<PAGE>
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
<PAGE>
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
<PAGE>
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
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
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
----------- -----------
<S> <C> <C>
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
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
Three months ended March 31, 1998
(Unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
---------- ------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
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
---------- ---- -------- ------- --------
---------- ---- -------- ------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
--------- -------
<S> <C> <C>
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
--------- -------
--------- -------
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
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
<PAGE>
2. RENTAL PROPERTIES
Rental properties consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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
-------- --------
-------- --------
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1998 1997
---------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
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)
----------- -----------
----------- -----------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
PRINCIPAL
BALANCE AT INTEREST MATURITY
COLLATERAL MARCH 31, 1998 RATE DATE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
------------
------------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
The following tables present the Company's FFO for the three months ended
March 31, 1998 and 1997 on a historical basis:
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------ -------------------
(In thousands)
<S> <C> <C>
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
------ ------
------ ------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 1,465 2,750
<SECURITIES> 0 0
<RECEIVABLES> 10,189 1,552
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 359,376 152,473
<DEPRECIATION> (10,466) (5,158)
<TOTAL-ASSETS> 372,143 161,690
<CURRENT-LIABILITIES> 12,449 8,000
<BONDS> 192,704 112,815
0 25,929
0 111
<COMMON> 114 0
<OTHER-SE> 166,876 12,335
<TOTAL-LIABILITY-AND-EQUITY> 372,143 161,690
<SALES> 0 0
<TOTAL-REVENUES> 11,696 7,161
<CGS> 0 0
<TOTAL-COSTS> 2,504 1,830
<OTHER-EXPENSES> 2,472 2,965
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,085 2,509
<INCOME-PRETAX> 4,635 (143)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 4,635 (143)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,635 (143)
<EPS-PRIMARY> 0.41 (0.04)
<EPS-DILUTED> 0.40 (0.04)
</TABLE>
