-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SQm0i4FFu4WY7fQ6MJnz8VBZIiRXTJ45QgCxnsasHBnSfpG0I1MingVqk1ip6g1X aD4+9tuPtVoJpB6T4YZ55Q== 0001047469-98-020540.txt : 19980518 0001047469-98-020540.hdr.sgml : 19980518 ACCESSION NUMBER: 0001047469-98-020540 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALEXANDRIA REAL ESTATE EQUITIES INC CENTRAL INDEX KEY: 0001035443 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 954502084 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12993 FILM NUMBER: 98623101 BUSINESS ADDRESS: STREET 1: 135 NORTH LOS ROBLES AVE STREET 2: SUITE 250 CITY: PASEDENA STATE: CA ZIP: 91101 BUSINESS PHONE: 8185780777 10-Q 1 10-Q 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 March 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 1-12993 ALEXANDRIA REAL ESTATE EQUITIES, INC. (Exact name of registrant as specified in its charter) Maryland 95-4502084 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 135 North Los Robles Avenue, Suite 250, Pasadena, California 91101 (Address of principal executive offices) (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 such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of May 14, 1998, 11,404,631 shares of common stock, par value $.01 per share, were outstanding. 1 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Balance Sheets of Alexandria Real Estate Equities, Inc. and Subsidiaries as of March 31, 1998 and December 31, 1997 Condensed Consolidated Statements of Operations of Alexandria Real Estate Equities, Inc. and Subsidiaries for the three months ended March 31, 1998 and 1997 Condensed Consolidated Statement of Stockholders' Equity of Alexandria Real Estate Equities, Inc. and Subsidiaries for the three months ended March 31, 1998 Condensed Consolidated Statements of Cash Flows of Alexandria Real Estate Equities, Inc. and Subsidiaries for the three months ended March 31, 1998 and 1997 Notes to Condensed Consolidated Financial Statements Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Item 2. CHANGES IN SECURITIES 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 2 Alexandria Real Estate Equities, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 1998 1997 --------- ------------ ASSETS Rental properties, net $341,953 $225,551 Land under development 6,957 4,419 Cash and cash equivalents 1,465 2,060 Tenant security deposits and other 5,156 6,799 restricted cash Secured note receivable 6,000 -- Tenant receivables and deferred rent 4,189 3,630 Loan fees and costs (net of accumulated amortization of $240 and $175, respectively) 1,590 1,350 Other assets 4,833 4,645 -------- -------- Total assets $372,143 $248,454 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Secured notes payable $ 60,204 $ 47,817 Unsecured line of credit 132,500 23,000 Accounts payable, accrued expenses and tenant security deposits 7,887 6,158 Dividends payable 4,562 4,562 -------- -------- Total liabilities 205,153 81,537 Stockholders' equity: Common stock, $0.01 par value per share, 100,000,000 shares authorized; 11,404,631 shares issued and outstanding 114 114 Additional paid-in capital 169,173 173,735 Accumulated deficit (2,297) (6,932) -------- -------- Total stockholders' equity 166,990 166,917 Total liabilities and stockholders' equity $372,143 $248,454 -------- -------- -------- --------
SEE ACCOMPANYING NOTES. 3 Alexandria Real Estate Equities, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, 1998 1997 ----------- ----------- Revenues: Rental $ 9,140 $ 5,175 Tenant recoveries 2,363 1,897 Other 193 89 ----------- ----------- 11,696 7,161 Expenses: Rental operations 2,504 1,830 General and administrative 751 583 Stock compensation -- 394 Post retirement benefit -- 632 Special bonus -- 353 Interest 2,085 2,509 Depreciation and amortization 1,721 1,003 ----------- ----------- 7,061 7,304 ----------- ----------- Net income (loss) $ 4,635 $ (143) ----------- ----------- ----------- ----------- Net income allocated to preferred stockholders $ -- $ 1,577 ----------- ----------- ----------- ----------- Net income (loss) allocated to common stockholders $ 4,635 $ (1,720) ----------- ----------- ----------- ----------- Net income (loss) per share of common stock (pro forma for 1997): -Basic $ 0.41 $ (0.04) ----------- ----------- -Diluted $ 0.40 $ (0.04) ----------- ----------- Weighted Average shares of common stock outstanding (pro forma for 1997): -Basic 11,404,631 3,642,131 ----------- ----------- -Diluted 11,652,772 3,642,131 ----------- -----------
SEE ACCOMPANYING NOTES. 4 Alexandria Real Estate Equities, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders' Equity Three months ended March 31, 1998 (Unaudited) (DOLLARS IN THOUSANDS)
NUMBER OF ADDITIONAL COMMON COMMON PAID-IN ACCUMULATED SHARES STOCK CAPITAL DEFICIT TOTAL ---------- ------ ---------- ------------ -------- Balance at December 31, 1997 11,404,631 $114 $173,735 $(6,932) $166,917 Dividends declared on common stock -- -- (4,562) -- (4,562) Net income -- -- -- 4,635 4,635 ---------- ---- -------- ------- -------- Balance at March 31, 1998 11,404,631 $114 $169,173 $(2,297) $166,990 ---------- ---- -------- ------- -------- ---------- ---- -------- ------- --------
SEE ACCOMPANYING NOTES. 5 Alexandria Real Estate Equities, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1998 1997 --------- ------- Net cash provided by operating activities $ 8,682 $ 3,239 INVESTING ACTIVITIES Purchase of rental properties (117,517) -- Additions to rental properties (547) (1,319) Additions to land under development (2,538) -- Issuance of note receivable (6,000) -- --------- ------- Net cash used in investing activities (126,602) (1,319) FINANCING ACTIVITIES Proceeds from secured notes payable 12,641 -- Net borrowings on unsecured line of credit 109,500 2,500 Principal reductions of secured notes payable (254) (367) Common dividends paid (4,562) (2,309) Preferred dividends paid -- (690) --------- ------- Net cash provided by (used in) financing activities 117,325 (866) Net (decrease) increase in cash and cash equivalents (595) 1,054 Cash and cash equivalents at beginning of period 2,060 1,696 --------- ------- Cash and cash equivalents at end of period $ 1,465 $ 2,750 --------- ------- --------- -------
SEE ACCOMPANYING NOTES. 6 Alexandria Real Estate Equities, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 1. BACKGROUND AND BASIS OF PRESENTATION BACKGROUND Alexandria Real Estate Equities, Inc., a Maryland corporation (the "Company"), was formed in October 1994 to acquire, manage, and selectively develop properties for lease to the life science industry ("Life Science Facilities"). As of March 31, 1998 and December 31, 1997, the Company owned 34 and 22 Life Science Facilities, respectively. The accompanying interim financial statements have been prepared by the Company's management in accordance with generally accepted accounting principles and in conformity with the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the interim financial statements presented herein reflect all adjustments of a normal and recurring nature that are necessary to fairly state 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 ended December 31, 1998. These financial statements should be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, which own, directly or indirectly, Life Science Facilities. All significant intercompany balances and transactions have been eliminated. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current period presentation. 7 2. RENTAL PROPERTIES Rental properties consist of the following:
MARCH 31, DECEMBER 31, 1998 1997 ------------------------------- (DOLLARS IN THOUSANDS) Land $ 58,343 $ 41,970 Buildings and improvements 290,021 189,518 Tenant and other improvements 4,055 2,867 -------- -------- 352,419 234,355 Less accumulated depreciation (10,466) (8,804) -------- -------- $341,953 $225,551 -------- -------- -------- --------
During the three months ended March 31, 1998, the Company acquired 12 Life Science Facilities from various unrelated third parties for an aggregate purchase price of $114,400,000. 3. SECURED NOTE RECEIVABLE In connection with the acquisition of a Life Science Facility in San Diego, California in March 1998, the Company 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 matures in March 2002. The loan is cross-defaulted to the lease with the sole tenant. Under certain circumstances, the Company may obtain title to the improvements that secure the loan, and, in such event, the Company may also require the sole tenant at the property to lease such improvements back from the Company for an additional rental amount. 4. UNSECURED LINE OF CREDIT The Company has an unsecured line of credit providing for borrowings of up to $150,000,000. The portion of the line in excess of $100,000,000 may be activated in increments at the Company's discretion (upon the payment of an activation fee), provided no default exists under the line of credit facility. As of March 31, 1998, the Company had activated $35,000,000 of the portion of the line in excess of $100,000,000. Borrowings under the line of credit bear interest at a floating rate based on the Company's 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, the Company must elect to fix the rate for a period of one, two, three or six months. 8 4. UNSECURED LINE OF CREDIT (CONTINUED) The line of credit contains financial covenants, including, among other things, maintenance of minimum market 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. Borrowings under the line of credit are limited to an amount based on a pool of unencumbered assets. Accordingly, as the Company acquires additional unencumbered properties, borrowings available under the line of credit will increase. As of March 31, 1998, borrowings under the line of credit were limited to approximately $150,000,000, and $132,500,000 was outstanding (leaving $17,500,000 available) at a weighted average interest rate of 7.0%. The line of credit expires May 31, 2000 and provides for annual extensions (provided there is no default) for one-year periods upon notice by the Company and consent of the participating banks. In addition, at the Company's election, the line of credit may be converted at any time to a term loan with principal installments over two years from the date of such conversion. 5. SECURED NOTES PAYABLE As of March 31, 1998, the Company had four notes payable to certain banks and an insurance company, secured by first deeds of trust on five Life Science Facilities. The notes bear interest at fixed rates ranging from 7.17% to 9.00% and are due at various dates through 2016. 6. DIVIDEND On March 4, 1998, the Company declared a cash dividend on its common stock of $4,562,000 ($ 0.40 per share) for the calendar quarter ended March 31, 1998. The dividend was paid on April 17, 1998. 7. COMMITMENTS The Company is committed to construct a building and certain improvements in San Diego, California at a cost of approximately $7.0 million under the terms of two build-to-suit leases. In addition, the Company is committed to construct a building and certain improvements in Gaithersburg, Maryland at a cost of between $9.3 million and $18.3 million (depending on the level of improvements to the facility elected by the tenant) under the terms of a build-to-suit lease. Under the terms of the lease, the tenant's rental rate will be adjusted depending on the ultimate cost of the improvements. 9 8. NET INCOME (Loss) PER SHARE The following table sets forth the computation of net income (loss) per pro forma share of common stock outstanding.
THREE MONTHS ENDED MARCH 31 1998 1997 --------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income (loss) $ 4,635 $ (143) ----------- ----------- ----------- ----------- Shares of common stock (pro forma for 1997) - basic 11,404,631 3,642,131 ----------- ----------- ----------- ----------- Add: dilutive effect of stock options 248,141 -- ----------- ----------- Shares of common stock - diluted 11,652,772 3,642,131 ----------- ----------- ----------- ----------- Net income (loss) per share $ 0.41 $ (0.04) ----------- ----------- ----------- ----------- Net income (loss) per share - diluted $ 0.40 $ (0.04) ----------- ----------- ----------- -----------
Historical per share data has not been presented for the three months ended March 31, 1997 because it is not meaningful due to the various changes in the Company's capital structure in connection with the Company's initial public offering on June 2, 1997 (the "Offering"). Pro forma shares of common stock outstanding for the three months ended March 31, 1997 include all shares of common stock outstanding after giving effect to a 1,765.923 to 1 stock split, the issuance of certain stock grants, the issuance and exercise of substitute stock options and conversions of preferred stock, each of which occurred in connection with the Offering. In addition, shares issued to the public in connection with the Offering have been weighted for the period of time they were outstanding. 9. SUBSEQUENT EVENT In May 1998, the Company obtained a loan for $36,500,000 secured by first deeds of trust on two of its Life Science Facilities. The loan bears interest at a rate of 7.22% per annum, payable in monthly installments based on a 30-year amortization schedule. The loan has an Anticipated Repayment Date, as defined, of May 2008. Proceeds from the loan will be used to pay down outstanding balances on the Company's unsecured line of credit. 10 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," "anticipates," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve known and unknown risks and uncertainties that could result in actual results of the Company differing materially from expected results expressed or implied by such forward-looking information and statements. In the context of forward-looking information and statements provided in this Form 10-Q and in other reports, please refer to the discussion of risk factors detailed in, as well as the other information contained in, the Company's filings with the Securities and Exchange Commission, including but not limited to, those risk factors set forth under the caption "Risk Factors" in the Company's Registration Statement on Form S-11 (File No. 333-23545) initially filed with the Securities and Exchange Commission on March 18, 1997. The following discussion should be read in conjunction with the financial statements and notes appearing elsewhere in this report. OVERVIEW Since its formation in October 1994, the Company has devoted substantially all of its resources to the acquisition and management of high quality, strategically located Life Science Facilities leased principally to tenants in the life science industry in its target markets. The Company's primary source of income is rental revenue (including tenant recoveries) from its properties (the "Properties"). The Company has acquired its current portfolio since the beginning of 1994, with four of the Properties acquired in calendar year 1994, eight acquired in 1996, three acquired in 1997 in connection with the Offering, seven acquired in 1997 after the Offering (together, the "1997 Acquired Properties") and twelve acquired in 1998 (the "1998 Acquired Properties"). As a result of the Company's acquisition activities in 1997 and 1998, the financial data shows significant increases in total revenue and expenses for the three months ended March 31, 1998 compared to the three months ended March 31, 1997. 11 RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 ("FIRST QUARTER 1998") TO THREE MONTHS ENDED MARCH 31, 1997 ("FIRST QUARTER 1997") Rental revenue increased by $3.9 million, or 77%, to $9.1 million for First Quarter 1998 compared to $5.2 million for First Quarter 1997. The increase resulted primarily from rental revenue from the 1997 Acquired Properties purchased after March 31, 1997 and from the 1998 Acquired Properties, which together added $3.7 million of rental revenue in First Quarter 1998. In addition, the Company received a rental termination payment of $122,000 in March 1998 associated with the termination of a lease at one of the Properties. Rental revenue from the Properties owned since January 1, 1997 (the "First Quarter Same Properties") increased by $87,000, or 2%, generally due to increases in rental rates. Tenant recoveries and other income increased by $570,000, or 29%, to $2.6 million for First Quarter 1998 compared to $2.0 million for First Quarter 1997. The increase resulted primarily from the 1997 Acquired Properties purchased after March 31, 1997 and the 1998 Acquired Properties, which together added $476,000 of tenant recoveries. Tenant recoveries from the First Quarter Same Properties were virtually unchanged in First Quarter 1998 compared to First Quarter 1997. Other income increased by $104,000, or 116%, for First Quarter 1998 compared to First Quarter 1997, largely resulting from interest income from increased amounts in capital improvement reserve accounts. Rental operating expenses increased by $674,000, or 37%, to $2.5 million for First Quarter 1998 compared to $1.8 million for First Quarter 1997. The increase resulted primarily from the 1997 Acquired Properties purchased after March 31, 1997 and the 1998 Acquired Properties, which together added $615,000 of rental operating expenses. Operating expenses for the First Quarter Same Properties were virtually unchanged in First Quarter 1998 compared to First Quarter 1997. General and administrative expenses increased by $168,000, or 29%, to $751,000 for First Quarter 1998 compared to $583,000 for First Quarter 1997, due to the Company's larger scope of operations and increased costs incurred as a result of being a public company in 1998. The special bonus of $353,000 for First Quarter 1997 was awarded to an officer of the Company in connection with the Offering and accrued for the period. Post retirement benefit expense of $632,000 for First Quarter 1997 reflects an adjustment for the non-cash accrual associated with a one-time post retirement benefit for an officer of the Company. Stock compensation expense of $394,000 was recorded for First Quarter 1997 for the non-recurring, non-cash expense related to the issuance of stock grants and options to officers, directors and certain employees of the Company principally in connection with the Offering. 12 Interest expense decreased by $424,000, or 17%, to $2.1 million for First Quarter 1998 compared to $2.5 million for First Quarter 1997. The decrease resulted primarily from lower interest expense in First Quarter 1998 due to indebtedness paid off in June 1997 with proceeds from the Offering. Depreciation and amortization increased by $718,000, or 72%, to $1.7 million for First Quarter 1998 compared to $1.0 million for First Quarter 1997. The increase resulted primarily from depreciation associated with the 1997 Acquired Properties purchased after March 31, 1997, and the addition of the 1998 Acquired Properties. As a result of the foregoing, there was net income of $4.6 million for First Quarter 1998 compared to a net loss of $143,000 for First Quarter 1997. LIQUIDITY AND CAPITAL RESOURCES SECURED DEBT As of March 31, 1998, the Company's secured debt is as follows:
PRINCIPAL BALANCE AT INTEREST MATURITY COLLATERAL MARCH 31, 1998 RATE DATE --------------------------------------------------------------------------------------- 3535/3565 General Atomics Court, San Diego, CA $17,936,000 9.00% December 2014 1431 Harbor Bay Parkway, Alameda, CA 8,500,000 7.17% January 2014 1102/1124 Columbia Street Seattle, WA 21,136,000 7.75% May 2016 100/800/801 Capitola Drive, Durham, NC 12,632,000 8.68% December 2006 ------------ $60,204,000 ------------ ------------
UNSECURED LINE OF CREDIT The Company has an unsecured line of credit providing for borrowings of up to $150 million. The portion of the line in excess of $100 million may be activated in increments at the Company's discretion (upon payment of an activation fee), provided no default exists under the line of credit facility. As of March 31, 1998, the Company had activated $35 million of the portion of the line in excess of $100 million. Borrowings under the line of credit bear interest at a floating rate based on the Company's 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 the Company must elect to fix the rate for a period of one, two, three or six months. 13 The line of credit contains financial covenants, including, among other things, maintenance of minimum market net worth, a total liabilities to gross asset value ratio, and a fixed charge coverage ratio (all as defined). In addition, the terms of the line of credit restrict, among other things, certain investments, indebtedness, distributions and mergers. Borrowings under the line of credit are limited to an amount based on a pool of unencumbered assets. Accordingly, as the Company acquires additional unencumbered properties, borrowings available under the line will increase. As of March 31, 1998, borrowings under the line of credit were limited to approximately $150 million. The line of credit is used primarily to finance acquisitions and capital improvements. As of March 31, 1998 and December 31, 1997, $132.5 million and $23 million, respectively, was outstanding under the line of credit. The line of credit expires May 31, 2000 and provides for annual extensions (provided there is no default) for two additional one-year periods upon notice by the Company and consent of the participating banks. In addition, at the Company's election, the line of credit may be converted at any time to a term loan with principal installments over two years from the date of such conversion. RESTRICTED CASH As of March 31, 1998, approximately $3.2 million has been set aside in a restricted cash account to complete the conversion of existing space into higher rent generic laboratory space (as well as certain related improvements to the property) at 1102/1124 Columbia Street pursuant to an agreement between the Company and a tenant. The Company also holds approximately $842,000 in security deposit reserve accounts based on the terms of certain lease agreements. LIQUIDITY REQUIREMENTS Although cash from operations required to fund interest expense has decreased substantially as a result of the Company's reduction in overall debt following the Offering, such reduction has been offset by an increased requirement to use cash from operations to meet distribution requirements to maintain the Company's status as a real estate investment trust ("REIT"). The Company expects to make distributions from cash available for distribution, which is anticipated to exceed cash historically available for distribution as a result of the reduction in debt described above, as well as the addition of the 1997 and 1998 Acquired Properties. Cash that accumulates on a short-term basis will be used to reduce outstanding balances under the Company's unsecured line of credit or will be invested by the Company primarily in interest-bearing accounts and other short-term, interest-bearing securities that are consistent with the Company's qualification for taxation as a REIT. The Company also believes that net cash provided by operations will be sufficient to fund its recurring non-revenue enhancing capital expenditures, tenant improvements and leasing commissions. The Company expects to meet certain long-term liquidity requirements, such as property acquisitions, property development activities, scheduled debt maturities, renovations, 14 expansions and other non-recurring capital improvements, through long-term secured and unsecured indebtedness, including borrowings under the unsecured line of credit, and the issuance of additional debt and/or equity securities. The Company is committed to construct a building and certain improvements in San Diego, California at a cost of approximately $7.0 million under the terms of two build-to-suit leases. In addition, the Company is committed to construct a building and certain improvements in Gaithersburg, Maryland at a cost of between $9.3 million and $18.3 million (depending on the level of improvements elected by the tenant) under the terms of a build-to-suit lease. Under the terms of the lease, the tenant's rental rate will be adjusted depending on the ultimate cost of the improvements. In May 1998, the Company obtained a loan for $36,500,000, secured by first deeds of trust on two of its life science facilities. The loan bears interest at a rate of 7.22% per annum, payable in monthly installments based on a 30-year amortization schedule. The loan is due in May 2008. Proceeds from the loan will be used to pay down outstanding balances on the Company's unsecured line of credit. EXPOSURE TO ENVIRONMENTAL LIABILITIES In connection with the acquisition of all of the Properties, the Company has obtained Phase I environmental assessments to ascertain the existence of any environmental liabilities or other issues. The Phase I environmental assessments of the properties have not revealed any environmental liabilities that the Company believes would have a material adverse effect on the Company's financial condition or results of operations taken as a whole, nor is the Company aware of any such material environmental liabilities. HISTORICAL CASH FLOWS Net cash provided by operating activities for First Quarter 1998 increased by $5.5 million to $8.7 million compared to net cash provided by operating activities of $3.2 million for First Quarter 1997. The increase resulted primarily from operating cash flows from the 1997 Acquired Properties purchased after March 31, 1997 and the 1998 Acquired Properties and a reduction of interest expense. Net cash used in investing activities increased by $125.3 million to $126.6 million for First Quarter 1998 compared to net cash used in investing activities of $1.3 million for First Quarter 1997. The increase resulted primarily from the costs associated with the acquisition of the 1998 Acquired Properties. Cash provided by financing activities increased by $118.2 million to $117.3 million for First Quarter 1998 compared to net cash used in financing activities of $866,000 for First Quarter 1997. The increase resulted primarily from $12.6 million in proceeds from secured debt and $109.5 million in net borrowings under the unsecured line of credit, offset by payment of $4.6 million of common stock dividends. 15 INFLATION More than 75% of the Company's 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 thereto). In addition, a majority of the Company's leases (on a square footage basis) contain effective annual rent escalations that are either fixed (ranging from 2.5% to 4.0%) or indexed based on a CPI or other index. Accordingly, the Company does not believe that its earnings or cash flow are subject to any significant risk of inflation. An increase in inflation, however, could result in an increase in the Company's variable rate borrowing cost, including borrowings under the unsecured line of credit. FUNDS FROM OPERATIONS Management believes 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 the ability of the Company to incur and service debt, to make capital expenditures and to make distributions. The Company computes FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 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 management's discretionary use because of needed 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 generally accepted accounting principles ("GAAP")), excluding gains (or losses) from debt restructuring, sales of property and unusual items, 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 the Company's financial performance or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make distributions. 16 The following tables present the Company's FFO for the three months ended March 31, 1998 and 1997 on a historical basis:
(UNAUDITED) (UNAUDITED) THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 1998 MARCH 31, 1997 ------------------ ------------------- (In thousands) Net income (loss) $4,635 $(143) Add: Special bonus - 353 Stock compensation - 394 Post-retirement benefit - 632 Depreciation and amortization 1,721 1,003 ------ ------ FFO $6,356 $2,239 ------ ------ ------ ------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During the three months ended March 31,1998, no legal proceedings were initiated against or on behalf of the Company, the adverse determination of which would have a material adverse effect upon the financial condition and results of operations of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 17 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K. On January 29, 1998, the Company filed Amendment No. 1 to its Current Report on Form 8-K, dated November 14, 1997 and filed with the Securities and Exchange Commission on December 1, 1997, pertaining to the acquisition of four Life Science Facilities, to include the previously omitted financial statements and pro forma financial information required by Item 7 of Form 8-K. On April 9, 1998, the Company filed a Current Report on Form 8-K, dated March 26, 1998, to report the acquisition of one Life Science Facility and certain vacant land in San Diego, California. 18 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 May 15, 1998. ALEXANDRIA REAL ESTATE EQUITIES, INC. /s/ JOEL S. MARCUS -------------------------------------- Joel S. Marcus Chief Executive Officer (Principal Executive Officer) /s/ PETER J. NELSON -------------------------------------- Peter J. Nelson Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 19 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31, 1998 10Q OF ALEXANDRIA REAL ESTATE EQUITIES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 MAR-31-1998 MAR-31-1997 1,465 2,750 0 0 10,189 1,552 0 0 0 0 0 0 359,376 152,473 (10,466) (5,158) 372,143 161,690 12,449 8,000 192,704 112,815 0 25,929 0 111 114 0 166,876 12,335 372,143 161,690 0 0 11,696 7,161 0 0 2,504 1,830 2,472 2,965 0 0 2,085 2,509 4,635 (143) 0 0 4,635 (143) 0 0 0 0 0 0 4,635 (143) 0.41 (0.04) 0.40 (0.04)
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