UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 1-12993
ALEXANDRIA REAL ESTATE EQUITIES, INC.(Exact name of registrant as specified in its charter)
135 North Los Robles Avenue, Suite 250 Pasadena, California 91101 (Address of principal executive offices including zip code)
(626) 578-0777 (Registrant's telephone number, including area code)
N/A (Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ],
As of November 12, 2001, 16,297,607 shares of common stock, par value $.01 per share, were outstanding.
ALEXANDRIA REAL ESTATE EQUITIES, INC.TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Alexandria Real Estate Equities, Inc. and SubsidiariesCondensed Consolidated Balance Sheets(Unaudited)(DOLLARS IN THOUSANDS)
September 30, December 31, 2001 2000 ------------ ------------ Assets Rental properties, net $783,474 $679,653 Property under development 46,306 26,092 Cash and cash equivalents 2,720 2,776 Tenant security deposits and other restricted cash 15,721 6,995 Secured note receivable 6,000 6,000 Tenant receivables 2,929 2,835 Deferred rent 19,160 14,945 Other assets 52,478 41,688 ------------ ------------ Total assets $928,788 $780,984 ============ ============ Liabilities and stockholders' equity Secured notes payable $244,697 $200,256 Unsecured line of credit 308,000 231,000 Accounts payable, accrued expenses and tenant security deposits 38,975 23,123 Dividends payable 8,250 7,453 ------------ ------------ Total liabilities 599,922 461,832 Stockholders' equity: Series A preferred stock 38,588 38,588 Common stock 163 155 Additional paid-in capital 299,265 278,868 Deferred compensation (1,775) (296) Retained earnings - - Accumulated other comprehensive income (7,375) 1,837 ------------ ------------ Total stockholders' equity 328,866 319,152 ------------ ------------ Total liabilities and stockholders' equity $928,788 $780,984 ============ ============
See accompanying notes.
Alexandria Real Estate Equities, Inc. and SubsidiariesCondensed Consolidated Income Statements(Unaudited)(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenues: Rental $25,505 $21,581 $72,666 $59,893 Tenant recoveries 6,607 5,663 18,814 15,121 Interest and other income 618 1,231 2,644 2,333 ----------- ----------- ----------- ----------- 32,730 28,475 94,124 77,347 Expenses: Rental operations 6,925 6,027 19,555 15,828 General and administrative 2,885 2,391 8,578 6,588 Interest 7,278 7,066 21,522 18,585 Depreciation and amortization 8,191 6,460 22,388 17,737 ----------- ----------- ----------- ----------- 25,279 21,944 72,043 58,738 ----------- ----------- ----------- ----------- Net income 7,451 6,531 22,081 18,609 Dividends on preferred stock 916 916 2,748 2,748 ----------- ----------- ----------- ----------- Net income available to common stockholders $6,535 $5,615 $19,333 $15,861 =========== =========== =========== =========== Net income per common share: -Basic $0.41 $0.39 $1.22 $1.12 =========== =========== =========== =========== -Diluted $0.40 $0.38 $1.20 $1.10 =========== =========== =========== =========== Weighted average shares of common stock outstanding: -Basic 16,135,399 14,518,005 15,875,151 14,130,016 =========== =========== =========== =========== -Diluted 16,413,591 14,782,077 16,118,022 14,354,664 =========== =========== =========== ===========
Condensed Consolidated Statements of Cash Flows(Unaudited)(DOLLARS IN THOUSANDS)
Nine Months Ended September 30, ---------------------- 2001 2000 ---------- ---------- Operating Activities Net income $22,081 $18,609 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,388 17,737 Amortization of loan fees and costs 924 765 Amortization of premiums on secured notes (257) (249) Stock compensation expense 1,897 1,238 Changes in operating assets and liabilities: Tenant security deposits and other restricted cash (8,726) (1,374) Tenant receivables (94) (303) Deferred rent (4,215) (4,289) Other assets (9,101) (9,693) Accounts payable, accrued expenses and tenant security deposits 8,022 (567) ---------- ---------- Net cash provided by operating activities $32,919 $21,874 ---------- ---------- Investing Activities Purchase of rental properties (55,746) (46,503) Additions to rental properties (49,324) (31,169) Additions to property under development (38,446) (23,439) Additions to investments (6,902) (10,051) ---------- ---------- Net cash used in investing activities (150,418) (111,162) ---------- ---------- Financing Activities Proceeds from secured notes payable 47,937 6,074 Net proceeds from issuance of common stock 16,751 52,130 Proceeds from exercise of stock options 3,344 3,969 Net borrowings on unsecured line of credit 77,000 48,000 Principal reductions of secured notes payable (3,239) (2,764) Dividends paid on common stock (21,603) (18,044) Dividends paid on preferred stock (2,747) (2,748) ---------- ---------- Net cash provided by financing activities 117,443 86,617 ---------- ---------- Net decrease in cash and cash equivalents (56) (2,671) Cash and cash equivalents at beginning of period 2,776 3,446 ---------- ---------- Cash and cash equivalents at end of period $2,720 $775 ========== ==========
Alexandria Real Estate Equities, Inc. and SubsidiariesNotes to Condensed Consolidated Financial Statements(Unaudited)
1. Background and Basis of Presentation
Background
Alexandria Real Estate Equities, Inc. is a real estate investment trust ("REIT") formed in 1994. We are engaged primarily in the ownership, operation, management, acquisition, conversion, retrofitting, expansion and selective development and redevelopment 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 services entities, not-for-profit scientific research institutions, universities and related government agencies. As of September 30, 2001, our portfolio consisted of 82 properties in nine states with approximately 5.3 million rentable square feet.
We have prepared the accompanying interim financial statements in accordance with accounting principles generally accepted in the United States and in conformity with the rules and regulations of the Securities and Exchange Commission. In our opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. These financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2000.
Basis of Presentation and Significant Accounting Policies
The accompanying condensed consolidated financial statements include the accounts of Alexandria Real Estate Equities, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current period presentation.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of the following (in thousands):
September 30, December 31, 2001 2000 ----------- ----------- Unrealized gain on marketable securities $455 $1,837 Unrealized loss on interest rate swap agreements (7,830) - ----------- ----------- ($7,375) $1,837 =========== ===========
The following table provides a reconciliation of comprehensive income (in thousands):
Nine Months Ended September 30, --------------------- 2001 2000 ---------- ---------- Net income $22,081 $18,609 Unrealized loss on marketable securities (1,383) - Unrealized loss on interest rate swap agreements (4,369) - ---------- ---------- Comprehensive income $16,329 $18,609 ========== ==========
Investments
We hold equity investments in certain publicly traded companies and privately held entities. 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 closing trading price at the balance sheet date, with unrealized gains and losses included in accumulated other comprehensive income, a separate component of stockholders' equity. The cost of investments sold is determined using the specific identification method, with realized gains and losses included in interest and other income.
Investment income of $217,000 for the quarter ended September 30, 2001 consisted of gross realized gains of $217,000 and no realized losses. The fair value of available-for-sale securities as of September 30, 2001 was $3,590,000, with related gross unrealized gains of $1,346,000 and gross unrealized losses of $891,000, respectively. At September 30, 2001, the cost of available- for-sale securities totaled $3,135,000.
Investments in non-publicly held entities as of September 30, 2001, totaled $22,236,000. These investments are accounted for under the cost method and are included in other assets in the accompanying balance sheets.
2. Rental Properties
Rental properties consist of the following (in thousands):
September 30, December 31, 2001 2000 ----------- ----------- Land $120,975 $99,373 Buildings and improvements 655,524 575,212 Tenant and other improvements 84,011 62,622 ----------- ----------- 860,510 737,207 Less accumulated depreciation (77,036) (57,554) ----------- ----------- $783,474 $679,653 =========== ===========
During the three months ended September 30, 2001, we acquired two properties containing approximately 130,000 rentable square feet from unrelated third parties for an aggregate purchase price (including closing and transaction costs) of approximately $27.6 million.
3. Unsecured Line of Credit
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. As of September 30, 2001, borrowings outstanding on the line of credit carried a weighted average interest rate of 5.35%.
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) of an additional one-year period, upon notice by the company and consent of the participating banks.
4. Interest Rate Swap Agreements
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 following table summarizes our interest rate swap agreements as of September 30, 2001 (dollars in thousands):
Notional Interest Transaction Date Effective Date Amount Pay Rate Termination Date Fair Value - ------------------- --------------- ------------ -------- ---------------- ----------- April 2000 May 20, 2000 $ 50,000 6.995% January 2, 2003 $ (2,639) July 2000 May 31, 2001 $ 50,000 7.070% May 31, 2003 $ (3,315) January 2001 January 31, 2001 $ 50,000 6.350% December 31, 2002 $ (2,232) ----------- Total $ (8,186) ===========
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.
As of September 30, 2001, our interest rate swap agreements have been reported in the accompanying balance sheet at their fair value as other liabilities of approximately $8.2 million. Unrealized losses on our interest rate swap agreements are initially reflected in accumulated other comprehensive income. Balances in accumulated other comprehensive income are recognized in earnings as swap payments are made.
5. Stockholders' Equity
On September 14, 2001, we declared a cash dividend on our common stock aggregating $7,483,000 ($ 0.46 per share) for the calendar quarter ended September 30, 2001. We paid the dividend on October 16, 2001. On September 14, 2001, we also declared a cash dividend on our Series A preferred stock aggregating $916,000 ($ 0.59375 per share) for the calendar quarter ended September 30, 2001. We paid the dividend on October 16, 2001.
6. Net Income Per Share
The following table shows the computation of net income per share of our common stock outstanding (dollars in thousands, except per share amounts):
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net income available to common stockholders $6,535 $5,615 $19,333 $15,861 ======================= =========== =========== Weighted average shares of common stock outstanding - basic 16,135,399 14,518,005 15,875,151 14,130,016 Add: dilutive effect of stock options and stock grants 278,192 264,072 242,871 224,648 ----------- ----------- ----------- ----------- Weighted average shares of common stock outstanding - diluted 16,413,591 14,782,077 16,118,022 14,354,664 =========== =========== =========== =========== Net income per common share: - Basic $0.41 $0.39 $1.22 $1.12 =========== =========== =========== =========== - Diluted $0.40 $0.38 $1.20 $1.10 =========== =========== =========== =========== Common dividends declared per share $0.46 $0.43 $1.38 $1.29 =========== =========== =========== ===========
7. Subsequent Event
In October 2001, we obtained an unsecured term loan for $50,000,000 from Fleet National Bank. The loan, which is due in February 2003, bears interest at LIBOR plus 1.625% and contains financial covenants similar to our unsecured line of credit. The proceeds of the loan were used to pay down a portion of the outstanding balance on our unsecured line of credit.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain information and statements included in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "expects", "may", "will", "should", "seeks", "approximately", "intends", "plans", "estimates" or "anticipates", or the negative of these words or similar words, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by the forward-looking statements, including, but not limited to, those described below in this report and under the headings "Business Risks" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2000. We do not take any responsibility to update any of these factors or to announce publicly any revisions to any of the forward-looking statements contained in this or any other document, whether as a result of new information, future events or otherwise. Readers of this Form 10-Q should also read our Securities and Exchange Commission and other publicly filed documents for further discussion regarding such factors. As used in this Form 10-Q, "we," "our," "ours" and "us" refer to Alexandria Real Estate Equities, Inc. and its subsidiaries.
The following discussion should be read in conjunction with the financial statements and notes appearing elsewhere in this report.
Overview
Since our formation in October 1994, we have devoted substantially all of our resources to the ownership, operation, management, acquisition, conversion, retrofitting, expansion and selective development and redevelopment of strategically located Life Science Facilities in our target markets.
As of September 30, 2001, our portfolio consisted of 82 properties containing approximately 5.3 million rentable square feet of office/laboratory space. As of that date, our properties were approximately 98.6% leased, excluding those properties in our redevelopment program. Our primary source of revenue is rental income and tenant recoveries from leases at the properties we own. The comparability of financial data from period to period is affected by the timing of our acquisition and development activities.
Results of Operations
Comparison of Three Months Ended September 30, 2001 ("Third Quarter 2001") to Three Months Ended September 30, 2000 ("Third Quarter 2000")
Rental revenue increased by $3.9 million, or 18%, to $25.5 million for Third Quarter 2001 compared to $21.6 million for Third Quarter 2000. The increase resulted primarily from rental revenue from properties acquired, placed in service or redeveloped after October 1, 2000. Rental revenue from the properties operating continuously since October 1, 2000 (the "Third Quarter Same Properties") increased by $1.3 million, or 6.6%, due to increases in rental rates and occupancy.
Tenant recoveries increased by $944,000, or 17%, to $6.6 million for Third Quarter 2001 compared to $5.7 million for Third Quarter 2000. The increase resulted primarily from tenant recoveries from the properties acquired, placed in service or redeveloped after October 1, 2000. Tenant recoveries for the Third Quarter Same Properties increased by $281,000, or 5.2%, primarily due to increases in certain recoverable operating expenses.
Interest and other income decreased by $613,000, or 50%, to $618,000 for Third Quarter 2001 compared to $1.2 million for Third Quarter 2000, resulting primarily from a decrease in service fee income and investment income.
Rental operating expenses increased by $898,000, or 15%, to $6.9 million for Third Quarter 2001 compared to $6.0 million for Third Quarter 2000. The increase resulted partially from rental operating expenses from the properties acquired, placed in service or redeveloped after October 1, 2000. Operating expenses for the Third Quarter Same Properties increased by $502,000, or 9.2%, primarily due to increases 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 computed under accounting principles generally accepted in the United States ("GAAP Basis") and under accounting principles generally accepted in the United States, adjusted to exclude the effect of straight line rent adjustments required by GAAP ("Cash Basis") for the Third Quarter Same Properties (dollars in thousands):
For the Three Months Ended September 30, ----------------------- 2001 2000 Change ----------- ----------- --------- GAAP BASIS: Revenue $27,172 $25,803 5.3% Rental operating expenses 5,973 5,471 9.2% ----------- ----------- --------- Net operating income $21,199 $20,332 4.3% =========== =========== ========= CASH BASIS (1): Revenue $26,340 $24,437 7.8% Rental operating expenses 5,973 5,471 9.2% ----------- ----------- --------- Net operating income $20,367 $18,966 7.4% =========== =========== =========
_________
(1) Revenue and operating expenses are computed in accordance with GAAP, except that revenue excludes the effect of straight line rent adjustments.
General and administrative expenses increased by $494,000, or 21%, to $2.9 million for Third Quarter 2001 compared to $2.4 million for Third Quarter 2000. The increase was primarily due to general and administrative expenses associated with the continued expansion of our portfolio of Life Science Facilities and related scope of operations.
Interest expense increased by $212,000, or 3%, to $7.3 million for Third Quarter 2001 compared to $7.1 million for Third Quarter 2000. The increase resulted from (a) indebtedness incurred to purchase the properties acquired after October 1, 2000 and (b) indebtedness incurred to finance the development and redevelopment of properties which have now been completed, partially offset by a reduction in variable interest rates on our unsecured line of credit.
Depreciation and amortization increased by $1.7 million, or 27%, to $8.2 million for Third Quarter 2001 compared to $6.5 million for Third Quarter 2000. The increase resulted primarily from depreciation associated with the properties acquired, placed in service or redeveloped after October 1, 2000.
As a result of the foregoing, net income was $7.5 million for Third Quarter 2001 compared to $6.5 million for Third Quarter 2000.
Comparison of Nine Months Ended September 30, 2001 ("Nine Months 2001") to Nine Months Ended September 30, 2000 ("Nine Months 2000")
Rental revenue increased by approximately $12.8 million, or 21%, to $72.7 million for Nine Months 2001 compared to $59.9 million for Nine Months 2000. The increase resulted primarily from rental revenue from properties acquired, placed in service or redeveloped after January 1, 2000. Rental revenue from the Properties acquired or placed in service before January 1, 2000 (the "Nine Months Same Properties") increased by $3.0 million, or 6.9%, primarily due to increases in rental rates and occupancy.
Tenant recoveries increased by approximately $3.7 million, or 24%, to $18.8 million for Nine Months 2001 compared to $15.1 million for Nine Months 2000. The increase resulted primarily from tenant recoveries from properties acquired, placed in service or redeveloped after January 1, 2000. Tenant recoveries from the Nine Months Same Properties increased by $1.2 million, or 10.0%, primarily due to increases in certain recoverable operating expenses.
Interest and other income increased by $311,000, or 13%, to $2.6 million for Nine Months 2001 compared to $2.3 million for Nine Months 2000, primarily resulting from an increase in investment income and service fee income.
Rental operating expenses increased by approximately $3.8 million, or 24%, to $19.6 million for Nine Months 2001 compared to $15.8 million for Nine Months 2000. The increase resulted primarily from properties acquired, placed in service or redeveloped after January 1, 2000. Operating expenses for the Nine Months Same Properties increased by $1.6 million, or 12.8%, primarily due to increases 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 computed on a GAAP Basis and on a Cash Basis for the Nine Months Same Properties (dollars in thousands):
For the Nine Months Ended September 30, ----------------------- 2001 2000 Change ----------- ----------- --------- GAAP BASIS: Revenue $60,470 $56,613 6.8% Rental operating expenses 13,861 12,289 12.8% ----------- ----------- --------- Net operating income $46,609 $44,324 5.2% =========== =========== ========= CASH BASIS (1): Revenue $59,574 $55,348 7.6% Rental operating expenses 13,861 12,289 12.8% ----------- ----------- --------- Net operating income $45,713 $43,059 6.2% =========== =========== =========
General and administrative expenses increased by approximately $2.0 million, or 30%, to $8.6 million for Nine Months 2001 compared to $6.6 million for Nine Months 2000. The increase was primarily due to the continued expansion of our portfolio of Life Science Facilities and related scope of operations.
Interest expense increased by approximately $2.9 million, or 16%, to $21.5 million for Nine Months 2001 compared to $18.6 million for Nine Months 2000. The increase resulted from (a) indebtedness incurred to purchase the properties acquired after January 1, 2000 and (b) indebtedness incurred to finance the development and redevelopment of properties which have now been completed, partially offset by a reduction in variable interest rates on our unsecured line of credit.
Depreciation and amortization increased by approximately $4.7 million, or 26%, to $22.4 million for Nine Months 2001 compared to $17.7 million for Nine Months 2000. The increase resulted primarily from depreciation associated with properties acquired or placed in service after January 1, 2000.
As a result of the foregoing, net income was $22.1 million for Nine Months 2001 compared to $18.6 million for Nine Months 2000.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities for Nine Months 2001 increased by $11.0 million, to $32.9 million compared to $21.9 million for Nine Months 2000. The increase resulted primarily from increases in operating cash flows from properties acquired, placed in service or redeveloped after January 1, 2000 and increases in trade accounts payable due to the timing of disbursements. These increases were offset by the increase in restricted cash held in escrow to complete the development of an office/laboratory facility.
Net cash used in investing activities increased by $39.3 million, to $150.4 million for Nine Months 2001 compared to $111.2 million for Nine Months 2000 primarily due to a higher level of acquisition, development and redevelopment activity during Nine Months 2001 compared to Nine Months 2000.
Net cash provided by financing activities increased by $30.8 million, to $117.4 million for Nine Months 2001 compared to $86.6 million for Nine Months 2000. Cash provided by financing activities for Nine Months 2001 and Nine Months 2000 consisted primarily of net proceeds from our unsecured line of credit, secured debt and exercise of stock options, partially offset by principal reductions on our secured debt and distributions to stockholders.
Commitments
As of September 30, 2001, we were committed to complete the construction of buildings at a remaining aggregate cost of $8.5 million. The funds have been set aside in an escrow account for the completion of this project.
As of September 30, 2001, we were also committed to fund approximately $44.9 million for the construction of generic building infrastructure improvements for tenants under the terms of various leases and for certain investments.
Restricted Cash
Restricted cash as of September 30, 2001 consists of the following (in thousands):
Amount --------- Funds held in trust as additional security required under the terms of certain secured notes payable $5,389 Security deposit funds based on the terms of certain lease agreements 1,874 Funds held in escrow to complete the development of an office/laboratory facility 8,458 --------- $15,721 =========
Secured Debt
Secured debt as of September 30, 2001 consists of the following (dollars in thousands):
Balance at Stated September 30, Interest Location of Collateral 2001 Rate Maturity Date - ------------------------------------ ------------ ----------- -------------- Worcester, MA (1) $10,922 8.75% January 2006 Durham, NC (two properties) 12,216 8.68% December 2006 Gaithersburg, MD (three properties 9,931 8.25% August 2007 Cambridge, MA (2) 19,249 9.125% October 2007 Chantilly, VA and Seattle, WA 35,364 7.22% May 2008 Worcester, MA and San Diego, CA 18,709 8.71% January 2010 Gaithersburg, MD (two properties) 24,547 8.33% November 2010 San Diego, CA (six properties) 24,076 7.75% July 2011 San Diego, CA 11,979 7.50% August 2011 Alameda, CA 4,811 7.165% January 2014 San Diego, CA (two properties) 16,041 9.00% December 2014 Seattle, WA 19,016 7.75% June 2016 Gaithersburg, MD (3) 18,981 LIBOR + 1.75% January 2002 San Francisco, CA (development project) (4) 18,855 LIBOR + 1.70% June 2003 ------------ $244,697 ============
(1) The balance shown includes an unamortized premium of $524,000. The effective rate of the loan is 7.25%.(2) The balance shown includes an unamortized premium of $1,676,000. The effective rate of the loan is 7.25%.(3) The balance shown represents the amount drawn on a construction loan that provides for borrowings of up to $19,000,000.(4) The balance shown represents the amount drawn on a construction loan that provides for borrowings of up to $25,175,000.
(1) The balance shown includes an unamortized premium of $524,000. The effective rate of the loan is 7.25%.
(2) The balance shown includes an unamortized premium of $1,676,000. The effective rate of the loan is 7.25%.
(3) The balance shown represents the amount drawn on a construction loan that provides for borrowings of up to $19,000,000.
(4) 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 September 30, 2001 (in thousands):
Year Amount ------------------------------------------- 2001 $803 2002 23,649 2003 23,904 2004 4,737 2005 4,438 Thereafter 184,966 ----------- Subtotal 242,497 Unamortized Premium 2,200 ----------- $244,697 ===========
Unsecured line of credit
The line of credit expires February 2003 and provides for an extension (provided there is no default) of an additional one-year period, upon notice by us and consent of the participating banks.
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 the interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements (dollars in thousands):
With respect to our swap agreements, we are exposed to losses in the event the financial institution is unable to perform under the agreements, or in the event one-month LIBOR is less than the agreed-upon fixed interest rates.
Other Resources and Liquidity Requirements
We expect to continue meeting our short-term liquidity and capital requirements generally by using our working capital and net cash provided by operating activities. We believe that the net cash provided by operating activities will continue to be sufficient to make distributions necessary to enable us to continue qualifying as a real estate investment trust. We also believe that net cash provided by operations will be sufficient to fund our recurring non-revenue enhancing capital expenditures and leasing commissions.
We expect to meet certain long-term liquidity requirements, for purposes such as property acquisitions, property development and redevelopment activities, scheduled debt maturities, generic building infrastructure improvements funded for tenants and non-recurring capital improvements, through long-term secured and unsecured indebtedness, including borrowings under our line of credit, and the issuance of additional debt and/or equity securities.
Inflation
Approximately 84% of our leases (on a square footage basis) are triple net leases, requiring tenants to pay substantially all real estate taxes and insurance, common area and other operating expenses, including increases therein. In addition, approximately 85% of our leases (on a square footage basis) require the tenants to pay a majority of operating expenses. Approximately 91% 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 a CPI index. Accordingly, we do not believe that our earnings or cash flow are subject to any significant risk from inflation. An increase in inflation, however, could result in an increase in our variable rate borrowing cost, including borrowings under our unsecured line of credit.
Funds from Operations
We believe that funds from operations ("FFO") is helpful to investors as a 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 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.
The following table presents our FFO for the three and nine months ended September 30, 2001 and 2000 (in thousands):
For the Three Months Ended September 30, ----------------------- 2001 2000 ----------- ----------- Net income $7,451 $6,531 Add: Depreciation and amortization 8,191 6,460 Subtract: Dividends on preferred stock (916) (916) ----------- ----------- FFO $14,726 $12,075 =========== =========== For the Nine Months Ended September 30, ----------------------- 2001 2000 ----------- ----------- Net income $22,081 $18,609 Add: Depreciation and amortization 22,388 17,737 Subtract: Dividends on preferred stock (2,748) (2,748) ----------- ----------- FFO $41,721 $33,598 =========== ===========
Property and Lease Information
The following table is a summary of our property portfolio as of September 30, 2001 (dollars in thousands):
Rentable Annualized Number of Square Base Occupancy Properties Feet Rent Percentage ----------- ----------- ----------- ----------- Market: Suburban Washington D.C. 19 1,613,529 $25,199 97.3% (1) California - San Diego 21 949,328 26,048 99.8% California - San Francisco Bay 7 412,172 12,109 100.0% Southeast 3 183,473 3,174 94.1% (1) New Jersey/Suburban Philadelphia 5 268,418 4,345 100.0% Eastern Massachusetts 6 384,974 12,676 100.0% Washington - Seattle 2 118,393 4,110 100.0% ----------- ----------- ----------- ----------- Total (2) 63 3,930,287 $87,661 98.6% =========== =========== =========== ===========
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(1) All, or substantially all, of the vacant space is office or warehouse space.(2) Excludes properties under redevelopment.
(1) All, or substantially all, of the vacant space is office or warehouse space.
(2) Excludes properties under redevelopment.
The following table provides information with respect to the lease expirations at our properties as of September 30, 2001:
Square Percentage of Annualized Base Year of Number of Footage of Aggregate Rent of Expiring Lease Expiring Expiring Portfolio Lease Leases (per Expiration Leases Leases Square Footage square foot) - --------- ---------- ---------- -------------- ---------------- 2001 (1) 25 183,004 4.0% $21.02 2002 35 560,758 12.1% $20.85 2003 27 445,263 9.6% $19.57 2004 23 391,724 8.5% $20.53 2005 15 318,642 6.9% $25.85 Thereafter 65 2,724,542 58.9% $23.83
(1) Represents leases expiring between October 1, 2001 and December 31, 2001.
The following table is a summary of our lease activity for the three months ended September 30, 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 22 274,215 $22.25 -- -- -- -- GAAP Rent 22 274,215 $22.58 -- -- -- -- Renewed / Released Space Cash Rent 7 168,258 $24.89 $25.36 1.9% $5.86 3.7 years GAAP Rent 7 168,258 $25.56 $26.30 2.9% $5.86 3.7 years Month-to-Month Leases Cash Rent 14 87,572 $18.89 $19.61 3.8% -- -- GAAP Rent 14 87,572 $18.64 $19.61 5.2% -- -- Total Leasing Cash Rent 21 255,830 $22.84 $23.39 2.4% -- -- GAAP Rent 21 255,830 $23.19 $24.01 3.5% -- -- Vacant Space Leased Cash Rent 3 14,050 -- $18.88 -- $5.01 2.1 Years GAAP Rent 3 14,050 -- $19.07 -- $5.01 2.1 Years All Lease Activity Cash Rent 24 269,880 -- $23.16 -- -- -- GAAP Rent 24 269,880 -- $23.75 -- -- --
The following table is a summary of our lease activity for the nine months ended Seotember 30, 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 52 879,314 $19.52 -- -- -- -- GAAP Rent 52 879,314 $19.39 -- -- -- -- Renewed / Released Space Cash Rent 29 567,120 $21.84 $24.25 11.0% $2.71 3.9 Years GAAP Rent 29 567,120 $21.72 $25.27 16.3% $2.71 3.9 Years Month-to-Month Leases Cash Rent 14 87,572 $18.27 $19.61 7.3% -- -- GAAP Rent 14 87,572 $18.03 $19.61 8.8% -- -- Total Leasing Cash Rent 43 654,692 $21.37 $23.63 10.6% -- -- GAAP Rent 43 654,692 $21.23 $24.51 15.4% -- -- Vacant Space Leased Cash Rent 19 241,423 -- $29.48 -- $22.41 6.6 Years GAAP Rent 19 241,423 -- $33.11 -- $22.41 6.6 Years All Lease Activity Cash Rent 62 896,115 -- $25.20 -- -- -- GAAP Rent 62 896,115 -- $26.83 -- -- --
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is the result of 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 legal enforceability of hedging contracts.
Our future earnings, cash flows and fair values relating to financial instruments are primarily dependent upon market rates of interest, such as LIBOR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. Based on interest rates at, and our swap agreements in effect on, September 30, 2001, we estimate that a 1% increase in interest rates on our line of credit would decrease annual future earnings and cash flows, after considering the effect of our interest rate swap agreements, by approximately $1.6 million. We further estimate that a 1% decrease in interest rates on our line of credit would increase annual future earnings and cash flows, after considering the effect of our interest rate swap agreements, by approximately $1.6 million. A 1% increase in interest rates on our secured debt and interest rate swap agreements would decrease their aggregate fair value by approximately $13.1 million. A 1% decrease in interest rates on our secured debt and interest rate swap agreements would increase their aggregate fair value by approximately $14.5 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 in effect on September 30, 2001. 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.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
To our knowledge, no litigation is pending against us, other than routine actions and administrative proceedings, none of which, in the aggregate, are expected to have a material adverse effect on our financial condition, results of operations or cash flows, and substantially all of which are expected to be covered by liability insurance.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
(b) Reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 14, 2001.