (145,343) (1) (3,458) - - - (3,459) Issuance of preferred stock, net of offering costs 38,588 - - (1,712) - - - 36,876 Stock compensation expense - 105,800 1 3,151 (3,152) - - - Amortization of stock compensation expense - - - - 1,658 - - 1,658 Exercise of stock options - 48,902 - 874 - - - 874 Dividends declared on preferred stock - - - - - (2,036) - (2,036) Dividends declared on common stock - - - (3,136) - (20,017) - (23,153) ---------- ----------- ------- --------- ----------- ----------- ------------ ---------- Balance at December 31, 1999 38,588 13,745,622 137 225,180 (1,494) - 172 262,583 Net income - - - - - 26,009 - 26,009 Unrealized gain on marketable securities - - - - - - 1,665 1,665 ---------- Comprehensive income - - - - - - - 27,674 Issuances of common stock, net of offering costs - 1,625,000 16 52,101 - - - 52,117 Stock compensation expense - 18,400 - 633 (633) - - - Amortization of stock compensation expense - - - - 1,831 - - 1,831 Exercise of stock options - 159,334 2 4,113 - - - 4,115 Dividends declared on preferred stock - - - - - (3,666) - (3,666) Dividends declared on common stock - - - (3,159) - (22,343) - (25,502) ---------- ----------- ------- --------- ----------- ----------- ------------ ---------- Balance at December 31, 2000 38,588 15,548,356 155 278,868 (296) - 1,837 319,152 FAS 133 transition adjustment - - - - - - (3,461) (3,461) Net income - - - - - 30,277 - 30,277 Unrealized loss on marketable securities - - - - - - (1,008) (1,008) Unrealized loss on swap agreements - - - - - - (3,517) (3,517) ---------- Comprehensive income - - - - - - - 25,752 Issuance of common stock, net of offering costs - 500,000 5 16,746 - - - 16,751 Stock compensation expense - 122,555 1 4,326 (4,327) - - - Amortization of stock compensation expense - - - - 2,841 - - 2,841 Exercise of stock options - 183,630 2 5,198 - - - 5,200 Dividends declared on preferred stock - - - - - (3,666) - (3,666) Dividends declared on common stock - - - (3,320) - (26,611) - (29,931) ---------- ----------- ------- --------- ----------- ----------- ------------ ---------- Balance at December 31, 2001 $ 38,588 16,354,541 $ 163 $ 301,818 $ (1,782) $ - $ (6,149) $ 332,638 ========== =========== ======= ========= =========== =========== ============ ==========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Year Ended December 31, ------------------------------- 2001 2000 1999 --------- --------- --------- Operating Activities Net income $ 30,277 $ 26,009 $ 22,053 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 30,578 24,251 18,532 Amortization of loan fees and costs 1,275 1,021 748 Amortization of premiums on secured notes (343) (331) (310) Stock compensation expense 2,841 1,831 1,658 Changes in operating assets and liabilities: Tenant security deposits and other restricted cash (4,533) (2,314) 2,810 Tenant receivables (288) 597 (548) Deferred rent (5,648) (5,931) (3,419) Other assets (11,774) (11,976) (3,199) Accounts payable, accrued expenses and tenant security deposits 17,955 (226) 7,686 --------- --------- --------- Net cash provided by operating activities 60,340 32,931 46,011
Investing Activities Purchase of rental properties (55,746) (48,584) (63,896) Additions to rental properties (69,530) (40,539) (16,807) Additions to property under development (57,390) (29,813) (29,130) Additions to investments, net (9,513) (13,544) (3,716) Issuance of note receivable - - - --------- --------- --------- Net cash used in investing activities (192,179) (132,480) (113,549)
Financing Activities Proceeds from secured notes payable 57,293 38,061 34,163 Net proceeds from issuances of common stock 16,751 52,117 29,829 Net proceeds from issuance of preferred stock - - 36,876 Exercise of stock options 5,200 4,115 874 Net borrowings from (principal reductions to) unsecured line of credit and unsecured term loan 97,000 39,000 (2,000) Principal reductions on secured notes payable (12,042) (6,026) (3,303) Dividends paid on common stock (29,097) (24,722) (22,278) Dividends paid on preferred stock (3,666) (3,666) (1,272) Repurchase of common stock - - (3,459) --------- --------- --------- Net cash provided by financing activities 131,439 98,879 69,430
Net (decrease) increase in cash and cash equivalents (400) (670) 1,892 Cash and cash equivalents at beginning of year 2,776 3,446 1,554 --------- --------- --------- Cash and cash equivalents at end of year $ 2,376 $ 2,776 $ 3,446 ========= ========= ========= Supplemental Disclosure of Cash Flow Information Cash paid during the year for interest, net of interest capitalized $ 29,447 $ 25,315 $ 23,512 ========= ========= =========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Background
Alexandria Real Estate Equities, Inc. is a real estate investment trust ("REIT") formed in 1994. We are engaged primarily in the ownership, operation, management, acquisition, expansion and selective redevelopment and development of properties containing a combination of office and laboratory space. We refer to these properties as "life science facilities." Our life science facilities are designed and improved for lease primarily to pharmaceutical, biotechnology, life science product and service companies, not-for-profit scientific research institutions, universities and related government agencies. As of December 31, 2001, our portfolio consisted of 82 properties in nine states with approximately 5,320,000 rentable square feet, compared to 75 properties in nine states with approximately 4,857,000 rentable square feet as of December 31, 2000.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Alexandria and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
2. Basis of Presentation and Summary of Significant Accounting Policies (continued)
Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of the following (in thousands):
December 31, --------------------- 2001 2000 ---------- ---------- Unrealized gain on marketable securities $ 829 $ 1,837 Unrealized loss on interest rate swap agreements (6,978) - ---------- ---------- $ (6,149) $ 1,837 ========== ==========
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," and have been included at fair value in other assets in the accompanying balance sheets. Fair value has been determined by the most recently traded price at the balance sheet date, with unrealized gains and losses shown as a separate component of stockholders' equity. The cost of investments sold is determined by the specific identification method, with realized gains and losses included in interest and other income.
The following table summarizes our available-for-sale securities (in thousands):
December 31, -------------------- 2001 2000 --------- --------- Cost of available-for-sale $ 3,192 $ 2,311 securities
Gross unrealized gains 1,527 2,249
Gross unrealized losses (698) (412) --------- --------- Fair value of available-for-sale securities $ 4,021 $ 4,148 ========= =========
Investments in privately held entities as of December 31, 2001 and 2000, totaled $24,417,000 and $14,777,000, respectively. These investments are accounted for under the cost method and are included in other assets in the accompanying balance sheets.
2. Basis of Presentation and Summary of Significant Accounting Policies (continued)
Investments (continued)
Investment income, which is included in interest and other income in the accompanying statements of income, consists of the following (in thousands):
Year Ended December 31, -------------------- 2001 2000 --------- ---------
Gross realized gains $ 2,408 $ 1,575
Gross realized losses (860) (129) --------- --------- Investment income $ 1,548 $ 1,446 ========= =========
Rental Properties and Property Under Development
Rental properties and property under development are stated at the lower of cost or estimated fair value. Write-downs to estimated fair value would be recognized when impairment indicators are present and a property's estimated undiscounted future cash flows, before interest charges, are less than its book value. In that situation, we would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property. Based on our assessment, no write-downs to estimated fair value were necessary for the periods presented.
The cost of maintenance and repairs is expensed as incurred. Major replacements and betterments are capitalized and depreciated over their estimated useful lives.
Depreciation is provided using the straight-line method using estimated lives of 30 to 40 years for buildings and building improvements, 20 years for land improvements and the term of the respective lease for tenant improvements.
Restricted Cash
Restricted cash consists of the following (in thousands):
December 31, ---------------------- 2001 2000 ---------- ---------- Funds held in trust as additional security required under the terms of certain secured notes payable $ 5,583 $ 5,103
Security deposit funds based on the terms of certain lease agreements 1,647 1,892
Funds held in escrow to complete the development of an office/laboratory facility 4,298 - ---------- ---------- $ 11,528 $ 6,995 ========== ==========
2. Basis of Presentation and Summary of Significant Accounting Policies (continued)
Loan Fees and Costs
Fees and costs incurred in obtaining long-term financing are amortized over the terms of the related loans and included in interest expense. Loan fees and costs, net of related amortization, totaled $6,815,000 and $5,810,000 as of December 31, 2001 and 2000, respectively, and are included in other assets on our balance sheets.
Rental Income
Rental income from leases with scheduled rent increases, free rent and other rent adjustments are recognized on a straight-line basis over the respective lease term. We include amounts currently recognized as income, and expected to be received in later years, in deferred rent on our balance sheets. Amounts received currently, but recognized as income in future years, are included in accrued expenses as unearned rent on our balance sheets.
Interest Income
Interest income was $923,000, $1,025,000 and $1,013,000 in 2001, 2000 and 1999, respectively, and is included in interest and other income in the accompanying statements of income.
Leasing Costs
Leasing costs are amortized on a straight-line basis over the term of the related lease. Leasing costs, net of related amortization, totaled $14,559,000 and $11,652,000 as of December 31, 2001 and 2000, respectively, and are included in other assets on our balance sheets.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value. The carrying amount of our secured note receivable approximates fair value because the applicable interest rate approximates the market rate for this loan.
The fair value of our secured notes payable was estimated using discounted cash flows analyses based on borrowing rates we believe we could obtain with similar terms and maturities. As of December 31, 2001 and 2000, the fair value of our secured notes payable was approximately $290,886,000 and $204,786,000, respectively.
2. Basis of Presentation and Summary of Significant Accounting Policies (continued)
Net Income Per Share
The following table shows the computation of net income per share of common stock outstanding, as well as the dividends declared per share of common stock:
Year Ended December 31, ------------------------------------ 2001 2000 1999 ----------- ----------- ----------- (Dollars in thousands, except per share amounts)
Net income available to common stockholders $ 26,611 $ 22,343 $ 20,017 =========== =========== =========== Weighted average shares of common stock outstanding - basic 15,953,459 14,460,711 13,525,840 Add: dilutive effect of stock options 254,719 238,767 144,728 ----------- ----------- ----------- Weighted average shares of common stock outstanding - diluted 16,208,178 14,699,478 13,670,568 =========== =========== =========== Net income per common share - basic $ 1.67 $ 1.55 $ 1.48 =========== =========== =========== Net income per common share - diluted $ 1.64 $ 1.52 $ 1.46 =========== =========== ===========
Common dividends declared per share $ 1.84 $ 1.72 $ 1.69 =========== =========== ===========
Operating Segments
We view our operations as principally one segment and the financial information disclosed herein represents all of the financial information related to our principal operating segment.
Income Taxes
As a REIT, we are not subject to federal income taxation as long as we meet a number of organizational and operational requirements and distribute all of our taxable income to our stockholders. Since we believe we have met these requirements and our distributions exceeded taxable income, no federal income tax provision has been reflected in the accompanying consolidated financial statements for the years ended December 31, 2001, 2000 and 1999. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate tax rates.
During 2001, 2000 and 1999, we declared dividends on our common stock of $1.84, $1.72 and $1.69 per share, respectively. During 2001, 2000 and 1999, we declared dividends on our Series A preferred stock of $2.375, $2.375 and $1.4184 per share, respectively.
3. Rental Properties
Rental properties consist of the following (in thousands):
December 31, ------------------------ 2001 2000 ----------- -----------
Land $ 121,005 $ 99,373 Building and improvements 667,435 575,212 Tenant and other improvements 92,276 62,622 ----------- ----------- 880,716 737,207 Less accumulated depreciation (84,090) (57,554) ----------- ----------- $ 796,626 $ 679,653 =========== ===========
Twenty-nine of our rental properties are encumbered by deeds of trust and assignments of rents and leases associated with the properties (see Note 6). The net book value of these properties as of December 31, 2001 is $345,200,000.
We lease space under noncancelable leases with remaining terms of one to 15 years.
As of December 31, 2001, approximately 82% of our leases (on a square footage basis) require that the lessee pay substantially all taxes, maintenance, insurance and certain other operating expenses applicable to the leased properties.
We capitalize interest to properties under development or redevelopment during the period the asset is undergoing activities to prepare it for its intended use. Total interest capitalized for the years ended December 31, 2001, 2000 and 1999 was $11,371,000, $7,710,000 and $3,784,000, respectively. Total interest incurred for the years ended December 31, 2001, 2000 and 1999 was $40,840,000, $33,832,000 and $23,792,000, respectively.
Minimum lease payments to be received under the terms of the operating lease agreements, excluding expense reimbursements, as of December 31, 2001, are as follows (in thousands):
2002 $ 98,525 2003 89,941 2004 82,988 2005 75,412 2006 65,849 Thereafter 245,756 ----------- $ 658,471 ===========
4. Secured Note Receivable
In connection with the acquisition of a life science facility in San Diego, California, in March 1998, we made a $6,000,000 loan to the sole tenant of the property, fully secured by a first deed of trust on certain improvements at the property. The loan bears interest at a rate of 11% per year, payable monthly, and is due March 25, 2002. The loan is cross-defaulted to the lease with the sole tenant.
5. Unsecured Line of Credit and Unsecured Term Loan
We have an unsecured line of credit that provides for borrowings of up to $325 million. Borrowings under the line of credit bear interest at a floating rate based on our election of either a LIBOR based rate or the higher of the bank's reference rate and the Federal Funds rate plus 0.5%. For each LIBOR based advance, we must elect to fix the rate for a period of one, two, three or six months.
The line of credit contains financial covenants, including, among other things, maintenance of minimum net worth, a total liabilities to gross asset value ratio and a fixed charge coverage ratio. In addition, the terms of the line of credit restrict, among other things, certain investments, indebtedness, distributions and mergers. The line of credit expires February 2003 and provides for an extension (provided there is no default) for an additional one-year period upon notice by the company and consent of the participating banks. As of December 31, 2001, borrowings outstanding on the line of credit carried a weighted average interest rate of 3.92%.
In October 2001, we obtained a $50 million unsecured term loan which bears interest at a floating rate based on our election of either a LIBOR based rate or the higher of the bank's reference rate and the Federal Funds rate plus 0.5%. For each LIBOR based advance, we must elect to fix the rate for a period of one, two, three or six months. The term loan contains financial covenants substantially similar to those on our line of credit. As of December 31, 2001, the term loan carried a weighted average interest rate of 3.98%.
Aggregate borrowings under the line of credit and the term loan are limited to an amount based on the net operating income derived from a pool of unencumbered assets. Accordingly, as we acquire or complete the development or redevelopment of additional unencumbered properties, aggregate borrowings available under the line of credit and the term loan will increase up to the maximum of $375 million. Under these provisions, as of December 31, 2001, aggregate borrowings under the line of credit and the term loan were limited to $360 million.
We utilize interest rate swap agreements to hedge our exposure to variable interest rates associated with our unsecured line of credit. 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 interest received is reflected as an adjustment to interest expense.
5. Unsecured Line of Credit and Unsecured Term Loan (continued)
The following table summarizes our interest rate swap agreements (dollars in thousands):
Notional Interest Termination Transaction Date Effective Date Amount Pay Rate Date Fair Value ---------------- ---------------- ------------- -------- ---------------- ---------- April 2000 May 20, 2000 $ 50,000 6.995% January 2, 2003 $ (2,385)
July 2000 May 31, 2001 50,000 7.070% May 31, 2003 (3,033)
January 2001 January 31, 2001 50,000 6.350% December 31, 2002 (2,035) ----------- $ (7,453) ===========
Effective January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," as amended by Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 133, as amended, establishes accounting and reporting standards for derivative financial instruments such as our interest rate swap agreements. Specifically, SFAS 133 requires us to reflect our interest rate swap agreements on the balance sheet at their estimated fair value. We use a variety of methods and assumptions based on market conditions and risks existing at each balance sheet date to determine the fair values of our interest rate swap agreements. These methods of assessing fair value result in a general approximation of value, and such value may never be realized. As of January 1, 2001, the adoption of SFAS 133, as amended, resulted in qualifying interest rate swap agreements reported on the balance sheet as a liability of approximately $3.5 million, with a corresponding reduction to accumulated other comprehensive income, a separate component of stockholders' equity.
All of our interest rate swap agreements meet the criteria to be deemed "effective" under SFAS 133 in reducing our exposure to variable interest rates. Accordingly, we have categorized these instruments as cash flow hedges.
On January 22, 2001, we terminated an interest rate swap agreement with a notional amount of $50 million, an interest pay rate of 7.25% and a maturity of December 31, 2001. The terminated interest rate swap agreement was replaced with the 6.350% interest rate swap agreement as shown in the table above. The fair value of the terminated interest rate swap agreement at the date of termination (a liability of $950,000) was transferred to the replacement 6.350% interest rate swap agreement. During 2001, approximately $475,000 was reclassified from other comprehensive income to interest expense. Approximately $475,000 will be credited against interest expense during 2002. These adjustments result in an effective interest pay rate for the 6.350% interest rate swap agreement of 7.30% for 2001 and 5.40% for 2002.
As of December 31, 2001, our interest rate swap agreements have been reported in the accompanying balance sheet at their fair value as other liabilities of approximately $7.5 million. The offsetting adjustments were reflected as deferred losses in accumulated other comprehensive income of $7.0 million. Balances in accumulated other comprehensive income are recognized in earnings as swap payments are made.
6. Secured Notes Payable
Secured notes payable consist of the following (in thousands):
December 31, ------------------- 2001 2000 --------- --------- 8.75% note, due January 2006, with an effective interest rate of 7.25% (includes unamortized premium of $494 and $611 at December 31, 2001 and 2000, respectively), secured by one property in Worcester, MA $ 10,799 $ 11,276 8.68% note, due December 2006, secured by two properties in Durham, NC 12,182 12,314 8.25% note, due August 2007, secured by three properties in Gaithersburg, MD 9,907 9,998 9.125% note, due October 2007, with an effective interest rate of 7.25% (includes unamortized premium of $1,619 and $1,845 at December 31, 2001 and 2000, respectively), secured by one property in Cambridge, MA 19,158 19,513 7.22% note, due May 2008, secured by two properties, one in Chantilly, VA and the other in Seattle, WA 35,264 35,646 8.71% note, due January 2010, secured by two properties, one in Worcester, MA and the other in San Diego, CA 18,676 18,798 8.33% note, due November 2010, secured by two properties in Gaithersburg, MD 24,508 24,675 7.75% note, due July 2011, secured by six properties in San Diego, CA 24,030 - 7.50% note, due August 2011, secured by one propety in San Diego, CA 11,912 - 7.40% note, due January 2012, secured by three properties in Gaithersburg, MD 28,250 - 7.165% note, due January 2014, secured by one property in Alameda, CA 4,811 6,018 9.00% note, due December 2014, secured by two properties in San Diego, CA 7,882 16,499 7.75% note, due June 2016, secured by one property in Seattle, WA 18,842 19,520 Construction loan at LIBOR plus 1.75%, due January 2002, providing for borrowings of up to $19,000,000, secured by one property in Gaithersburg, - 18,981 Construction loan at LIBOR plus 1.70%, due June 2003, providing for borrowings of up to $25,175,000, secured by two properties in San Francisco, CA 18,940 7,018 --------- --------- $ 245,161 $ 200,256 ========= =========
As of December 31, 2001, all of our secured notes payable, except for the 7.165% note and the construction loan secured by the two properties in San Francisco, CA, require monthly payments of principal and interest. The 7.165% note requires monthly payments of interest and semi-annual payments of principal. The construction loan secured by the two properties in San Francisco, CA, requires monthly payments of interest only.
6. Secured Notes Payable
(continued) Future principal payments due on secured notes payable as of December 31, 2001, are as follows (in thousands):
2002 $ 5,638 2003 25,062 2004 5,901 2005 5,713 2006 24,764 Thereafter 175,970 ----------- Subtotal 243,048 Unamortized premium 2,113 ----------- $ 245,161 ===========
7. Issuance of Common Stock
In April 2001, we sold 500,000 shares of common stock to institutional investors. The shares were issued at a price of $36.44 per share, resulting in aggregate proceeds of approximately $16.8 million, net of offering costs.
8. Non-Cash Transactions
In connection with the acquisition of a property in San Diego, California, in 2001 and three properties in Gaithersburg, Maryland, in 2000, we assumed secured notes payable. The following table summarizes these transactions (in thousands):
2001 2000 ----------- -----------
Aggregate purchase price $ 20,350 $ 18,000 Secured notes payable assumed 12,000 10,040 ----------- ----------- Cash paid for the properties $ 8,350 $ 7,960 =========== ===========
In 2001 and 2000, we incurred $2,841,000 and $1,831,000, respectively, in non-cash stock compensation expense.
9. Preferred Stock and Excess Stock
Series A Cumulative Redeemable Preferred Stock
In June 1999, we completed a public offering of 1,543,500 shares of our 9.50% Series A cumulative redeemable 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 $36.9 million, net of underwriters' discounts and commissions and other offering costs. The dividends on our Series A preferred stock are cumulative and accrue from the date of original issuance. We pay dividends quarterly in arrears at an annual rate of $2.375 per share. Our Series A preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not redeemable prior to June 11, 2004, except in order to preserve our status as a REIT. Investors in our Series A preferred stock generally have no voting rights. On or after June 11, 2004, we may, at our option, redeem our Series A preferred stock, in whole or in part, at any time for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends.
Preferred Stock and Excess Stock Authorizations
Our charter authorizes the issuance of up to 100,000,000 shares of preferred stock, of which 1,543,500 shares were issued and outstanding as of December 31, 2001. In addition, 200,000,000 shares of "excess stock" (as defined) are authorized, none of which were issued and outstanding at December 31, 2001.
10. Commitments and Contingencies
Employee Retirement Savings Plan
Effective January 1, 1997, we adopted a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code ("Code") whereby our employees may contribute a portion of their compensation to their respective retirement accounts, in an amount not to exceed the maximum allowed under the Code. The plan provides that we contribute eight percent of our employees' salary (subject to statutory limitations), which amounted to $353,000, $254,000 and $185,000, respectively, for the years ended December 31, 2001, 2000 and 1999. Employees who participate in the plan are immediately vested in their contributions and in the contributions of the company.
Concentration of Credit Risk
We maintain our cash and cash equivalents at insured financial institutions. The combined account balances at each institution periodically exceed FDIC insurance coverage, and, as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. We believe that the risk is not significant.
We are dependent on rental income from relatively few tenants in the life science industry. The inability of any single tenant to make its lease payments could adversely affect our operations. As of December 31, 2001, we had 194 leases with a total of 167 tenants and 45 of our 82 properties were each leased to a single tenant. At December 31, 2001, our three largest tenants accounted for approximately 14.1% of our aggregate annualized base rent.
We generally do not require collateral or other security from our tenants, other than security deposits. In addition to security deposits held in cash, we hold $10.8 million in irrevocable letters of credit available from certain tenants as security deposits for 37 leases as of December 31, 2001.
10. Commitments and Contingencies (continued)
Commitments
As of December 31, 2001, we were committed under the terms of certain leases to complete the construction of buildings and certain related improvements at a remaining aggregate cost of $12.9 million.
As of December 31, 2001, we were also committed to fund approximately $39.1 million for the construction of building infrastructure improvements under the terms of various leases and for certain investments.
11. Stock Option Plans and Stock Grants
1997 Stock Plan
In 1997, we adopted a stock option and incentive plan (the "1997 Stock Plan") for the purpose of attracting and retaining the highest quality personnel, providing for additional incentives and promoting the success of the company by providing employees the opportunity to acquire common stock pursuant to (i) options to purchase common stock; and (ii) share awards. As of December 31, 2001, a total of 409,623 shares were reserved for the granting of future options and share awards under the 1997 Stock Plan.
Options under our plan have been granted at prices that are equal to the market value of the stock on the date of grant and expire ten years after the date of grant. Employee options vest ratably in three annual installments from the date of grant. Non-employee director options vest immediately on the date of grant. The options outstanding under the 1997 Stock Plan expire at various dates through November 2011.
In addition, the 1997 Stock Plan permits us to issue share awards to our employees and non-employee directors. A share award is an award of common stock which (i) may be fully vested upon issuance or (ii) may be subject to the risk of forfeiture under Section 83 of the Internal Revenue Code. For employees, these shares generally vest over a one-year period and the sale of the shares is restricted prior to the date of vesting. For non-employee directors, these shares are generally fully vested upon issuance and the sale of the shares is not restricted. During 2001, we awarded 122,555 shares of common stock. These shares were recorded at fair value with a corresponding charge to stockholders' equity. The unearned portion is amortized as compensation expense on a straight- line basis over the vesting period.
11. Stock Option Plans and Stock Grants (continued)
1997 Stock Plan (continued)
We have 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 has been recognized. Although we have elected to follow APB 25, pro forma information regarding net income and net income per share is required by Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation." This information has been determined as if we had accounted for our stock options under the fair value method under Statement 123. The fair value of the options issued under the 1997 Stock Plan was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2001, 2000 and 1999:
Year Ended December 31, ------------------------------------ 2001 2000 1999 ----------- ----------- -----------
Risk-free interest rate 4.68% 5.15% 6.48% Dividend yield 4.49% 4.78% 5.66% Volatility factor of the expected market price 22.4% 23.2% 24.6% Weighted average expected life of the options 5.2 years 4.7 years 5.8 years
For purposes of the following pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods (in thousands, except per share information):
Year Ended December 31, ----------- ------------------------ 2001 2000 1999 ----------- ----------- -----------
Pro forma net income available to common stockholders $ 25,690 $ 21,532 $ 19,083 Pro forma net income per common share: - Basic $ 1.61 $ 1.49 $ 1.41 - Diluted $ 1.59 $ 1.46 $ 1.40
11. Stock Option Plans and Stock Grants (continued)
1997 Stock Plan (continued)
A summary of the stock option activity under our 1997 Stock Plan and related information for the years ended December 31, 2001, 2000 and 1999 follows:
2001 2000 1999 -------------------- -------------------- --------------------
Weighted Weighted Weighted Average Average Average Stock Exercise Stock Exercise Stock Exercise Options Price Options Price Options Price --------- --------- --------- --------- --------- --------- Outstanding-beginning of year 901,000 $ 27.73 785,000 $ 25.37 821,500 $ 24.49 Granted 193,500 38.27 316,000 33.78 70,500 29.56 Exercised (183,630) 27.58 (145,334) 26.38 (75,000) 20.11 Forfeited (61,000) 34.48 (54,666) 32.45 (32,000) 23.98 --------- --------- --------- --------- --------- --------- Outstanding-end of year 849,870 $ 29.68 901,000 $ 27.73 785,000 $ 25.37 ========= ========= ========= ========= ========= =========
Exercisable at end of year 497,040 $ 25.29 519,001 $ 23.94 426,003 $ 24.36 ========= ========= ========= ========= ========= ========= Weighted average fair value of options granted $ 6.19 $ 5.51 $ 5.28 ========= ========= =========
Exercise prices for options outstanding as of December 31, 2001 range from $20.00 to $39.41. The weighted average contractual life of options outstanding is 7.3 years.
12. Quarterly Financial Data (Unaudited)
Following is a summary of consolidated financial information on a quarterly basis for 2001 and 2000:
Quarter ------------------------------------------ First Second Third Fourth --------- --------- --------- --------- (In thousands, except per share amounts) ---- Revenues $ 30,995 $ 30,399 $ 32,730 $ 33,666 Net income available to common stockholders $ 6,390 $ 6,408 $ 6,535 $ 7,280 Net income per share: - Basic $ 0.41 $ 0.40 $ 0.41 $ 0.45 - Diluted $ 0.41 $ 0.39 $ 0.40 $ 0.44
---- Revenues $ 23,962 $ 24,910 $ 28,475 $ 29,563 Net income available to common stockholders $ 4,821 $ 5,425 $ 5,615 $ 6,484 Net income per share: - Basic $ 0.35 $ 0.38 $ 0.39 $ 0.42 - Diluted $ 0.35 $ 0.38 $ 0.38 $ 0.41
13. Subsequent Event (Unaudited)
In January 2002, we completed a public offering of 2,300,000 shares of our 9.10% Series B cumulative redeemable 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 $55.1 million, net of underwriters' discounts and other offering costs. The dividends on our Series B preferred stock are cumulative and accrue from the date of original issuance. We pay dividends quarterly in arrears at an annual rate of $2.275 per share. Our Series B preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not redeemable prior to January 22, 2007, except in order to preserve our status as a REIT. Investors in our Series B preferred stock generally have no voting rights. On or after January 22, 2007, we may, at our option, redeem our Series B preferred stock, in whole or in part, at any time for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends.
In February 2002, we sold 418,970 shares of our common. The shares were issued at a price of $39.46 per share, resulting in aggregate proceeds of approximately $16.4 million (after deducting underwriting discounts and other offering costs).
Alexandria Real Estate Equities, Inc. and Subsidiaries
Schedule III
Consolidated Financial Statement Schedule of Rental Properties
and Accumulated Depreciation
December 31, 2001
(In Thousands, Except Square Foot Data)
Initial Costs Costs Total Costs ----------------------- Capitalized ---------------------- Square Buildings and Subsequent to Buildings and Accumulated Year Built/ Property Name Footage Land Improvements Acquisition Land Improvements Total Depreciation (1) Encumbrances Renovated ------------- ---------- -------- ------------- ------------ -------- ------------ --------- ---------------- ----------- ------------------- North Torrey Pines Road #1 107,753 $ 3,903 $ 5,960 $ 1,104 $ 3,903 $ 7,064 $ 10,967 $ 2,040 $ _ 1971/1994 Science Park Road 74,557 _ _ 15,553 _ 15,553 15,553 1,023 _ 2000 North Torrey Pines Road #2 86,962 2,663 10,649 2,644 2,663 13,293 15,956 3,639 _ 1986/1996 General Atomics Court #1 76,084 2,651 18,046 1,430 2,651 19,476 22,127 4,461 5,182 1986/1991 General Atomics Court #2 43,600 1,227 9,554 1 1,227 9,555 10,782 2,243 2,700 1991 Roselle Street #1 18,173 463 1,840 833 463 2,673 3,136 702 _ (2) 1983/1998 Nexus Centre Drive 67,050 2,548 13,638 _ 2,548 13,638 16,186 3,080 _ 1989 Nancy Ridge Drive #1 29,333 733 2,273 1,851 733 4,124 4,857 746 _ (3) 1997 Roselle Street #2 17,603 444 1,699 1,601 444 3,300 3,744 408 _ late 1970's/1999 Tansy Street 15,410 651 1,375 1,789 651 3,164 3,815 349 _ 1978/1999 John Hopkins Court #1 34,723 1,122 _ 3,861 1,122 3,861 4,983 155 _ 2000 John Hopkins Court #2 55,200 1,683 _ 5,631 1,683 5,631 7,314 403 _ 1999 Towne Centre Drive #1 45,030 275 8,621 46 275 8,667 8,942 540 _ 1987 Towne Centre Drive #2 52,228 320 10,070 744 320 10,814 11,134 919 _ 1987/2000 Towne Centre Drive #3 41,554 258 8,170 5,198 258 13,368 13,626 771 _ 1987/2000 Roselle Street #3 18,193 455 2,581 4 455 2,585 3,040 98 24,030 (2) 1981 Roselle Street #4 30,147 754 4,288 4 754 4,292 5,046 167 _ (2) 1981/1998 Roselle Street #5 22,577 564 3,224 4 564 3,228 3,792 128 _ (2) 1981/1995 Roselle Street #6 17,433 436 2,480 5 436 2,485 2,921 97 _ (2) 1981/1999 Roselle Street #7 24,208 605 3,459 4 605 3,463 4,068 138 _ (2) 1981/1995 Nancy Ridge Drive #2 21,940 515 1,566 2,217 515 3,783 4,298 101 _ early 1980's Campus Point Drive 71,510 4,246 16,165 87 4,246 16,252 20,498 190 11,912 1986/1992/1998 North Hill Avenue 31,343 2,172 812 7,139 2,172 7,951 10,123 103 1940's/2001 Harbor Bay Parkway #1 61,015 1,506 5,357 2,280 1,506 7,637 9,143 1,433 _ 1983/1999 Harbor Bay Parkway #2 27,745 775 1,917 1,403 775 3,320 4,095 445 _ 1984/2000 Harbor Bay Parkway #3 47,777 1,200 3,880 252 1,200 4,132 5,332 548 _ 1986/1994 Harbor Bay Parkway #4 68,711 1,800 9,731 216 1,800 9,947 11,747 1,309 4,811 1985/1994 Mitten Road & Malcolm Road 153,837 4,751 12,612 4,094 4,751 16,706 21,457 1,766 _ 1962/1997 Hanover Street 32,074 _ 6,628 3,011 _ 9,639 9,639 2,539 _ 1968/1985/2000 Garcia Avenue & Bayshore Parkway 98,964 _ 21,323 1,651 _ 22,974 22,974 2,522 _ 1980/2000 Oyster Point Boulevard #1 53,980 3,519 _ 11,962 3,519 11,962 15,481 346 18,940 2001 Oyster Point Boulevard #2 53,980 3,519 _ 6,323 3,519 6,323 9,842 130 _ 2001 Durant Avenue 25,000 3,313 966 2,756 3,313 3,722 7,035 _ _ 1930 Columbia Street 209,361 6,566 23,528 10,751 6,566 34,279 40,845 5,277 18,842 1975/1997 Western Avenue 47,746 1,432 7,497 2,118 1,432 9,615 11,047 1,518 35,264 (4) 1929/1990/2000 First Avenue 70,647 2,119 11,275 4,564 2,119 15,839 17,958 1,894 _ 1980/1990/2000 Professional Drive #1 47,558 871 5,362 2,968 871 8,330 9,201 1,098 _ 1989/1999 Professional Drive #2 62,739 1,129 6,940 20 1,129 6,960 8,089 971 _ 1987 West Watkins Mill Road #1 138,938 3,281 14,416 164 3,281 14,580 17,861 2,019 24,508 (5) 1989/1997 Quince Orchard Road #1 49,225 1,267 3,031 5,147 1,267 8,178 9,445 2,261 _ (5) 1982/1997 Clopper Road #1 44,464 900 2,732 1,503 900 4,235 5,135 564 _ (6) 1989 Research Boulevard #1 48,800 602 4,391 692 602 5,083 5,685 545 _ 1966 East Guide Drive #1 45,989 748 3,609 1,058 748 4,667 5,415 598 _ 1981/1986 Research Boulevard #2 105,000 1,733 9,611 471 1,733 10,082 11,815 1,393 _ 1967/1996/2000 East Guide Drive #2 44,500 775 4,122 164 775 4,286 5,061 541 _ 1981/1995 Piccard Drive 131,511 2,800 11,533 1,674 2,800 13,207 16,007 1,410 _ 1978/1994 Newbrook Drive 248,186 4,800 27,639 375 4,800 28,014 32,814 3,388 _ (4) 1992 Virginia Manor Road 191,884 _ 13,679 470 _ 14,149 14,149 1,585 _ 1990 Old Columbia Road 75,500 1,510 5,210 1,612 1,510 6,822 8,332 1,066 _ 1983/1997 Firstfield Road #1 25,175 376 3,192 2,085 376 5,277 5,653 380 _ 1974/2000 Shady Grove Road 41,062 840 3,115 36 840 3,151 3,991 371 _ 1987 Aliceanna Street 179,397 1,848 6,120 1,124 1,848 7,244 9,092 638 _ early 1950's/1995 West Watkins Mill Road #2 57,410 859 4,149 1,458 859 5,607 6,466 440 _ 1988/2000 Clopper Road #2 92,990 2,463 493 17,994 2,463 18,487 20,950 2,393 28,250 (6) 2000 Firstfield Road #2 53,416 971 5,141 3,504 971 8,645 9,616 215 _ (7) 1980/2001 Firstfield Road #3 53,595 947 5,092 913 947 6,005 6,952 232 _ (7) 1980 Quince Orchard Road #2 54,874 970 5,138 960 970 6,098 7,068 199 9,907 (7) 1981 Clopper Road #3 59,838 983 6,638 70 983 6,708 7,691 206 _ (6) 1989/1992 Research Place 58,632 1,466 5,708 476 1,466 6,184 7,650 _ _ 1972 Charlestown Navy Yard 24,940 _ 6,247 19 _ 6,266 6,266 657 _ 1880/1991 Pond Street 24,867 622 3,053 38 622 3,091 3,713 314 _ 1965/1990 Westview Street 40,000 960 3,032 374 960 3,406 4,366 298 _ 1975 Plantation Street #1 92,711 2,352 14,173 167 2,352 14,340 16,692 1,260 18,676 (3) 1993 Memorial Drive 96,500 2,440 37,754 62 2,440 37,816 40,256 3,062 19,158 1920's/1997/1999 Innovation Drive 113,956 2,734 14,567 689 2,734 15,256 17,990 1,348 10,799 1991 Plantation Street #2 92,423 651 _ 15,395 651 15,395 16,046 3,043 _ 2000 Arsenal Street #1 92,500 3,360 7,316 15,600 3,360 22,916 26,276 72 _ 1978/1984/2001 Hartwell Avenue 59,000 1,475 7,194 1,443 1,475 8,637 10,112 _ _ 1972/1996-1999 Arsenal Street #2 96,150 6,413 5,457 1,189 6,413 6,646 13,059 _ _ 1980 College Road 106,036 1,943 9,764 929 1,943 10,693 12,636 1,205 _ 1968/1974/1984 Williams Drive 37,000 740 4,506 47 740 4,553 5,293 444 _ 1982/1994 Phillips Parkway 75,972 1,840 2,298 10,887 1,840 13,185 15,025 828 _ late 1960's/1999 Campus Drive 42,782 654 4,234 119 654 4,353 5,007 473 _ 1989 Electronic Drive 40,000 600 3,110 3,065 600 6,175 6,775 1,381 _ 1983/1998 Princeton Road 42,600 1,075 1,438 2,950 1,075 4,388 5,463 1,165 _ 1984/1999 Capitola Drive #1 65,114 337 5,795 172 337 5,967 6,304 755 _ (8) 1986 Capitola Drive #2 119,916 577 11,688 1,874 577 13,562 14,139 1,489 12,182 (8) 1985 Technology Parkway 37,080 370 4,191 479 370 4,670 5,040 438 _ 1976/1985/1993 Triangle Drive 32,120 161 3,410 92 161 3,502 3,663 356 _ 1981 Alexander Road 86,239 _ 376 11,614 _ 11,990 11,990 556 _ 2000 Kit Creek Road 37,908 374 3,383 3,207 374 6,590 6,964 205 _ 1995 ---------- -------- ------------- ------------ -------- ------------ --------- ---------------- ----------- 5,319,945 $121,005 $ 541,231 $ 218,480 $121,005 $ 759,711 $ 880,716 $ 84,090 $ 245,161 ========== ======== ============= ============ ======== ============ ========= ================ ===========
_______________
The depreciable life ranges from 30 to 40 years for buildings and improvements, 20 years for land improvements, and the term of the respective lease for tenant improvements.
Loan secured by Roselle Street #1, Roselle Street #3, Roselle Street #4, Roselle Street #5, Roselle Street #6 and Roselle Street #7 is shown under Roselle Street #3.
Loan secured by Nancy Ridge Drive # 1and Plantation Street #1 is shown under Plantation Street #1.
Loan secured by Western Avenue and Newbrook Drive is shown under Western Avenue.
Loan secured by West Watkins Mill Road #1 and Quince Orchard Road #1 is shown under West Watkins Mill Road #1.
Loan secured by Clopper Road #1, Clopper Road #2 and Clopper Road #3 is shown under Clopper Road #2.
Loan secured by Firstfield Road #2, Firstfield Road #3 and Quince Orchard Road #2 is shown under Quince Orchard Road #2.
Loan secured by Capitola Drive #1 and Capitola Drive #2 is shown under Capitola Drive #2.
A summary of activity of consolidated rental properties and accumulated depreciation is as follows (in thousands):
Rental Properties Year Ended December 31, ------------------------------------ 2001 2000 1999 ----------- ----------- ----------- Balance at beginning of period $ 737,207 $ 590,202 $ 490,518 Purchase of rental properties 55,746 48,584 63,896 Additions to rental properties 69,530 40,539 16,807 Transfer of costs for completed development projects 18,233 57,882 18,981 ----------- ----------- ----------- Balance at end of period $ 880,716 $ 737,207 $ 590,202 =========== =========== ===========
Accumulated Depreciation December 31, ------------------------------------ 2001 2000 1999 ----------- ----------- -----------
Balance at beginning of period $57,554 $35,496 $18,611 Depreciation expense 26,536 22,058 16,885 ----------- ----------- ----------- Balance at end of period $84,090 $57,554 $35,496 =========== =========== ===========