SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-12993
ALEXANDRIA REAL ESTATE EQUITIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 95-4502084
(State or other jurisdiction (IRS Employer I.D. Number)
of incorporation or organization)
135 N. LOS ROBLES AVENUE, SUITE 250
PASADENA, CALIFORNIA 91101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (626) 578-0777
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the shares of Common Stock held by non-
affiliates was approximately $266.2 million based on the closing price for
such shares on the New York Stock Exchange on March 27, 1998.
As of March 27, 1998 the Registrant had 11,404,631 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates information by reference from the
definitive Proxy Statement to be mailed in connection with the registrant's
annual meeting of stockholders to be held on May 15, 1998.
INDEX TO FORM 10-K
ALEXANDRIA REAL ESTATE EQUITIES, INC.
PAGE REFERENCE
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . 20
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . 20
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . 21
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 21
Item 12. Security Ownership of Certain Beneficial Owners and Management . . 21
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . 22
i
PART I
When used herein, the words "believes," "expects," "anticipates," "intends"
and similar expressions are intended to identify forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended, regarding events, conditions and financial trends that may affect the
Company's future plan of operation, business strategy, results of operations and
financial position. Forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties. Actual results may
differ materially from those included within the forward-looking statements as a
result of various factors, including, but not limited to, those described below
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the risk factors identified in the Company's
Registration Statement on Form S-11 (No. 333-23545) initially filed with the
Securities and Exchange Commission on March 18, 1997. The Company disclaims any
obligation to update any such factors or to announce publicly the result of any
revisions to any of the forward-looking statements.
ITEM 1. BUSINESS.
BACKGROUND AND FORMATION.
Alexandria Real Estate Equities, Inc. ("Alexandria" and, together with its
subsidiaries, the "Company"), a Maryland corporation, is a real estate
investment trust ("REIT") engaged primarily in the acquisition, management,
expansion and selective development of high quality, strategically located
properties containing office and laboratory space designed and improved for
lease principally to pharmaceutical, biotechnology, diagnostic and personal care
products companies, major scientific research institutions and related
government agencies (collectively, the "Life Science Industry"). Properties
leased to tenants in the Life Science Industry typically consist of suburban
office buildings containing scientific research and development laboratories and
other improvements that are generic to tenants operating in the Life Science
Industry (such properties, "Life Science Facilities"). As of December 31, 1997,
the Company owned 22 Life Science Facilities (the "Properties") and two parcels
of vacant land, aggregating approximately 4.2 acres, adjacent to the Company's
3535 and 3565 General Atomics Court Properties in the Torrey Pines area of San
Diego, California.
FORMATION. In connection with the formation of Alexandria in October 1994,
Health Science Properties Holding Corporation ("Holdings"), a Maryland
corporation formed in September 1993 and capitalized in January 1994,
contributed substantially all of its assets and liabilities (other than certain
outstanding unsecured notes) to Alexandria in exchange for all of the then
issued and outstanding shares of common stock of Alexandria, par value $.01 per
share (the "Common Stock"). Holdings was the sole holder of the Common Stock
until June 2, 1997, when Alexandria completed its initial public offering (the
"Offering") of 6,750,000 shares of Common Stock. On June 26, 1997, Alexandria
issued an additional 1,012,500 shares of Common Stock pursuant to the exercise
of the over-allotment option granted to the underwriters in connection with the
Offering.
THE OFFERING AND RECENT DEVELOPMENTS.
THE OFFERING. Each of the following transactions occurred in connection
with the Offering:
- - The 27,500 outstanding shares of Series V Preferred Stock of Alexandria,
issued in 1996 in a series of transactions to raise additional equity
capital, were converted into 1,659,239 shares of Common Stock.
- - The Company acquired 100% of the membership interests in ARE Acquisitions,
LLC, a Delaware limited liability company (the "Acquisition LLC"), thereby
acquiring three of the Properties, for an aggregate purchase price of
approximately $58.8 million.
- - The Company repaid approximately $77.7 million of its then-existing
mortgage indebtedness with a portion of the net proceeds of the Offering
and the net proceeds of (i) an $8.5 million mortgage loan on the
Property located at 1431 Harbor Bay
1
Parkway and (ii) a $6.9 million mortgage loan on the Property located at
1102 and 1124 Columbia Street. The Company subsequently repaid the
mortgage loan on 1102 and 1124 Columbia Street in November 1997.
ACQUISITIONS. Since December 31, 1997 (through March 27, 1998), the
Company has acquired 11 additional Life Science Facilities containing an
aggregate of 927,000 rentable square feet for an aggregate purchase price of
approximately $110 million and made a $6 million loan secured by real estate
related to one of these Life Science Facilities. Of these amounts, $103
million was funded through draws on the Company's unsecured line of credit,
approximately $13 million through the assumption of existing debt and the
remainder with working capital. The recent acquisitions were in California
(in the San Diego and San Francisco Bay areas), Seattle, Washington, suburban
Maryland, Boston/Cambridge, Massachusetts, Raleigh/Durham, North Carolina and
the New York/New Jersey and suburban Philadelphia areas.
STRUCTURE. The Company is in the process of modifying its existing
corporate structure to facilitate its operation as an umbrella partnership or
"UPREIT." The Company has formed an operating partnership (the "Operating
Partnership") through which the Company expects to conduct substantially all
of its operations. The Company believes that the UPREIT structure will
enhance its acquisition activities by providing an additional source of
acquisition consideration. Initially, however, the Company will own all of
the interests in the Operating Partnership ("OP Units").
BUSINESS AND GROWTH STRATEGY.
As of December 31, 1997, the Company owned 22 Properties containing
approximately 1.75 million rentable square feet of office and laboratory
space located in California (in the San Diego and San Francisco Bay areas),
Seattle, Washington and suburban Washington, D.C. (including Maryland and
Virginia). The Company also owned two parcels of vacant land aggregating
approximately 4.2 acres in San Diego, California. The Company focuses its
operations and acquisition activities principally in these markets, as well
as in certain other markets, including Boston/Cambridge, Massachusetts,
Raleigh/Durham, North Carolina and the New York/New Jersey and suburban
Philadelphia areas. See "--Recent Developments." The Company's tenant base
is broad and diverse within the Life Science Industry and reflects the
Company's focus on regional, national and international tenants with
substantial financial and operational resources. For a detailed description
of the Properties and tenants, see "Item 2. Properties." The Company is led
by a senior management team with extensive experience in both the real estate
and Life Science industries and is supported by a highly experienced board of
directors.
The Company seeks to maximize growth in funds from operations ("FFO")
and cash available for distribution to stockholders through effective
management, operation, acquisition, expansion and selective development of
Life Science Facilities. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Funds from Operations" for
a complete discussion of how the Company computes and views FFO as well as a
discussion of other measures of cash flow. In particular, the Company seeks
to increase FFO and cash available for distribution per share by (i)
acquiring high quality Life Science Facilities at attractive returns in its
target markets; (ii) realizing contractual rental rate escalations; (iii)
retenanting and releasing space within its portfolio at higher rental rates,
and with minimal tenant improvement costs; (iv) expanding existing Properties
or converting existing office space to generic laboratory space that can be
leased at higher rental rates; (v) selectively developing properties on a
retrofit or build-to-suit basis; and (vi) continuing to implement effective
cost control measures, including pass-through provisions in tenant leases for
operating expenses and certain capital expenditures.
2
ACQUISITIONS. The Company seeks to identify and acquire high quality Life
Science Facilities in its target markets. Critical evaluation of prospective
property acquisitions is an essential component of the Company's acquisition
strategy. When evaluating acquisition opportunities, the Company assesses a
full range of matters relating to the properties, including the quality of the
tenants, the condition and capacity of building infrastructure, the quality and
generic characteristics of laboratory facilities and the physical condition of
the shell structure and common area improvements. Management also considers
opportunities available for leasing vacant space and for retenanting occupied
space.
INTERNAL GROWTH. The Company seeks to achieve internal growth from several
sources. The Company seeks to (i) include rental rate escalation provisions in
its leases; (ii) acquire undervalued or underperforming properties where it can
improve investment returns through releasing of vacant space and replacement of
existing tenants with new tenants at higher rental rates; (iii) achieve higher
rental rates as existing leases expire; and (iv) expand existing facilities that
are fully leased and/or convert existing office space to higher rent generic
laboratory space. The Company's ability to negotiate contractual rent
escalations in future leases and to achieve increases in rental rates will
depend upon market conditions and demand for Life Science Facilities at the time
such leases are negotiated and such increases are proposed.
DEVELOPMENT. The Company intends to emphasize acquisitions over
development in pursuing its growth objectives. However, the Company plans to
pursue selective build-to-suit and retrofit development projects where it
expects to achieve investment returns that will equal or exceed its returns
on acquisitions. The Company generally intends to undertake build-to-suit
and retrofit projects only if the Company's investment in infrastructure will
be substantially generic in nature and not tenant specific.
FINANCING/WORKING CAPITAL. The Company believes that cash provided by
operations and its unsecured line of credit will be sufficient to fund its
working capital requirements. The Company generally expects to finance
future acquisitions initially through the Company's unsecured line of credit
and then to refinance such indebtedness with additional equity or debt
capital. The Company also may issue Common Stock, OP Units or interests in
other subsidiaries as consideration for acquisitions. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a complete discussion of the
Company's unsecured line of credit and other outstanding indebtedness.
COMPETITION
Management believes that the Company is the only publicly traded entity
focusing primarily on the acquisition, management, expansion and selective
development of Life Science Facilities. However, various entities, including
insurance companies, pension and investment funds, partnerships, developers,
investment companies and other REITs invest in Life Science Facilities and
therefore compete for investment opportunities with the Company. Many of these
entities have substantially greater financial resources than the Company and may
be able to accept more risk than the Company can prudently manage, including
risks with respect to the creditworthiness of a tenant or the geographic
proximity of its investments. Competition from these entities may reduce the
number of suitable investment opportunities offered to the Company or increase
the bargaining power of property owners seeking to sell.
3
GOVERNMENT REGULATION
The Company and the Properties are subject to various federal, state and
local regulatory requirements, including local building codes, environmental and
other similar regulations. The Company believes that the Properties are in
substantial compliance with all applicable building code and related
regulations.
ENVIRONMENTAL MATTERS. Under various federal, state and local
environmental laws and regulations, a current or previous owner or operator of
real estate, as well as certain other parties, may be required to investigate
and remediate the effects of hazardous or toxic substances or petroleum product
releases on, under, in or from such property, and may be held liable to a
governmental entity or to third parties for investigation and cleanup costs and
certain damages resulting from such releases. Such laws and regulations
typically impose responsibility and liability without regard to whether such
person knew of or caused the releases, and the liability under such laws and
regulations has been interpreted to be joint and several, unless the harm is
divisible and there is a reasonable basis for allocation of responsibility. The
cost of investigating and remediating such contamination may be substantial, and
the presence of such contamination, or the failure to properly remediate it, may
adversely affect the owner's ability to sell or rent such property or to borrow
using such property as collateral. In addition, the owner of a site may be
subject to governmental fines and common law claims by third parties seeking to
recover damages and costs resulting from such contamination.
Certain other federal, state and local laws and regulations govern the
management and disposal of asbestos containing materials ("ACMs"). Such laws
and regulations may impose liability for the release of ACMs and may provide for
third parties to seek recovery from owners or operators of such property for
personal injury associated with ACMs. In connection with the ownership and
operation of its properties, the Company may be potentially liable for such
costs. ACMs have been detected at certain of the Properties, but are not
expected to result in material environmental costs or liabilities to the
Company. Federal, state and local laws and regulations also require the removal
or upgrading of certain underground storage tanks and regulate the discharge of
storm water, wastewater and any water pollutants, the emission of air
pollutants, the generation, management and disposal of hazardous or toxic
chemicals, substances or wastes, and workplace health and safety.
Life Science Industry tenants, including certain of the Company's tenants,
engage in various research and development activities involving the controlled
use of hazardous materials, chemicals, biological and radioactive compounds.
Although the Company believes that the tenants' activities involving such
materials comply in all material respects with applicable laws and regulations,
the risk of contamination or injury from these materials cannot be completely
eliminated. In the event of such contamination or injury, the Company could be
held liable for any damages that result, and any such liability could exceed the
Company's resources and its environmental remediation coverage.
All of the Properties have been, and it is contemplated that all future
acquisitions will be, subjected to a Phase I or similar environmental assessment
(which generally includes a site inspection, interviews and a records review,
but no subsurface sampling). These assessments and certain follow-up
investigations (including, as appropriate, asbestos, radon and lead surveys,
additional public records review, subsurface sampling and other testing) of the
Properties have not revealed any environmental liability that the Company
believes would have a material adverse effect on the Company's business or
results of operations. Nevertheless, it is possible that the assessments on the
Properties have not revealed, or that the assessments on future acquisitions
will not reveal, all environmental liabilities and that there may be material
environmental liabilities of which the Company is unaware.
The Company believes that the Properties currently are in compliance in all
material respects with applicable environmental laws.
AMERICANS WITH DISABILITIES ACT. Under the Americans with Disabilities Act
of 1990 (the "ADA"), places of public accommodation and/or commercial facilities
are required to meet certain federal requirements related to access and use by
disabled persons. Although management of the Company believes that the
Properties are substantially in compliance with the present requirements of the
ADA, the Company may incur additional costs in connection with such
4
compliance in the future. In addition, a number of additional federal, state
and local laws and regulations exist that may require modifications to the
Company's properties, or affect certain future renovations thereof, with respect
to access by disabled persons. Non-compliance with the ADA could result in the
imposition of fines or an award of damages to private litigants, and also could
result in an order to correct any non-complying feature. Under certain of the
Company's leases, the tenant is responsible for ensuring that the property
complies with all laws and regulations, including the ADA. Notwithstanding the
foregoing, the Company may be required to make substantial capital expenditures
to comply with this law. In addition, provisions of the ADA may impose
limitations or restrictions on the completion of certain renovations and thus
may limit the overall returns on the Company's investments.
FINANCIAL INFORMATION REGARDING INDUSTRY SEGMENTS AND OPERATIONS.
The Company currently is involved only in the real estate industry
segment within the United States; the Company has no foreign operations.
Accordingly, all financial statements contained herein relate to such
industry segment. See "Item 2. Properties" and "Item 8. Financial Statements
and Supplementary Data" for detailed financial information regarding the
Company's business.
EMPLOYEES
As of December 31, 1997, the Company had 18 full-time employees.
ITEM 2. PROPERTIES.
GENERAL.
The Properties range in size from approximately 30,000 to 250,000 square
feet, are built to accommodate single or multiple tenants and are generally one
or two story concrete tilt-up or block and steel frame structures. The
exteriors typically resemble traditional suburban office properties, but
interior infrastructures are designed to accommodate the needs of Life Science
Industry tenants. Such improvements typically are generic to Life Science
Industry tenants rather than specific to a particular tenant. As a result,
management believes that the improvements have long-term value and utility and
are readily usable by a wide range of Life Science Industry tenants. Generic
infrastructure improvements for each Property include: reinforced concrete
floors, upgraded roof loading capacity and increased floor to ceiling heights;
heavy-duty HVAC systems and advanced environmental control technology;
significantly upgraded electrical, gas and plumbing infrastructure; and
laboratory benches.
The Company owns fee simple title in each of the Properties, except with
respect to 1311, 1401 and 1431 Harbor Bay Parkway, in which the Company owns a
commercial condominium interest, together with an undivided interest in the
common areas of the project in which the Property is a part.
Leases in the Company's multi-tenant buildings typically have terms of
three to seven years, while the single-tenant building leases typically have
terms of 10 to 20 years. As of December 31, 1997, approximately 76% of the
Company's leases (on a square footage basis) were triple net leases,
requiring tenants to pay substantially all real estate taxes and insurance,
common area and other operating expenses (including increases thereto) in
addition to base rent. In addition, approximately 19% of the Company's
leases (on a square footage basis) required the tenants to pay a majority of
operating expenses. The remaining leases were gross leases, pursuant to which
tenants generally pay for substantially all real estate taxes and insurance,
common area and other operating expenses above those for an established base
year. Approximately 64% of the Company's leases (on a square footage basis)
contained effective annual rent escalations that are either fixed (ranging
from 2.5% to 4.0%) or indexed based on a consumer price index or other index.
In addition, approximately 77% of the Company's leases (on a square footage
basis) provided for the recapture of certain capital expenditures (such as
HVAC systems maintenance and/or replacement, roof replacement and parking
lot resurfacing), which the Company believes would typically be borne by the
landlord in traditional office leases. The leases also typically give the
Company the right to review and approve tenant alterations to the property.
Generally, tenant-installed improvements remain the property of the Company
after termination of the lease. However, the Company is permitted under the
terms of most of its leases to require that the tenant remove such
improvements and restore the premises to their original condition. As of
December 31, 1997, the Company had 42 leases with a total of 35 tenants, and
12 of the Properties were single-tenant properties.
5
As of December 31, 1997, the Company managed 21 of the Properties, and the
remaining Property was managed by a major tenant at such Property. All material
decisions with respect to all of the Properties are made by the Company.
The following table sets forth certain information with respect to the
Properties as of December 31, 1997:
PERCENTAGE OF ANNUALIZED ANNUALIZED
AGGREGATE BASE RENT NET EFFECTIVE
PORTFOLIO PER LEASED RENT PER
YEAR BUILT/ RENTABLE PERCENTAGE ANNUALIZED ANNUALIZED SQUARE FEET LEASED SQUARE
PROPERTIES RENOVATED(1) SQUARE FEET LEASED(2) BASE RENT(2)(3) BASE RENT (3) FOOT(4) MAJOR TENANTS
---------- ------------ ----------- --------- ------------ --------- ------- ------- -------------
SAN DIEGO
10933 North Torrey 1971/1994 108,133 100% $2,309,136 7.3% $21.35 16.24 The Scripps Research
Pines Institute
Road San Diego, CA Advanced Tissue
Sciences, Inc.
11099 North Torrey 1986/1996 86,962 100 2,208,192 7.0 25.39 23.62 Agouron
Pines Pharmaceuticals,
Road San Diego, CA Inc.
Axys Pharmaceuticals,
Inc.
3535 General Atomics 1991 76,084 100 2,554,464 8.1 33.57 32.61 The Scripps Research
Court Institute
San Diego, CA R.W. Johnson
Research
Institute(5)
Syntro Corporation(6)
3565 General Atomics 1991 43,600 100 1,526,952 4.8 35.02 35.02 Agouron
Court Pharmaceuticals,
San Diego, CA Inc.
11025 Roselle Street 1983 18,532 59 224,995 0.7 20.45 20.45 Collateral
San Diego, CA Therapeutics, Inc.
SAN FRANCISCO BAY AREA
1201 Harbor Bay 1983 61,100 100 913,296 2.9 14.95 12.22 Avigen Inc.
Parkway American President
Alameda, CA Companies, Ltd.
1311 Harbor Bay 1984 30,000 85 407,844 1.3 15.96 15.96 Chiron Corporation
Parkway Therasense, Inc.
Alameda, CA
1401 Harbor Pay 1986/1994 47,777 100 518,592 1.6 10.85 10.50 Chiron Diagnostics
Parkway
Alameda, CA
1431 Harbor Bay 1985/1994 70,000 100 1,413,972 4.5 20.20 12.86 U.S. Food & Drug
Parkway Administration
Alameda, CA
SEATTLE, WASHINGTON
1102/1124 Columbia 1975/1997 213,397 100 4,777,368 15.1 22.39 22.05 Fred Hutchinson
Street Cancer
Seattle, WA **+ Research Center
Corixa Corporation
Swedish Medical
Center
SUBURBAN WASHINGTON,
D.C.
300 Professional Drive 1989 48,440 100 669,732 2.1 13.83 13.83 Mobile Telesystems,
Gaithersburg, MD Inc.
Antex Biologics Inc.
401 Professional Drive 1987 62,739 100 1,038,588 3.3 16.55 16.55 Gillette Capital
Gaithersburg, MD Corporation(7)
25/35/45 West Watkins 1989/1997 138,938 100 1,900,200 6.0 13.68 13.67 Genetic Therapy,
Mill Inc.(8)
Road Gaithersburg, MedImmune, Inc.
MD
708 Quince Orchard 1982 49,225 100 1,191,600 3.8 24.21 23.87 Gene Logic, Inc.
Road
Gaithersburg, MD(9)
940 Clopper Road 1989 44,464 63 360,240 1.1 12.90 12.90 Immunomatrix, Inc.
Gaithersburg, MD Lockheed Martin
Federal Systems,
Inc.
1401 Research 1966 48,800 100 722,904 2.3 14.81 14.24 U.S. Bureau of
Boulevard Alcohol
Rockville, MD Tobacco and
Firearms
6
PERCENTAGE OF ANNUALIZED ANNUALIZED
AGGREGATE BASE RENT NET EFFECTIVE
PORTFOLIO PER LEASED RENT PER
YEAR BUILT/ RENTABLE PERCENTAGE ANNUALIZED ANNUALIZED SQUARE FEET LEASED SQUARE
PROPERTIES RENOVATED(1) SQUARE FEET LEASED(2) BASE RENT(2) BASE RENT (3) FOOT(4) MAJOR TENANTS
---------- ------------ ----------- --------- ------------ --------- ------- ------- -------------
1500 East Gude Drive 1981/1986 45,989 83 483,636 1.5 12.62 12.62 bioMerieux Vitek,
Rockville, MD Inc.
3/3 1/2 Taft Court 1981/1986 24,460 15 36,600 0.1% 9.68 9.68 bioMerieux Vitek,
Rockville, MD Inc.
1413 Research 1967/1996 105,000 100 1,563,456 4.9 14.89 13.33 U.S. Army Corps of
Boulevard Engineers
Rockville, MD
1550 East Gude Drive 1981/1995 44,500 100 596,004 1.9 $13.39 $13.39 Shire
Rockville, MD Pharmaceuticals,
PLC(10)
1330 Piccard Drive 1978/1994 131,511 100 1,903,656 6.0 14.48 14.48 Intracel Corporation
Rockville, MD
14225 Newbrook Drive 1992 248,186 100 4,341,132 13.7 17.49 17.49 American Medical
Chantilly, VA + --------- ---- ----------- ----- ------ ------ Laboratories, Inc.
Total/Weighted Average(11): 1,747,837 96.7% $31,662,559 100.0% $18.72 $17.68
--------- ---- ----------- ----- ------ ------
--------- ---- ----------- ----- ------ ------
______________
** Gross revenues from the Property for the year ended December 31, 1997
represent in excess of 10% of the aggregate gross revenues of the
Company for such period.
+ Book value of the Property represents in excess of 10% of the Company's
total assets as of December 31, 1997.
(1) Includes year in which construction was completed and, where applicable,
year of most recent major renovation.
(2) Based on all leases at the respective Property in effect as of
December 31, 1997.
(3) Annualized Base Rent means the annualized fixed base rental amount in
effect as of December 31, 1997 (using rental revenue computed on a
straight-line basis in accordance with GAAP) paid by tenants under the
terms of their leases. This amount, divided by the rentable square feet
leased at the Property as of December 31, 1997, is the Annualized Base
Rent per Leased Square Foot.
(4) Annualized Net Effective Rent is the Annualized Base Rent in effect as
of December 31, 1997, less (for gross leases) real estate taxes and
insurance, common area and other operating expenses and (for all leases)
amortized tenant improvements and leasing commissions. This amount,
divided by the rentable square feet leased at the Property as of
December 31, 1997, is the Annualized Net Effective Rent per Leased
Square Foot.
(5) The R.W. Johnson Research Institute is a wholly owned subsidiary of
Johnson & Johnson.
(6) Syntro Corporation is a wholly owned subsidiary of Schering-Plough
Corporation
(7) Gillette Capital Corporation is a wholly owned subsidiary of The
Gillette Company, the guarantor of the lessee's obligations under the
lease.
(8) Genetic Therapy, Inc. is a wholly owned subsidiary of Novartis AG.
(9) As of December 31, 1997, Gene Logic, Inc. was converting office space to
laboratory space at this Property and expected to take occupancy upon
completion in March 1998.
(10) Shire Pharmaceuticals, PLC subleases its space from Quest Diagnostics,
Inc.
(11) Weighted Average based on a percentage of aggregate leased square feet.
7
LOCATION AND TYPE OF SPACE
The following table sets forth, as of December 31, 1997, the gross
revenues and type of space within the Properties by rentable square footage
in each of the Company's existing markets.
GROSS REVENUES AND TYPE OF SPACE
TOTAL RENTABLE % OF TOTAL RENTABLE ANNUALIZED % OF ANNUALIZED
GEOGRAPHIC AREA SQUARE FOOTAGE SQUARE FOOTAGE BASE RENT(1) BASE RENT
- ---------------- --------------- ------------------- -------------- ---------------
San Diego...................... 333,311 19.0% $ 8,823,739 27.9%
San Francisco Bay Area......... 208,877 12.0 3,253,704 10.2
Seattle........................ 213,397 12.2 4,777,368 15.1
Suburban Washington, D.C....... 992,252 56.8 14,807,748 46.8
--------- ------ ----------- ------
Total...................... 1,747,837 100.0% $31,662,559 100.0%
--------- ------ ----------- ------
--------- ------ ----------- ------
- -----------------
(1) Annualized Base Rent means the annualized fixed base rental amount in
effect as of December 31, 1997 (using rental revenues computed on a
straight-line basis in accordance with GAAP) paid by tenants under the terms
of their leases.
TENANTS
The Properties are leased principally to tenants engaged in a variety of
activities in the Life Science Industry. The following table sets forth
information regarding the Company's leases with its 20 largest tenants based
upon Annualized Base Rent as of December 31, 1997.
8
20 LARGEST TENANTS
REMAIN- PERCENTAGE OF
ING PERCENTAGE AGGREGATE
INITIAL APPROXIMATE PERCENTAGE OF AGGREGATE ANNUALIZED PORTFOLIO
NUMBER LEASE AGGREGATE OF AGGREGATE ANNUALIZED PORTFOLIO NET EFFECTIVE ANNUALIZED
OF TERM IN RENTABLE LEASED BASE RENT (IN ANNUALIZED RENT (IN NET EFFECTIVE
TENANT LEASES YEARS SQUARE FEET SQUARE FEET THOUSANDS)(1) BASE RENT THOUSANDS)(2) RENT
------ ------ ------- ----------- ------------ ------------- ------------ ------------- -------------
American Medical 1 19.0 248,200 14.7% $ 4,341 13.7% $4,341 14.5%
Laboratories, Inc.
Fred Hutchinson Cancer 2 0.4 131,600 7.8 2,705 8.5 2,686 9.0
Research Center(3) 1.9
6.9
Agouron Pharmaceuticals, 2 2.8 70,500 4.2 2,312 7.3 2,251 7.5
Inc. 3.8
Corixa Corporation 2 0.8 65,200 3.8 1,964 6.2 1,911 6.4
7.0
Intracel Corporation 1 9.0 131,500 7.8 1,904 6.0 1,904 6.4
Advanced Tissue 2 2.7 84,500 5.0 1,721 5.4 1,392 4.7
Sciences, Inc. 2.7
U.S. Army Corps of 1 1.4 105,000 6.2 1,563 4.9 1,399 4.7
Engineers(4) 3.8
U.S. Food & Drug 1 16.0 70,000 4.1 1,414 4.5 900 3.0
Administration
R.W. Johnson 1 1.1 45,000 2.7 1,379 4.4 1,306 4.4
Pharmaceutical Research
Institute
The Scripps Research 2 1.8 41,900 2.5 1,334 4.2 1,111 3.7
Institute 2.5
MedImmune, Inc.(5) 2 8.9 81,300 4.8 1,300 4.1 1,298 4.3
8.9
Axys Pharmaceuticals, 1 4.0 55,500 3.3 1,262 4.0 1,191 4.0
Inc.
Gene Logic, Inc. 2 9.9 49,200 2.9 1,192 3.8 1,175 3.9
9.9
Gillette Capital 1 8.3 62,700 3.7 1,039 3.3 1,039 3.5
Corporation(6)
U.S. Bureau of Alcohol, 1 3.5 48,800 2.9 723 2.3 695 2.3
Tobacco & Firearms
Shire Pharmaceuticals, 1 2.3 44,500 2.6 596 1.9 596 2.0
PLC(7)
bioMerieux Vitek, Inc. 1 8.8 42,100 2.5 520 1.6 520 1.7
Chiron Corporation 1 2.0 47,800 2.8 519 1.6 501 1.7
American Presidential 1 0.8 38,100 2.2 494 1.6 494 1.7
Companies, Ltd.
Syntro Corporation 1 2.0 12,800 0.8 430 1.4 429 1.4
-- ---- --------- ---- ------- ---- ------- ----
Total/Weighted
Average(8) 27 7.8 1,476,200 87.3% $28,712 90.7% $27,139 90.8%
-- ---- --------- ---- ------- ---- ------- ----
-- ---- --------- ---- ------- ---- ------- ----
9
____________
(1) Annualized Base Rent means the annualized fixed base rental amount in
effect as of December 31, 1997 (using rental revenue computed on a
straight-line basis in accordance with GAAP) paid by tenants under the
terms of their leases.
(2) Annualized Net Effective Rent is the Annualized Base Rent in effect as of
December 31, 1997 (using rental revenue computed on a straight-line basis
in accordance with GAAP), less (for gross leases) real estate taxes and
insurance, common area and other operating expenses and (for all leases)
amortized tenant improvements and leasing commissions.
(3) Of the 131,554 rentable square feet leased to Fred Hutchinson Cancer
Research Center, leases with respect to 61,465 square feet, 28,466 square
feet and 41,623 square feet are subject to expiration in 1998, 1999 and
2004, respectively. Fred Hutchinson Cancer Research Center has the right
to terminate the leases at any time after November 30, 1999, upon 12 months
prior written notice.
(4) Of the 105,000 rentable square feet at 1413 Research Boulevard, leases with
respect to 30,000 square feet are subject to expiration in 1999 and leases
with respect to 75,000 rentable square feet are subject to expiration in
2001.
(5) In addition to the base rent shown, MedImmune, Inc. pays $322,000 per year
in reimbursements for improvements installed by the prior owner of the
property. These payments, which are accounted for as tenant recovery
revenue, continue through the term of the lease. The terms of the lease
with MedImmune allow it to terminate such lease at various dates during the
lease upon six to 12 months notice and the payment of a termination penalty
determined based on the date of the termination. In the event of such
early termination, the remaining amount due over the term of the lease for
improvements as described above must be paid in full.
(6) Gillette Capital Corporation is a wholly owned subsidiary of The Gillette
Company, the guarantor of the lessee's obligations under the lease.
(7) Shire Pharmaceuticals, PLC subleases its space at 1550 East Gude Drive from
Quest Diagnostics, Inc.
(8) Weighted Average based on percentage of aggregate leased square feet.
ITEM 3. LEGAL PROCEEDINGS.
To the Company's knowledge, no litigation is pending against the Company,
other than routine actions and administrative proceedings, substantially all of
which are expected to be covered by liability insurance or which, in the
aggregate, are not expected to have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders in the
fourth quarter of the fiscal year ended December 31, 1997.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock began trading on the New York Stock Exchange ("NYSE")
on May 28, 1997 under the symbol "ARE." On March 27, 1998, the last reported
sales price per share of Common Stock on the NYSE was $31 5/8, and there were
approximately 168 holders of record of the Common Stock (excluding beneficial
owners whose shares are held in the name of CEDE & Co.). The following table
sets forth the quarterly high and low sales prices per share of the Common
Stock reported on the NYSE and the distributions paid by Alexandria with
respect to each such period.
PER SHARE
PERIOD(1) HIGH LOW DISTRIBUTION
- --------- ---- --- ------------
May 28, 1997 to June 30, 1997.............. 22 1/4 20 5/8 $0.1275(2)
July 1, 1997 to September 30, 1997......... 28 9/16 21 5/8 $0.40
October 1, 1997 to December 31, 1997....... 31 7/8 26 5/8 $0.40
January 1, 1998 to March 27, 1998.......... 34 1/8 29 7/8 $0.40(3)
____________
(1) Period commencing on date Common Stock began trading on the NYSE and ending
on March 27, 1998. Prior to the Offering and the 1,765.923 to 1 stock
split in connection therewith, Alexandria paid the following dividends on
its Common Stock during 1996 and 1997: (1) March 26, 1996, distribution
of Warrants, pro rata, to purchase 117,362 shares of common stock of Corixa
Corporation; (2) September 30, 1996, $183.30 per share; (3) February 3,
1997, $1,549.82 per share; (4) March 31, 1997, $750.01 per share; and (5)
June 5, 1997, $475.00 per share.
(2) Alexandria paid a distribution of $0.1275 per share of Common Stock on
July 18, 1997 for the period May 28, 1997 through June 30, 1997, which is
approximately equivalent to a quarterly distribution of $0.40 per share for
the full calendar quarter.
(3) On February 26, 1998, the Board of Directors of Alexandria authorized
the payment of a distribution of $0.40 per share of Common Stock for the
quarter ending March 31, 1998 to be paid on April 17, 1998 to holders of
record as of the close of business on April 7, 1998.
Future distributions by Alexandria will be determined by the Board of
Directors and will be dependent upon a number of factors, including actual
cash available for distribution, the Company's financial condition and
capital requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Directors deems
relevant. To maintain its qualification as a REIT, Alexandria must make
annual distributions to stockholders of at least 95% of its taxable income,
determined without regard to deductions for dividends paid and by excluding
any net capital gains. Under certain circumstances, Alexandria may be
required to make distributions in excess of cash flow available for
distribution to meet such distribution requirements. In such case, the
Company may borrow funds or may raise funds through the issuance of
additional debt or equity capital. There can be no assurance that any such
distributions will be made by Alexandria.
11
ITEM 6. SELECTED FINANCIAL DATA.
The following table should be read in conjunction with the consolidated
financial statements included elsewhere in this Form 10-K.
FOR THE PERIOD
YEAR ENDED DECEMBER 31 OCTOBER 27, 1994
---------------------------------------- (INCEPTION) THROUGH
1997 1996 1995 DECEMBER 31, 1994
---------- ---------- ---------- -------------------
(dollars in thousands, except per share amounts)
OPERATING DATA:
Total revenue................................................ $ 34,846 $ 17,673 $ 9,923 $ 1,011
Total expenses............................................... 37,643 15,498 9,057 1,659
-----------------------------------------------------------
(Loss) income from operations................................ (2,797) 2,175 866 (648)
Charge in lieu of taxes...................................... - - (105) -
-----------------------------------------------------------
Net (loss) income............................................ $ (2,797) $ 2,175 $ 761 $ (648)
-----------------------------------------------------------
-----------------------------------------------------------
Net (loss) income per pro forma share of Common
Stock - restated for 1996, 1995 and 1994 (basic and
diluted)................................................ $ (0.35) $ 0.60 $ 0.43 $ (0.37)
-----------------------------------------------------------
-----------------------------------------------------------
Pro forma weighted average shares of Common Stock
outstanding - restated for 1996, 1995 and 1994(1)....... 8,075,864 3,642,131 1,765,923 1,765,923
-----------------------------------------------------------
-----------------------------------------------------------
Cash dividends declared per pro forma share of
Common Stock - restated for 1996 and 1995............... $ 1.60 $ 0.87 $ 0.51 $ -
-----------------------------------------------------------
-----------------------------------------------------------
BALANCE SHEET DATA (AT PERIOD END):
Rental properties - net of accumulated depreciation.......... $ 229,970 $ 146,960 $ 54,353 $ 54,366
Total assets................................................. $ 248,454 $ 160,480 $ 58,702 $ 56,600
Mortgage loans payable and unsecured line of credit.......... $ 70,817 $ 113,182 $ 40,894 $ 39,164
Total liabilities............................................ $ 81,537 $ 120,907 $ 42,369 $ 40,119
Mandatorily redeemable Series V Preferred Stock.............. $ - $ 25,042 $ - $ -
Stockholders' equity......................................... $ 166,917 $ 14,531 $ 16,333 $ 16,481
OTHER DATA:
Net (loss) income............................................ $ (2,797) $ 2,175 $ 761 $ (648)
Add:
Special bonus(2)............................................. 353 - - -
Stock compensation(3)........................................ 4,239 - - -
Post-retirement benefit(4)................................... 632 438 - -
Acquisition LLC financing costs(5)........................... 6,973 - - -
Write-off of unamortized loan costs(6)....................... 2,295 - - -
Depreciation and amortization................................ 4,866 2,405 1,668 63
-----------------------------------------------------------
Funds from operations(7)..................................... $ 16,561 $ 5,018 $ 2,429 $ (585)
-----------------------------------------------------------
-----------------------------------------------------------
Cash flows from operating activities......................... $ 3,883 $ (1,646) $ 355 $ (1,024)
Cash flows from investing activities......................... $ (87,620) $ (94,900) $ (1,554) $ (29,924)
Cash flows from financing activities......................... $ 84,101 $ 97,323 $ 927 $ 32,139
Number of properties owned at period end..................... 22 12 4 4
Rentable square feet of properties owned
at period end........................................... 1,747,837 1,031,070 313,042 313,042
Occupancy of properties owned at period end.................. 97% 97% 96% 88%
12
______________
(1) Pro forma shares of Common Stock outstanding for the years ended December
31, 1997 and 1996 include all shares outstanding after giving effect to the
Offering, weighted for the period beginning from the date of the Offering,
conversion of all series of preferred stock, the 1,765.923 to 1 stock
split, the issuance of the stock grants and exercise of substitute stock
options. Pro forma restated shares of Common Stock outstanding for the
periods ended December 31, 1995 and 1994 include shares outstanding after
giving effect to the 1,765.923 to 1 stock split.
(2) Represents a $353,000 special bonus paid to an officer of the Company in
connection with the Offering.
(3) Represents an accrual for $4,239,000 of non-recurring, non-cash
compensation expense relating to the issuance of stock options and stock
grants. In connection with the Offering, the holders of options previously
granted by Holdings under its 1994 stock option plans received options to
purchase shares of Common Stock of the Company in substitution therefor.
These substitute options were exercised in connection with the Offering.
(4) This adjustment relates solely to the non-cash accrual of a one-time
post-retirement benefit for an officer of the Company.
(5) In connection with the Offering, the Company acquired the membership
interests in the Acquisition LLC for $58,844,000, which exceeded the
purchase price paid by the Acquisition LLC for the properties by
$6,973,000. This difference was accounted for as a financing cost.
(6) Of this amount, $2,147,000 represents the write-off of costs associated
with debt paid off in connection with the Offering, and $148,000 represents
the write-off of costs associated with debt paid off in November 1997.
(7) The Company computes funds from operations ("FFO") in accordance with
standards established by the Board of Governors of NAREIT in its March 1995
White Paper ("White Paper"). The White Paper defines FFO as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring, sales of property and unusual items, plus real estate
related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. For a more detailed
discussion of FFO, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Funds from Operations."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-K.
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.
In June 1997, the Company completed an initial public offering (the
"Offering") of its common stock, par value $.01 per share (the "Common
Stock"). In connection with the Offering (and related exercise of the
underwriters' over-allotment option), 7,762,500 shares of Common Stock were
issued. Aggregate proceeds from the Offering (including proceeds from the
exercise of the over-allotment option), net of underwriting discounts and
commissions, advisory fees and offering costs, were approximately $138.9
million.
The Company receives income from rental revenue (including tenant
recoveries) from its properties. Of the 22 properties owned by the Company
as of December 31, 1997 (the "Properties"), four were acquired in calendar
year 1994, eight in 1996 (the "1996 Acquired Properties"), three in 1997 in
connection with the Offering and seven in 1997 subsequent to the Offering
(together, the "1997 Acquired Properties"). As a result of the Company's
acquisition activities, the financial data shows significant increases in
total revenues and expenses for 1997 compared to 1996, largely attributable
to the 1997 Acquired Properties, and the recognition of a full year of
revenues for the 1996 Acquired Properties. For the foregoing reasons, and
due to the effects of the Offering and related transactions, the Company does
not believe its year-to-year historical financial data are comparable.
Accordingly, the Company also has included pro forma financial information,
which gives effect to the Offering and the acquisitions made in 1996 and 1997
in connection therewith.
13
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
Rental revenue increased by $12.7 million, or 98%, to $25.6 million for
1997 compared to $12.9 million for 1996. The increase resulted primarily
from the 1996 Acquired Properties being owned for a full period and the
addition of the 1997 Acquired Properties, which together contributed an
additional $12.5 million of rental revenue in 1997. Rental revenue from the
Properties owned since January 1, 1996 (the "Same Properties") increased by
$180,000, or 2%. This increase resulted primarily from the conversion of
19,310 square feet of storage space to higher rent laboratory space at 10933
North Torrey Pines Road in October 1996.
Tenant recoveries increased by $4.2 million, or 100%, to $8.4 million
for 1997 compared to $4.2 million for 1996. The increase resulted primarily
from the 1996 Acquired Properties being owned for a full period and the
addition of the 1997 Acquired Properties, which together contributed an
additional $3.8 million of tenant recoveries. Tenant recoveries for the Same
Properties increased by $416,000, or 19%, due to an increase in operating
expenses (particularly utilities) being passed through to the tenants.
Other income increased by $273,000, or 48%, to $836,000 for 1997
compared to $563,000 for 1996, resulting from an increase in interest income
due to the investment of excess funds from the Offering and increased amounts
in capital improvement reserve accounts.
Rental operating expenses increased by $4.4 million, or 100%, to $8.8
million for 1997 compared to $4.4 million for 1996. The increase resulted
almost entirely from the 1996 Acquired Properties being owned for a full
period and the addition of the 1997 Acquired Properties, which together
contributed an additional $4.0 million in operating expenses. Operating
expenses for the Same Properties increased by $401,000, or 17%, primarily due
to increased utility expenses (due to greater usage) which were passed
through to the tenants.
General and administrative expenses increased by $504,000, or 26%, to
$2.5 million for 1997 compared to $2.0 million for 1996 due to the Company's
larger scope of operations and increased costs incurred as a result of being
a public company.
Special bonus of $353,000 in 1997 reflects a bonus paid to an officer of
the Company in connection with the Offering. Post retirement benefit expense
of $632,000 and $438,000 in 1997 and 1996, respectively, 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 $4.2 million was recorded in 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.
Interest expense increased by $716,000, or 11%, to $7.0 million for 1997
compared to $6.3 million for 1996. The increase resulted from indebtedness
incurred to acquire the 1996 Acquired Properties, offset by a reduction in
ongoing interest expense due to the payoff of $72.7 million in secured notes
payable in June 1997 with proceeds from the Offering.
Acquisition LLC financing costs of $7.0 million in 1997 represent the
portion of the purchase price of the membership interests in ARE
Acquisitions, LLC (the "Acquisition LLC") in excess of the cost incurred by
the Acquisition LLC to acquire its three Life Science Facilities.
Write-off of unamortized loan costs in 1997 represents the write-off of
$2.1 million in loan costs associated with $72.7 million of secured notes
repaid with proceeds of the Offering and $148,000 in loan costs associated
with the payoff of debt in November 1997.
14
Depreciation and amortization increased by $2.5 million, or 102%, to
$4.9 million for 1997 compared to $2.4 million for 1996. The increase
resulted primarily from depreciation associated with the 1996 Acquired
Properties being owned for a full period and the addition of the 1997
Acquired Properties.
As a result of the foregoing, the net loss was $2.8 million for 1997
compared to net income of $2.2 million for 1996.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Rental revenue increased by $4.9 million, or 61%, to $12.9 million for
the year ended December 31, 1996 compared to $8.0 million for the year ended
December 31, 1995. The increase resulted primarily from the 1996 Acquired
Properties, which contributed an additional $4.6 million of rental revenue in
1996. Rental revenue from the Properties owned since January 1, 1995 (the
"1995 Same Properties") increased by $370,000, or 5%. Of this increase,
$320,000 resulted from a full year of rental income in 1996 resulting from
the increase in occupancy at 11099 North Torrey Pines Road during 1995.
Tenant recoveries increased by $2.5 million, or 147%, to $4.2 million
for 1996 compared to $1.7 million for 1995. The increase resulted primarily
from the addition of the 1996 Acquired Properties, which contributed an
additional $2.1 million of tenant recoveries. Tenant recoveries from the
1995 Same Properties increased by $395,000, or 23%. Of this increase,
$300,000 resulted from a new lease at 11099 North Torrey Pines Road. The
remaining increase resulted primarily from a new energy management system at
10933 North Torrey Pines Road that allows the Company to more accurately
measure and recover from its tenants certain costs of utility usage.
Other income increased by $359,000, or 176%, to $563,000 for 1996
compared to $204,000 for 1995. The increase resulted primarily from the
addition of the 1996 Acquired Properties, which contributed an additional
$337,000 of other income.
Rental operating expenses increased by $2.2 million, or 100%, to $4.4
million for 1996 compared to $2.2 million for 1995. The increase resulted
primarily from the addition of the 1996 Acquired Properties, which
contributed an additional $2.0 million of rental operating expenses. Rental
operating expenses from the 1995 Same Properties increased by $162,000, or
7%, primarily as a result of an increase in expenses at 10933 North Torrey
Pines Road.
General and administrative expenses increased by $364,000, or 23%, to
$2.0 million for 1996 compared to $1.6 million for 1995. The increase
resulted primarily from additional professional fees incurred during 1996.
Post-retirement benefit expense in 1996 represents the non-cash accrual
associated with a one-time post-retirement benefit for an officer of the
Company.
Interest expense increased by $2.8 million, or 80%, to $6.3 million for
1996 compared to $3.5 million for 1995. The increase resulted primarily from
indebtedness incurred to acquire the 1996 Acquired Properties, which
contributed an additional $2.3 million of interest expense, and debt
outstanding under the Company's then-existing unsecured line of credit, which
was repaid in July 1996.
Depreciation and amortization increased by $737,000, or 44%, to $2.4
million for 1996 compared to $1.7 million for 1995. The increase resulted
primarily from depreciation associated with the 1996 Acquired Properties.
As a result of the foregoing, net income increased by $1.4 million, or
184%, to $2.2 million for 1996 compared to $761,000 for 1995.
15
LIQUIDITY AND CAPITAL RESOURCES
THE OFFERING AND SECURED DEBT
The Company completed the Offering in June 1997. Aggregate proceeds of
the Offering (including proceeds from the exercise of the over-allotment
option), net of underwriting discounts and commissions, advisory fees, and
offering costs, were approximately $138.9 million. The Company used such net
proceeds, as well as $15.4 million in proceeds from two new mortgage loans,
to repay outstanding debt of approximately $77.7 million. In addition, in
November 1997, the Company paid off $6.7 million of secured debt with funds
from its unsecured line of credit obtained in connection with the Offering.
Total secured debt as of December 31, 1997 included the following:
PRINCIPAL BALANCE AT INTEREST MATURITY
COLLATERAL DECEMBER 31, 1997 RATE DATE
- ---------- -------------------- ---- ----
(IN THOUSANDS)
3535/3565 General Atomics Court,
San Diego, CA $ 18,050 9.00% December 2014
1431 Harbor Bay Parkway, Alameda, CA 8,500 7.17% January 2014
1102/1124 Columbia Street, Seattle, WA 21,267 7.75% May 2016
------------
$ 47,817
------------
------------
UNSECURED LINE OF CREDIT
In connection with the Offering, the Company obtained an unsecured line
of credit providing for borrowings of up to $150 million, consisting of a
$100 million activated portion and a $50 million portion that may be
activated as needed at the Company's discretion (upon payment of an
activation fee) provided that no default exists thereunder. The line of
credit provides for borrowings bearing 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 one, two, three
or six month period.
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). The
Company was in compliance with all such covenants as of December 31, 1997.
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 December 31, 1997, borrowings under the line of credit were
limited to approximately $103 million, and $23 million was outstanding
(leaving $80 million available), at a weighted average rate of interest of
6.9%.
The line of credit expires on 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 December 31, 1997, approximately $3.4 million had been set aside
in a restricted cash account to complete the upgrade of 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 $758,000 in security deposit reserve
accounts based on the terms of certain lease agreements.
16
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 REIT status. The Company expects to make
distributions from cash available for distribution, which is expected to
exceed cash historically available for distribution as a result of the
reduction in debt described above, as well as the addition of the 1996 and
1997 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, scheduled debt maturities, renovations,
expansions and other non-recurring capital improvements, through long-term
secured and unsecured indebtedness, including borrowings under the line of
credit, and the issuance of additional debt and/or equity securities.
EXPOSURE TO ENVIRONMENTAL LIABILITIES
In connection with the acquisition of all of 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 1997 increased by $5.5
million to $3.9 million compared to net cash used by operating activities of
$(1.6) million for 1996. The increase resulted primarily from operating cash
flows from the addition of the 1996 Acquired Properties and the 1997 Acquired
Properties.
Net cash used in investing activities decreased by $7.3 million to
$(87.6) million for 1997 compared to net cash used in investing activities of
$(94.9) million for 1996. This use of cash related primarily to costs
associated with the acquisition of the 1997 Acquired Properties.
Net cash provided by financing activities decreased by $13.2 million to
$84.1 million for 1997 compared to $97.3 million for 1996. The decrease was
impacted by $85.8 million of principal reductions in debt, retired
principally with proceeds from the Offering, offset by $138.9 million in net
proceeds from the Offering, $15.4 million in proceeds from secured debt, and
$25.5 million in proceeds from unsecured lines of credit. In addition, the
Company paid dividends on the Common Stock of $8.8 million and dividends on
preferred stock of $1.1 million during 1997.
CAPITAL EXPENDITURES, TENANT IMPROVEMENTS AND LEASING COSTS
The following table sets forth total and weighted average per square
foot capital expenditures (excluding those expenditures which are recoverable
from tenants or are revenue-enhancing) and tenant improvements and leasing
costs for the period from October 1994 (inception of operations) to December
31, 1994, and for the years ended December 31, 1995, 1996, and 1997,
attributable to leases that commenced at the Properties after acquisition by
the Company.
17
TOTAL/
WEIGHTED AVERAGE 1997 1996 1995 1994
---------------- ---------- ---------- ---------- ----------
CAPITAL EXPENDITURES:
Weighted average square feet in 2,426,479 1,342,216 563,901 314,779 205,583
portfolio
Property related capital expenditures $ 745,000 $ 547,000 $ 181,000 $ 17,000 $ -
Per weighted average square foot in
portfolio $ 0.31 $ 0.41 $ 0.32 $ 0.05 $ -
TENANT IMPROVEMENTS AND LEASING COSTS:
RETENANTED SPACE:
Retenanted square feet 276,711 40,953 180,398 49,938 5,422
Tenant improvements and leasing costs $ 1,986,000 $ 164,000 $1,220,000 $ 576,000 $ 26,000
Per square foot leased $ 7.18 $ 4.00 $ 6.76 $ 11.53 $ 4.80
RENEWAL SPACE:
Renewal square feet 42,379 1,232 25,063 16,084 -
Tenant improvements and leasing costs $ 48,291 $ - $ - $ 48,291 $ -
Per square foot leased $ 1.14 $ - $ - $ 3.00 $ -
Capital expenditures may fluctuate in any given period subject to the
nature, extent, and timing of improvements required and to the extent they
are recoverable from tenants. The Company maintains an active preventive
maintenance program in order to minimize required capital improvements.
Tenant improvements and leasing costs also may fluctuate in any given
year depending upon factors such as the timing and extent of vacancies, the
type of lease (renewal or replacement tenant), the involvement of external
leasing agents and overall competitive market conditions.
INFLATION
As of December 31, 1997, approximately 76% of the Company's leases (on a
square footage basis) were triple net leases, requiring tenants to pay
substantially all real estate taxes and insurance, common area and other
operating expenses (including increases thereto). In addition, approximately
19% of the Company's leases (on a square footage basis) required the tenants
to pay a majority of operating expenses. In addition, approximately 64% 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 the consumer price index 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.
IMPACT OF THE YEAR 2000
The Company has evaluated the significance of the change from the year
1999 to the year 2000 on its existing computer system and has taken steps to
ensure that its computer system will not be adversely affected thereby. The
financial impact of steps taken to accommodate the change for the year 2000
is not anticipated to be material. The Company relies in part on the
computer systems of its vendors and other companies. If any such company
failed to become year 2000 compliant, the Company could be adversely affected
thereby. The Company has surveyed several of its larger vendors, and all have
responded that they either are currently year 2000 compliant, or are actively
taking steps to become year 2000 compliant.
18
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Due to the impact of the Offering and related transactions and the
acquisitions by the Company in 1996 and 1997, the historical results of
operations are not indicative of the Company's future results of operations.
The following pro forma condensed consolidated financial information presents
the results of operations of the Company as if the Offering (including the
exercise of the over-allotment option) and related transactions occurred on
January 1, 1996. Pro forma results for the year ended December 31, 1997 do
not include the operations of two of the Properties (14225 Newbrook Drive and
1330 Piccard Drive) for the period prior to their acquisition by the
Acquisition LLC (on January 13, 1997 and January 15, 1997, respectively).
These Properties were owner-occupied prior to purchase and, as a result,
there were no historical operating results for these Properties as rental
properties. The adjusted pro forma financial information presented below
assumes that the new leases entered into with the sellers of such Properties
were in effect for the entire period presented. The pro forma and adjusted
pro forma financial information presented below is based upon historical
information and various assumptions and does not purport to present the
actual results that would have occurred had the Offering and related
transactions occurred on January 1, 1996, nor to project the Company's
results of operations for any future period.
CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL INFORMATION
(UNAUDITED)
ADJUSTED
PRO FORMA PRO FORMA
------------------------- -----------
YEAR ENDED DECEMBER 31
1997 1996 1997
------------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Total revenues $ 38,103 $ 25,249 $ 38,374
Expenses:
Rental operations 8,857 6,471 8,865
General and administrative 2,662 2,900 2,662
Interest 4,818 3,836 4,818
Special bonus 353 - 353
Stock compensation 4,239 - 4,239
Post retirement benefit 632 438 632
Write-off of unamortized loan 148 - 148
costs
Depreciation and amortization 5,269 3,521 5,309
----------- ----------- -----------
26,978 17,166 27,026
----------- ----------- -----------
Net income $ 11,125 $ 8,083 $ 11,348
----------- ----------- -----------
----------- ----------- -----------
Pro forma shares of Common Stock
outstanding 11,404,631 11,404,631 11,404,631
----------- ----------- -----------
----------- ----------- -----------
Net income per pro forma share of
Common Stock outstanding $ 0.98 $ 0.71 $ 1.00
----------- ----------- -----------
----------- ----------- -----------
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 the National Association of Real
Estate Investment Trusts ("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
19
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 principals
("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. (See "-Historical Cash Flows" for information
regarding these measures of cash flow).
The following tables present the Company's FFO for the year ended 1997
on a historical, pro forma and adjusted pro forma basis and for the years
ended 1996 and 1995 on a historical basis. The adjusted pro forma
information for the year ended December 31, 1997 assumes that leases entered
into with sellers of previously owner-occupied properties were in effect for
the entire period presented:
(UNAUDITED) (UNAUDITED)
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31
---------------------------- -----------------------
ADJUSTED
PRO PRO 1996 1995
HISTORICAL FORMA FORMA HISTORICAL HISTORICAL
---------- ------- -------- ---------- ----------
(IN THOUSANDS)
Net (loss) income $(2,797) $11,125 $11,348 $2,175 $ 761
Add:
Special bonus 353 353 353 - -
Stock compensation 4,239 4,239 4,239 - -
Post-retirement benefit 632 632 632 438 -
Acquisition LLC
financing costs 6,973 - - - -
Write-off of
unamoritized loan costs 2,295 148 148 - -
Depreciation and
amortization 4,866 5,269 5,309 2,405 1,668
------- ------- ------- ------ ------
Funds from Operations $16,561 $21,766 $22,029 $5,018 $2,429
------- ------- ------- ------ ------
------- ------- ------- ------ ------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X
are included in this Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated by reference from the
Company's definitive proxy statement to be mailed in connection with its annual
meeting of stockholders to be held on May 15, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement to be mailed in connection with its annual
meeting of stockholders to be held on May 15, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement to be mailed in connection with its annual
meeting of stockholders to be held on May 15, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement to be mailed in connection with its annual
meeting of stockholders to be held on May 15, 1998.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial information is included as a
separate section of this Annual Report on Form 10-K:
PAGE
----
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . .F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1996. . . . . . . . .F-2
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1996, and 1995. . . . . . . . . . . . . . . . . . . .F-3
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1997, 1996, and 1995. . . . . . . . . . . . . . . . . . . .F-4
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996, and 1995. . . . . . . . . . . . . . . . . . . .F-5
Notes to Consolidated Financial Statements for the Years ended
December 31, 1997, 1996, and 1995. . . . . . . . . . . . . . . . . . . .F-6
Schedule III - Consolidated Financial Statement of Rental Properties
and Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . F-24
(B) REPORTS ON FORM 8-K.
On December 2, 1997, the Company filed a report on Form 8-K relating
to the acquisition of certain real property. On January 28, 1998, the Company
filed the required financial statements thereto by amendment on Form 8-K/A.
(C) EXHIBITS.
EXHIBIT
NUMBER EXHIBIT
- ------- -------
3.1++ Articles of Amendment and Restatement of the Registrant
3.2++ Certificate of Correction of the Registrant
3.3++ Amended and Restated Bylaws of the Registrant
4.1+ Specimen Certificate representing shares of Common Stock
10.1 Amended and Restated Executive Employment Agreement by and between the
Registrant and Joel S. Marcus, dated January 5, 1994, and amended as of
March 28, 1997
10.2 Amended and Restated Executive Employment Agreement by and between the
Registrant and Alan D. Gold, dated January 5, 1994, and amended as of
March 28, 1997
10.3 Amended and Restated Executive Employment Agreement by and between the
Registrant and Gary Kreitzer, dated January 5, 1994, and amended as of
March 28, 1997
10.4 Amended and Restated Executive Employment Agreement by and between the
Registrant and Steven Stone, dated January 5, 1994, and amended as of
March 28, 1997
22
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.5 Second Amendment to the Executive Employment Agreement and General and
Special Release by and between the Registrant and Jerry M. Sudarsky,
dated May 30, 1997
10.6+++ Executive Employment Agreement between the Registrant and James H.
Richardson, dated July 31, 1997
10.7+ Executive Employment Agreement between the Registrant and Peter J.
Nelson, dated April 22, 1997
10.8+ Form of Director Indemnification Agreement
10.9 Registration Rights Agreement by and between the Registrant and Health
Science Properties Holding Corporation, dated June 2, 1997
10.10+ Standard Lease Form to be executed by tenant and the Registrant as
Landlord
10.11+ Form of Management Agreement
10.12+ Stockholders Agreement by and among the Registrant, Health Science
Properties Holding Corporation and AEW Partners II, L.P., dated
September 9, 1996
10.13 1997 Stock Award and Incentive Plan of the Registrant
10.14+ Form of Non-Employee Director Stock Option Agreement for use in
connection with options issued pursuant to the 1997 Stock Option Plan
10.15+ Form of Incentive Stock Option Agreement for use in connection with
options issued pursuant to the 1997 Stock Option Plan
10.16+ Form of Nonqualified Stock Option Agreement for use in connection with
options issued pursuant to the 1997 Stock Option Plan
10.17 Revolving Loan Agreement among the Registrant, ARE-QRS Corp., ARE
Acquisitions, LLC, the Banks therein named and the Bank of America NT &
SA, dated June 2, 1997
10.18 Amendment No. 1 to Revolving Loan Agreement among the Registrant, ARE-
QRS Corp., ARE Acquisitions, LLC, the Banks therein named and the Bank
of America NT & SA, dated September 9, 1997
10.19 Amendment No. 2 to Revolving Loan Agreement among the Registrant, ARE-
QRS Corp. ARE Acquisitions, LLC, the Banks therein named and the Bank of
America NT & SA, dated January 28, 1998
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
___________
+ Incorporated by reference to the Registrant's Registration Statement on
Form S-11 (No. 333-23545), declared effective by the Commission on May 27,
1997
++ Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 1997, filed with the Commission on August 14,
1997
+++ Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, filed with the Commission on
November 14, 1997
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
Dated: March 30, 1998 By: /s/ Joel S. Marcus
----------------------------------
Joel S. Marcus
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ------ -----
/s/ J M Sudarsky
- ------------------------------------ Chairman of the Board of Directors March 30, 1998
Jerry M. Sudarsky
/s/ Joel S. Marcus
- ------------------------------------ Chief Executive Officer (Principal March 30, 1998
Joel S. Marcus Executive Officer) and Director
/s/ Alan D. Gold
- ------------------------------------ President and Director March 30, 1998
Alan D. Gold
/s/ Peter J. Nelson
- ------------------------------------ Chief Financial Officer, Treasurer and March 30, 1998
Peter J. Nelson Secretary (Principal Financial and
Accounting Officer)
/s/ Joseph Elmaleh
- ------------------------------------ Director March 30, 1998
Joseph Elmaleh
/s/ Viren Mehta
- ------------------------------------ Director March 30, 1998
Viren Mehta
/s/ David M. Petrone
- ------------------------------------ Director March 30, 1998
David M. Petrone
/s/ Anthony M. Solomon
- ------------------------------------ Director March 30, 1998
Anthony M. Solomon
24
EXHIBIT INDEX
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------- ------- -------------
3.1++ Articles of Amendment and Restatement of the Registrant
3.2++ Certificate of Correction of the Registrant
3.3++ Amended and Restated Bylaws of the Registrant
4.1+ Specimen Certificate representing shares of Common Stock
10.1 Amended and Restated Executive Employment Agreement by
and between the Registrant and Joel S. Marcus, dated
January 5, 1994, and amended as of March 28, 1997
10.2 Amended and Restated Executive Employment Agreement by
and between the Registrant and Alan D. Gold, dated
January 5, 1994, and amended as of March 28, 1997
10.3 Amended and Restated Executive Employment Agreement by
and between the Registrant and Gary Kreitzer, dated
January 5, 1994, and amended as of March 28, 1997
10.4 Amended and Restated Executive Employment Agreement by
and between the Registrant and Steven Stone, dated
January 5, 1994, and amended as of March 28, 1997
10.5 Second Amendment to the Executive Employment Agreement
and General and Special Release by and between the
Registrant and Jerry M. Sudarsky, dated May 30, 1997
10.6+++ Executive Employment Agreement between the Registrant
and James H. Richardson, dated July 31, 1997
10.7+ Executive Employment Agreement between the Registrant
and Peter J. Nelson, dated April 22, 1997
10.8+ Form of Director Indemnification Agreement
10.9 Registration Rights Agreement by and between the
Registrant and Health Science Properties Holding
Corporation, dated June 2, 1997
10.10+ Standard Lease Form to be executed by tenant and the
Registrant as Landlord
10.11+ Form of Management Agreement
10.12+ Stockholders Agreement by and among the Registrant,
Health Science Properties Holding Corporation and AEW
Partners II, L.P., dated September 9, 1996
10.13 1997 Stock Award and Incentive Plan of the Registrant
10.14+ Form of Non-Employee Director Stock Option Agreement for
use in connection with options issued pursuant to the
1997 Stock Option Plan
10.15+ Form of Incentive Stock Option Agreement for use in
connection with Options issued pursuant to the 1997
Stock Option Plan
10.16+ Form of Nonqualified Stock Option Agreement for use in
connection with Options issued pursuant to the 1997
Stock Option Plan
10.17 Revolving Loan Agreement among the Registrant, ARE-QRS
Corp., ARE Acquisitions, LLC, the Banks therein named
and the Bank of America NT & SA, dated June 2, 1997
25
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------- ------- -------------
10.18 Amendment No. 1 to Revolving Loan Agreement among the
Registrant, ARE-QRS Corp., ARE Acquisitions, LLC, the
Banks therein named and the Bank of America NT & SA,
dated September 9, 1997
10.19 Amendment No. 2 to Revolving Loan Agreement among the
Registrant, ARE-QRS Corp. ARE Acquisitions, LLC, the
Banks therein named and the Bank of America NT & SA,
dated January 28, 1998
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
______________
+ Incorporated by reference to the Registrant's Registration Statement on
Form S-11 (No. 333-23545), declared effective by the Commission on May 27,
1997
++ Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 1997, filed with the Commission on August 14,
1997
+++ Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, filed with the Commission on
November 14, 1997
26
Report of Independent Auditors
To the Board of Directors and Stockholders of
Alexandria Real Estate Equities, Inc.
We have audited the accompanying consolidated balance sheets of Alexandria
Real Estate Equities, Inc. and subsidiaries (the "Company") as of December
31, 1997, and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1997,
1996 and 1995. Our audits also included the consolidated financial statement
Schedule III, rental properties and accumulated depreciation. These
consolidated financial statements and consolidated financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company as of December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for the years ended December 31, 1997,
1996 and 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, the related consolidated financial statement schedule
referred to above, when considered in relation to the consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California
January 30, 1998
F-1
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Balance Sheets
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31
1997 1996
-------------------------
ASSETS
Rental properties, net $ 229,970 $ 146,960
Cash and cash equivalents 2,060 1,696
Tenant security deposits and other restricted cash 6,799 5,585
Tenant receivables and deferred rent 3,630 1,332
Loan fees and costs (net of accumulated amortization of $175 and $131
in 1997 and 1996, respectively) 1,350 2,502
Other assets 4,645 2,405
-------------------------
Total assets $ 248,454 $ 160,480
-------------------------
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Secured notes payable $ 47,817 $ 113,182
Unsecured line of credit 23,000 -
Accounts payable, tenant security deposits and other liabilities 6,158 3,650
Dividends payable 4,562 1,550
Due to Health Science Properties Holding Corporation - 2,525
-------------------------
81,537 120,907
Commitments and contingencies - -
Manditorily redeemable Series V cumulative convertible preferred
stock, $0.01 par value, $1,000 stated value per share, 50,000 shares
authorized; 27,500 issued and outstanding at December 31, 1996 - 25,042
Stockholders' equity:
Preferred stock:
Series T 8.5% preferred stock, $0.01 par value and $100 stated
value per share, 12 shares issued and outstanding at
December 31, 1996 - 1
Series U 8.5% cumulative convertible preferred stock, $0.01 par
value and $500 stated value per share, 220 shares issued and
outstanding at December 31, 1996 - 110
Common stock, $0.01 par value per share, 100,000,000 shares
authorized; 11,604,631 and 1,765,923 shares issued and
outstanding at December 31, 1997 and 1996, respectively 114 -
Additional paid-in capital 173,735 16,195
Accumulated deficit (6,932) (1,775)
-------------------------
Total stockholders' equity 166,917 14,531
-------------------------
Total liabilities and stockholders' equity $ 248,454 $ 160,480
-------------------------
-------------------------
SEE ACCOMPANYING NOTES.
F-2
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Statements of Operations
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------
Revenues:
Rental $ 25,622 $ 12,941 $ 8,020
Tenant recoveries 8,388 4,169 1,699
Other 836 563 204
-----------------------------------------
34,846 17,673 9,923
Expenses:
Rental operations 8,766 4,356 2,228
General and administrative 2,476 1,972 1,608
Interest 7,043 6,327 3,553
Stock compensation 4,239 - -
Post retirement benefit 632 438 -
Special bonus 353 - -
Acquisition LLC financing costs 6,973 - -
Write-off of unamortized loan costs 2,295 - -
Depreciation and amortization 4,866 2,405 1,668
-----------------------------------------
37,643 15,498 9,057
-----------------------------------------
(Loss) income from operations (2,797) 2,175 866
Charge in lieu of income taxes - - 105
-----------------------------------------
Net (loss) income $ (2,797) $ 2,175 $ 761
-----------------------------------------
-----------------------------------------
Net (loss) income allocated to preferred
stockholders $ 3,038 $ 1,590 $ -
-----------------------------------------
-----------------------------------------
Net (loss) income allocated to common stockholders $ (5,835) $ 585 $ 761
-----------------------------------------
-----------------------------------------
Net (loss) income per pro forma share of
common stock - restated for 1996 and
1995 (basic and diluted) $ (0.35) $ 0.60 $ 0.43
-----------------------------------------
-----------------------------------------
Pro forma weighted average shares of
common stock outstanding - restated for
1996 and 1995 (basic and diluted) 8,075,864 3,642,131 1,765,923
-----------------------------------------
-----------------------------------------
SEE ACCOMPANYING NOTES.
F-3
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NUMBER OF
SERIES T SERIES T SERIES U SERIES U NUMBER OF
PREFERRED PREFERRED PREFERRED PREFERRED COMMON COMMON
SHARES STOCK SHARES STOCK SHARES STOCK
--------- -------- --------- --------- ---------- ------
Balance at January 1, 1995 (restated) - $ - - $ - 1,765,923 $ 18
Issuance of Series T preferred stock 12 1 - - - -
Dividends declared and payable on common stock - - - - - -
Net income - - - - - -
-------------------------------------------------------------
Balance at December 31, 1995 (restated) 12 1 - - 1,765,923 18
Issuance of Series U preferred stock - - 220 110 - -
Accretion on Series V preferred stock - - - - - -
Cash dividends on Series T, U, & V preferred stock - - - - - -
Dividends declared and payable on common stock - - - - - -
Net income - - - - - -
-------------------------------------------------------------
Balance at December 31, 1996 (restated) 12 1 220 110 1,765,923 18
Accretion on Series V preferred stock - - - - - -
Cash dividends on Series T, U and V preferred stock - - - - - -
Exercise of compensatory stock options and issuance
of stock grants (including compensation expense of
$4,161) - - - - 209,615 2
Issuance of common stock in connection with initial
public offering, net of offering costs - - - - 7,762,500 78
Conversion of Series V and Series U preferred stock - - (220) (110) 1,666,593 16
Redemption of Series T preferred stock (12) (1) - - - -
Dividends declared and payable on common stock - - - - - -
Net loss - - - - - -
-------------------------------------------------------------
Balance at December 31, 1997 - $ - - $ - 11,404,631 $114
-------------------------------------------------------------
-------------------------------------------------------------
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- --------
Balance at January 1, 1995 (restated) $ 17,110 $ (648) $ 16,480
Issuance of Series T preferred stock - - 1
Dividends declared and payable on common stock - (909) (909)
Net income - 761 761
-------------------------------------
Balance at December 31, 1995 (restated) 17,110 (796) 16,333
Issuance of Series U preferred stock - - 110
Accretion on Series V preferred stock (933) - (933)
Cash dividends on Series T, U, & V preferred stock - (665) (665)
Dividends declared and payable on common stock - (2,489) (2,489)
Net income - 2,175 2,175
-------------------------------------
Balance at December 31, 1996 (restated) 16,177 (1,775) 14,531
Accretion on Series V preferred stock (1,911) - (1,911)
Cash dividends on Series T, U and V preferred stock - (1,127) (1,127)
Exercise of compensatory stock options and issuance
of stock grants (including compensation expense of
$4,161) 4,190 - 4,192
Issuance of common stock in connection with initial
public offering, net of offering costs 138,812 - 138,890
Conversion of Series V and Series U preferred stock 27,045 - 26,951
Redemption of Series T preferred stock - - (1)
Dividends declared and payable on common stock (10,578) (1,233) (11,811)
Net loss - (2,797) (2,797)
-------------------------------------
Balance at December 31, 1997 $173,735 $(6,932) $166,917
-------------------------------------
-------------------------------------
SEE ACCOMPANYING NOTES
F-4
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
OPERATING ACTIVITIES
Net (loss) income $ (2,797) $ 2,175 $ 761
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,866 2,405 1,668
Stock option compensation 4,161 - -
Changes in operating assets and liabilities:
Tenant security deposits and other restricted cash (1,214) (4,371) (779)
Tenant receivables and deferred rent (2,298) (502) (709)
Loan fees and costs 906 (2,402) (15)
Other assets (2,249) (1,231) (982)
Accounts payable, tenant security deposits and other
liabilities 2,508 2,280 411
---------------------------------
Net cash provided by (used in) operating activities 3,883 (1,646) 355
INVESTING ACTIVITIES
Additions to rental properties (3,566) (1,578) (1,554)
Purchase of rental properties (84,054) (93,322) -
---------------------------------
Net cash used in investing activities (87,620) (94,900) (1,554)
FINANCING ACTIVITIES
Proceeds from secured notes payable 15,360 77,260 1,250
Proceeds from issuance of common stock 138,919 - -
Proceeds from issuance of Series V preferred stock
(net of issuance costs of $3,391) - 24,109 -
Proceeds from issuance of Series U preferred stock - 110 -
Proceeds from unsecured lines of credit 25,500 - 1,000
(Decrease) increase in due to Health Science
Properties Holding Corporation (2,525) 2,420 105
Principal reductions on unsecured line of credit (2,500) (4,000) -
Principal reductions on secured notes payable (80,725) (972) (519)
Common dividends paid (8,800) (939) (909)
Preferred dividends paid (1,127) (665) -
Redemption of Series T preferred stock (1) - -
---------------------------------
Net cash provided by financing activities 84,101 97,323 927
Net increase (decrease) in cash and cash equivalents 364 777 (272)
Cash and cash equivalents at beginning of year 1,696 919 1,191
---------------------------------
Cash and cash equivalents at end of year $ 2,060 $ 1,696 $ 919
---------------------------------
---------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest and financing
costs, net of interest capitalized $ 13,552 $ 5,953 $ 3,409
---------------------------------
---------------------------------
SEE ACCOMPANYING NOTES.
F-5
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
1. BACKGROUND, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BACKGROUND
Alexandria Real Estate Equities, Inc. (known as Health Science Properties,
Inc. prior to 1997), a Maryland corporation (the "Company"), is a real estate
investment trust ("REIT") formed in 1994.
The Company and its subsidiaries were formed to acquire, manage and
selectively develop properties for lease principally to participants in the
life science industry ("Life Science Facilities"). As of December 31, 1997
and 1996, the Company owned 22 and 12 Life Science Facilities, respectively,
in four and three states, respectively, consisting of 1,748,000 and 1,031,000
rentable square feet, respectively.
BASIS OF PRESENTATION
The 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 accounts and transactions
have been eliminated in consolidation.
THE INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS
On June 2, 1997, the Company completed an initial public offering (the
"Offering") of 6,750,000 shares of common stock. The Offering price was
$20.00 per share, resulting in gross proceeds of $135,000,000. On June 26,
1997, the underwriters exercised their over-allotment option provided for in
the Offering, and the Company issued an additional 1,012,500 shares of common
stock, resulting in additional gross proceeds of $20,250,000. The aggregate
net proceeds of the Offering (including exercise of the over-allotment
option), net of underwriting discounts and commissions, advisory fees and
offering costs, were approximately $138,890,000.
F-6
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. BACKGROUND, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
THE INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS (CONTINUED)
The following transactions also occurred in June 1997 in connection with the
Offering:
- - The Company paid off debt of approximately $77,723,000, including (i)
mortgage debt of $72,698,000, (ii) debt of $2,500,000 outstanding under
its prior unsecured line of credit, and (iii) debt of $2,525,000 to Health
Science Properties Holding Corporation ("Holdings"). Holdings owned all of
the Company's common stock prior to the Offering and 15.5% of the common
stock of the Company after the Offering and the exercise of the over-
allotment option.
- - The Company obtained two new mortgage loans totaling $15,360,000.
- - The Company acquired an entity that owns three Life Science Facilities
from affiliates of PaineWebber Incorporated, the lead managing underwriter
for the Offering, for an aggregate purchase price of $58,844,000 (see
Note 9).
- - Each previously outstanding share of the Company's common stock was split
into 1,765.923 shares of common stock. The share data as of and for the
years ended December 31, 1996 and 1995 has been restated to reflect the
effects of the stock split.
- - All of the previously outstanding shares of Series T preferred stock were
redeemed at their stated value ($1,200 in the aggregate) (see Note 6).
- - All of the previously outstanding shares of Series U preferred stock and
Series V preferred stock were converted into shares of common stock (7,354
shares in the aggregate for Series U and 1,659,239 shares in the aggregate
for Series V) (see Note 6).
- - Officers, directors and certain employees of the Company were granted an
aggregate of 152,615 shares of the Company's common stock. In addition,
officers, directors and certain employees of the Company were granted
options to purchase 57,000 shares of the Company's common stock in
substitution for stock options previously issued by Holdings (see Notes 5
and 8). These options were exercised at a nominal exercise price in
connection with the Offering.
F-7
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. BACKGROUND, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
THE INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS (CONTINUED)
- - Officers, directors and employees of the Company were granted options
under the Company's 1997 stock option plan to purchase an aggregate of
600,000 shares of common stock of the Company at the Offering price (see
Note 8).
- - A special bonus of $353,000 was paid to an officer of the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less when purchased to be cash equivalents.
RENTAL PROPERTIES
Rental properties consist of the Company's portfolio of Life Science
Facilities, recorded at cost. Costs associated with acquiring and renovating
properties are capitalized as incurred. If events or circumstances indicate
that the carrying amount of a property may be impaired, the Company would
make an assessment of its recoverability by estimating the future
undiscounted cash flows, excluding interest charges, of the property. If the
carrying amount were to exceed the aggregate future cash flows, the Company
would recognize an impairment loss to the extent the carrying amount exceeds
the fair value of the property. Based upon such periodic assessments, no
impairment has been determined and no rental properties carrying amounts have
been adjusted.
F-8
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. BACKGROUND, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
RENTAL PROPERTIES (CONTINUED)
Maintenance and repairs are expensed as incurred. Major replacements and
betterments are capitalized and depreciated over their estimated useful lives.
Depreciation is provided using the straight-line method using estimated lives
of 30 to 40 years for buildings and building improvements, 20 years for land
improvements, and the term of the respective lease for tenant improvements.
RESTRICTED CASH
Restricted cash as of December 31, 1997 and 1996, consists of a tenant
improvement reserve of $3,364,000 and $4,715,000, respectively, established
by the Company pursuant to a lease at one of the Company's properties, funds
held in trust of $1,966,000 and none, respectively, as additional security on
a note with the City of Seattle, and security deposit funds and other
restricted cash of $1,469,000 and $870,000, respectively. In connection with
the repayment of the note with the City of Seattle, the cash held in trust was
returned to the Company in February 1998 (see Note 4).
LOAN FEES AND COSTS
Fees and costs incurred in obtaining long-term financing are amortized over
the terms of the related loans and included in interest expense.
RENTAL INCOME
Rental income from leases with scheduled rent increases, free rent and other
rent adjustments are recognized on a straight-line basis over the lease term.
Amounts currently recognized as income, and expected to be received in later
years, are included in tenant receivables and deferred rent. Amounts received
currently, but recognized as income in future years, are included in unearned
rent.
OTHER INCOME
Other income consists of interest income and other income associated with the
operations of the properties. Interest income was $588,000, $118,000 and
$57,000 in 1997, 1996 and 1995, respectively.
F-9
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. BACKGROUND, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LEASING COMMISSIONS
Leasing commissions are amortized on a straight-line basis over the term of
the related lease.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value of financial instruments at
December 31, 1997 and 1996 were determined by management using available
market information and appropriate valuation methodologies. Considerable
judgment is necessary to interpret market data and develop estimated fair
value. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Based on the borrowing rates currently available to the Company for bank
loans with similar maturities, the fair value of secured notes payable as of
December 31, 1997 and 1996 is approximately $46,822,000 and $113,215,000,
respectively. All other financial instruments are stated at amounts that
approximate their fair value.
NET (LOSS) INCOME PER SHARE
Historical per share data has not been presented because it is not meaningful
due to the material changes in the Company's capital structure as a result of
the Offering.
The Company has adopted Statement of Financial Accounting Standards No. 128
("FAS 128") and has restated pro forma net income per share for the years
ended December 31, 1996 and 1995. Because the impact of the Company's stock
options outstanding as of December 31, 1997 is antidilutive, diluted net
income per share is not presented for 1997. There were no dilutive stock
options on a pro forma basis for 1996 and 1995.
F-10
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. BACKGROUND, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
NET (LOSS) INCOME PER SHARE (CONTINUED)
Pro forma shares of common stock outstanding for the years ended December 31,
1997 and 1996 include all shares outstanding after giving effect to the
1,765.923 to 1 stock split, the issuance of stock grants, the issuance and
exercise of substitute stock options and the conversion of the Series U and
Series V preferred stock. In addition, shares issued to the public in
connection with the Offering have been weighted for the period of time they
were outstanding. Pro forma shares of common stock outstanding for the year
ended December 31, 1995 include all shares outstanding after giving effect to
the 1,765.923 to 1 stock split.
The following table sets forth the computation of net (loss) income per pro
forma share of common stock outstanding:
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net (loss) income $ (2,797) $ 2,175 $ 761
---------- ---------- ----------
---------- ---------- ----------
Pro forma shares of common stock
before shares issued in the
Offering - restated for 1996
and 1995 3,642,131 3,642,131 1,765,923
Shares issued in the Offering,
weighted for period outstanding 4,433,733 - -
---------- ---------- ----------
Pro forma weighted average shares
- restated for 1996 and 1995 8,075,864 3,642,131 1,765,923
---------- ---------- ----------
---------- ---------- ----------
Pro forma net (loss) income per
pro forma share - restated for
1996 and 1995 $ (0.35) $ 0.60 $ 0.43
---------- ---------- ----------
---------- ---------- ----------
Pro forma dividends declared per
share - restated for 1996 and
1995 $ 1.60 $ 0.87 $ 0.51
---------- ---------- ----------
---------- ---------- ----------
F-11
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. BACKGROUND, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INCOME TAXES
As a REIT, the Company is not subject to federal income taxation as long as
it meets a number of organizational and operational requirements and
distributes all of its taxable income to its stockholders. Since the Company
believes it has met these requirements and the Company's distributions
exceeded taxable income, no federal income tax provision has been reflected
in the accompanying consolidated financial statements for 1997 and 1996. If
the Company fails to qualify as a REIT in any taxable year, the Company will
be subject to federal income tax on its taxable income at regular corporate
tax rates. For the year ended December 31, 1997, the Company reported that
37.6% of its distributions with respect to common stock represented a return
of capital for federal income tax purposes, while none of the distributions
for the year ended December 31, 1996 represented a return of capital.
For the year ended December 31, 1995, before the Company elected to be taxed
as a REIT, deferred income taxes were recognized for tax consequences of
temporary differences resulting from income and expense items reported for
financial accounting and tax purposes in different periods and tax net
operating loss carryforwards.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. RENTAL PROPERTIES
Rental properties are as follows:
DECEMBER 31
1997 1996
------------------------
(DOLLARS IN THOUSANDS)
Land $ 46,283 $ 28,383
Building and improvements 189,624 121,236
Tenant and other improvements 2,867 1,535
------------------------
238,774 151,154
Less accumulated depreciation (8,804) (4,194)
------------------------
$229,970 $146,960
------------------------
------------------------
F-12
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. RENTAL PROPERTIES (CONTINUED)
Four of the Company's rental properties are encumbered by deeds of trust and
assignments of rents and leases associated with the properties (see Note 4).
The net book value of these properties as of December 31, 1997 is $70,663,000.
The Company leases space under noncancelable leases with remaining terms of 1
to 20 years. Certain tenants are also obligated to reimburse the Company for
specific operating expenses.
The Company capitalizes interest to properties under construction and
renovation during the period the asset is undergoing activities to prepare it
for its intended use. Total interest capitalized was $96,000 in 1997. Total
interest incurred for the years ended December 31, 1997, 1996 and 1995 was
$7,139,000, $6,327,000 and $3,553,000, respectively.
A majority of the Company's lease agreements require that the lessee pay all
taxes, maintenance, insurance and certain other operating expenses applicable
to the leased properties.
Minimum lease payments to be received under the terms of the operating lease
agreements, excluding expense reimbursements, as of December 31, 1997, are as
follows (in thousands):
1998 $ 31,642
1999 27,734
2000 24,079
2001 20,869
2002 17,095
Thereafter 107,032
--------
$228,451
--------
--------
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. UNSECURED LINE OF CREDIT
In connection with the Offering, the Company obtained an unsecured line of
credit providing for borrowings of up to $150,000,000, consisting of a
$100,000,000 activated portion and a $50,000,000 portion that may be activated
as needed at the Company's discretion (upon the payment of an activation fee)
provided no default exists under the line of credit facility. Borrowings under
the line of credit bear interest at a floating rate which is 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
F-13
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. UNSECURED LINE OF CREDIT (CONTINUED)
advance, the Company must elect to fix the rate for a one, two, three or six
month period.
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). The
Company was in compliance with all covenants as of December 31, 1997. 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 credit will
increase. As of December 31, 1997, borrowings under the line of credit were
limited to approximately $103,000,000, and $23,000,000 was outstanding
(leaving $80,000,000 available), at a weighted average rate of interest of
6.9%.
The line of credit expires on May 31, 2000 and provides for annual extensions
(provided there is no default) for two additional one-year periods. 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.
In connection with obtaining the line of credit, the Company incurred
$705,000 in fees and costs, which are being amortized over the term of the
line of credit. In addition, the Company is required to continue to pay
certain periodic fees for the line of credit, depending on the usage of the
facility. The fees are included as part of interest expense.
4. SECURED NOTES PAYABLE
As of December 31, 1997, the Company had three notes payable to banks and an
insurance company, secured by first and second deeds of trust on four rental
properties. The notes bear interest at fixed rates ranging from 7.17% to
9.00% and are due at various dates through 2016. As of December 31, 1997 and
1996, the outstanding balances under these notes were $47,817,000 and
$61,292,000, respectively.
As of December 31, 1996, the Company had an aggregate of $51,890,000
outstanding under two notes payable and two secured lines of credit with
PaineWebber Incorporated, the City of Seattle and two banks. The loans bore
interest at variable rates based upon LIBOR or the prime rate. As of December
31, 1996, the interest rates on these loans ranged from 8.28% to 9.75%. In
connection with the Offering, the Company repaid $46,030,000 of the balance
outstanding as of December 31, 1996. The remaining
F-14
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. SECURED NOTES PAYABLE (CONTINUED)
$5,860,000 was repaid in November 1997. In connection with the retirement of
these loans, the Company wrote-off $2,147,000 of unamortized loan costs,
including the cost of certain interest rate cap agreements.
Future principal payments due on secured notes payable as of December 31,
1997, are as follows (in thousands):
1998 $ 1,009
1999 2,451
2000 2,320
2001 2,502
2002 2,699
Thereafter 36,836
-------
$47,817
-------
-------
5. NON-CASH TRANSACTIONS
Stock compensation expense represents non-cash compensation expense
associated with stock grants and stock options issued to officers, directors
and certain employees of the Company in connection with the Offering. Stock
compensation expense of $4,239,000 was recognized to record the stock grants
and the issuance and exercise of substitute stock options (see Note 8).
In connection with the Offering, outstanding shares of the Company's Series U
preferred stock and Series V preferred stock were converted into shares of
common stock (see Note 6). The common stock issued was recorded at the book
value of the Series U preferred stock and the Series V preferred stock (an
aggregate of $27,061,000).
6. PREFERRED STOCK AND EXCESS STOCK
SERIES V CUMULATIVE CONVERTIBLE PREFERRED STOCK
Prior to the Offering, the Company had 27,500 shares of manditorily
redeemable Series V cumulative convertible preferred stock outstanding. The
stated value of each share was $1,000. In connection with the Offering, the
shares were converted into 1,659,239 shares of common stock. The conversion
rate was computed to provide for an internal rate of return on the stated
value of each share, equal to 20% less the return previously received from
prior dividends.
F-15
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. PREFERRED STOCK AND EXCESS STOCK (CONTINUED)
SERIES V CUMULATIVE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Prior to conversion, Series V preferred stockholders were entitled to
dividends at an annual rate of 10% of the stated value per share during the
first twelve dividend periods or such larger amount as would be payable on an
as converted basis if the Series V preferred stock were converted to common
stock. Dividends were cumulative and payable in quarterly equal installments
on March 31, June 30, September 30, and December 31 of each year. Offering
costs associated with the issuance of the Series V preferred stock were
deducted from the proceeds of the issuance. Until the conversion of the
Series V preferred stock into shares of common stock in 1997, the Company
accreted the amount of the offering costs and the difference between the
minimum yield requirement on the Series V preferred stock (20% per annum) and
the minimum dividend payment as a charge to additional paid-in capital.
SERIES T AND SERIES U PREFERRED STOCK
Holders of each of the Series T and Series U preferred stock were entitled to
dividends at an annual rate of 8.5% of the stated value per share. In
connection with the Offering, all of the previously outstanding shares of
Series T preferred stock (12 shares) were redeemed at their stated value
($1,200 in the aggregate). In connection with the Offering, all of the
previously outstanding shares of Series U preferred stock (220 shares) were
converted into an aggregate of 7,354 shares of common stock.
PREFERRED STOCK AND EXCESS STOCK AUTHORIZATIONS
The charter of the Company authorizes the issuance of up to 100,000,000
shares of preferred stock and 200,000,000 shares of excess stock (as
defined), none of which was issued and outstanding at December 31, 1997.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company currently is not subject to any material legal proceedings or
claims, nor, to management's knowledge, are any material legal proceedings or
claims being threatened.
F-16
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
POST-RETIREMENT BENEFIT
In 1997, in connection with the Offering, an officer of the Company retired.
In connection with the officer's retirement, the Company agreed to pay a
post-retirement benefit equal to $150,000 for each of the first three years
following the Offering, and $90,000 per year (plus an annual increase of 2%
per year) thereafter for the remainder of the longer of the executive's life
and the executive's current spouse's life. In 1997 and 1996, the Company
recorded a post-retirement expense for past services equal to $632,000 and
$438,000, respectively (pursuant to a prior agreement). The accrual was based
upon the estimated number of payments to be made, discounted at a rate of 8%.
As of December 31, 1997, the accrued liability for post-retirement benefit is
$1,037,000. For the year ended December 31, 1997, the Company paid $75,000
under the retirement agreement of which $42,000 represented interest.
EMPLOYEE RETIREMENT SAVINGS PLAN
Effective January 1, 1997, the Company adopted a retirement savings plan
pursuant to Section 401(k) of the Internal Revenue Code ("Code"), whereby
participants may contribute a portion of their compensation to their
respective retirement accounts, in an amount not to exceed the maximum
allowed under the Code. The plan provides for matching contributions by the
Company, which amounted to $36,000 for the year ended December 31, 1997. Plan
participants are immediately vested in their contributions and in the
matching contributions by the Company.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash and cash equivalents at insured financial
institutions. The combined account balances at each institution periodically
exceed FDIC insurance coverage, and, as a result, there is a concentration of
credit risk related to amounts in excess of FDIC insurance coverage.
Management believes that the risk is not significant.
The Company is dependent on rental payments from a limited number of tenants,
and the inability of any single tenant to make its lease payments could
adversely affect the Company and its ability to make distributions to
stockholders. As of December 31, 1997, the Company had 42 leases with a total
of 35 tenants, and 12 of the Company's 22 properties were single tenant
properties. At December 31, 1997, three of the Company's tenants accounted
for approximately 29.5% of the Company's aggregate annualized base rent.
F-17
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONCENTRATION OF CREDIT RISK (CONTINUED)
The Company does not generally require collateral or other security from its
tenants other than security deposits. The Company has available from certain
tenants two irrevocable letters of credit totaling $858,000 which are used as
security deposits for two leases.
8. STOCK OPTION PLANS AND STOCK GRANTS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee and director stock options,
stock grants and stock appreciation rights. Under APB 25, if the exercise
price of employee and director stock options granted by the Company equals
the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
1997 STOCK OPTION PLAN
In connection with the Offering, the Company adopted a stock option and
incentive plan (the "1997 Stock Option Plan"). The 1997 Stock Option Plan is
administered by the Compensation Committee of the Board of Directors and
provides for the grant of incentive stock options intended to qualify as such
under Section 422 of the Code, non-qualified stock options, stock
appreciation rights and restricted stock to employees, officers, directors
and independent contractors (including non-employee directors) of the Company
with respect to 900,000 shares of common stock. The 1997 Stock Option Plan
permits the Compensation Committee to select eligible employees, officers,
directors and independent contractors (including non-employee directors) of
the Company to receive awards, to determine the type and number of awards to
be granted and to determine the terms, conditions, restrictions and
performance criteria relating to any award. As of December 31, 1997, there
were 701,000 options outstanding under the 1997 Stock Option Plan. The
Company has reserved 900,000 shares of common stock for issuance under the
1997 Stock Option Plan.
During the year ended December 31, 1997, the Company granted 701,000 stock
options under the 1997 stock option plan at exercise prices ranging from
$20.00 to $30.94 (the market price at date of grant). All of these options
have a ten year term. Options for 671,000 shares vest ratably in three annual
installments from the date of grant. The
F-18
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTION PLANS AND STOCK GRANTS (CONTINUED)
1997 STOCK OPTION PLAN (CONTINUED)
remaining 30,000 options (which were issued to non-employee directors) were
exercisable immediately upon the date of grant.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options
under the fair value method. The fair value of the options issued under the
1997 Stock Option Plan was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997: risk-free interest rate of 5.82%; dividend yield
ranging from 5.17% to 8%; volatility factor of the expected market price of
the Company's common stock of 28.7%; and a weighted average expected life of
the option of five years.
For purposes of the following pro forma disclosures for the year ended
December 31, 1997, the estimated fair value of these options has been
amortized to expense over the vesting periods (in thousands, except per share
information):
Pro forma net loss $ (3,096)
---------
---------
Pro forma net loss per share $ (0.38)
---------
---------
A summary of the Company's stock option activity under the 1997 Stock Option
Plan, and related information for the year ended December 31, 1997 follows:
WEIGHTED
AVERAGE
STOCK EXERCISE
OPTIONS PRICE OF
GRANTED OPTIONS
---------------------------
Outstanding-beginning of year -
Granted 701,000 $ 20.80
Exercised - -
Forfeited - -
---------------------------
Outstanding-end of year 701,000 $ 20.80
---------------------------
---------------------------
Exercisable at end of year 30,000 $ 20.00
---------------------------
---------------------------
Weighted-average per share fair value
of options granted during the year
based upon the minimum value method $ 2.93
-----------
-----------
F-19
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTION PLANS AND STOCK GRANTS (CONTINUED)
1997 STOCK OPTION PLAN (CONTINUED)
Exercise prices for options outstanding as of December 31, 1997 range from
$20.00 to $30.94. The weighted average contractual life of those options is
9.5 years.
PRIOR STOCK OPTION PLAN
Prior to the Offering, the Company had a ten-year incentive and nonqualified
stock option plan (the "Prior Plan") for certain employees and non-employee
directors of the Company.
Under the Prior Plan, holders of options to purchase common stock of Holdings
granted under stock option plans of Holdings ("Holdings Stock Options") were
eligible, under certain circumstances (including the Offering), to receive
substitute stock options of the Company in substitution for previously
granted Holdings Stock Options. As such, in connection with the Offering,
officers, directors and certain employees of the Company received substitute
stock options to purchase 57,000 shares of common stock of the Company under
the Prior Plan. Such substitute stock options were exercised in connection
with the Offering at a nominal exercise price. No further stock options were
issued under the Prior Plan. In connection with the issuance of the
substitute stock options, the Company recognized $1,187,000 of stock
compensation expense.
The following table sets forth certain information regarding activity in
Holdings Stock Options, including (i) the grant date of the Holdings Stock
Options, (ii) the number of substitute stock options that were granted in
connection with the Offering in substitution for the underlying Holdings Stock
Options and (iii) the weighted average exercise price of substitute stock
options for shares of the Company's common stock.
F-20
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTION PLANS AND STOCK GRANTS (CONTINUED)
PRIOR STOCK OPTION PLAN (CONTINUED)
For the Year Ended December 31,
----------------------------------------------------------------------------------
1997 1996
---------------------------------------- ----------------------------------------
Weighted- Weighted-
Grant Date Substitute Average Grant Date Substitute Average
of Holdings Stock Exercise price of Holdings Stock Exercise price
Stock Options of Substitute Stock Options of Substitute
Options General (1) Options Options General (1) Options
----------- ----------- -------------- ----------- ----------- --------------
Outstanding - beginning of year 37,749 $ 0.54 78,935 $ 0.54
Granted 1/28/97 19,251 0.54 7/1/96 1,756 0.54
Exercised (57,000) (0.54) (42,942) 0.54
Forfeited - - - -
----------- -------------- ----------- --------------
Outstanding - end of year - - 37,749 $ 0.54
----------- -------------- ----------- --------------
----------- -------------- ----------- --------------
Exercisable at end of year - - 13,606 $ 0.54
----------- -------------- ----------- --------------
----------- -------------- ----------- --------------
Weighted-average fair value of
options granted during the
year based upon the minimum
value method $ 0.93 $ 0.03
-------------- --------------
-------------- --------------
For the Year Ended December 31,
----------------------------------------
1995
----------------------------------------
Weighted-
Grant Date Substitute Average
of Holdings Stock Exercise price
Stock Options of Substitute
Options General (1) Options
------------ ----------- -------------
Outstanding - beginning of year 51,727 $ 0.54
Granted 12/31/95 27,208 0.54
Exercised - -
Forfeited - -
----------- -------------
Outstanding - end of year 78,935 $ 0.54
----------- -------------
----------- -------------
Exercisable at end of year 35,384 $ 0.54
----------- -------------
----------- -------------
Weighted-average fair value of
options granted during the
year based upon the minimum
value method $ 0.04
-------------
-------------
(1) The grant of substitute stock options was made in May 1997.
No compensation expense was recorded with respect to Holdings Stock
Options issued during the years ended December 31, 1996 and 1995
since they were issued with an exercise price equal to the then fair
market value of the Holdings common stock.
STOCK GRANTS
In connection with the Offering, officers, directors and certain
employees of the Company were granted on aggregate of 152,615 shares
of common stock. As a result of the grants, the Company recorded
stock compensation expense of $3,052,000.
F-21
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. PURCHASE OF ACQUISITION LLC
During January 1997, the Company assigned its rights to purchase three Life
Science Facilities to an entity owned by affiliates of PaineWebber
Incorporated ("PaineWebber"), the lead managing underwriter of the Offering
(the "Acquisition LLC"). In January 1997, the Acquisition LLC acquired the
three Life Science Facilities for $51,871,000 from unaffiliated sellers. In
connection with the Offering, the Company acquired 100% of the membership
interests in the Acquisition LLC from the PaineWebber affiliates.
The Company's purchase price for the membership interests ($58,844,000)
exceeded the cost incurred by the Acquisition LLC to acquire the properties
($51,871,000). The Company's acquisition of the membership interests in the
Acquisition LLC has been recorded as a financing transaction, with the excess
of the purchase price of such membership interests over the cost of the
Acquisition LLC to acquire the properties ($6,973,000) being reflected as a
financing cost in the accompanying consolidated statement of operations.
10. RELATED PARTY TRANSACTIONS
During 1997, 1996 and 1995, the Company incurred $3,358,000, $1,708,000 and
$369,000, respectively, for legal services provided by a firm of which a
minority shareholder of Holdings is a member.
During 1996, Holdings advanced to the Company $2,483,000 bearing interest at a
rate of 10% per annum which was due on demand. For the year ended December 31,
1996, $162,000 of interest was accrued and $42,000 was paid on this advance.
During 1997 in connection with the Offering, the Company repaid this advance
plus accrued interest.
F-22
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of consolidated financial information on a quarterly
basis for 1997 and 1996:
QUARTER
---------------------------------------------------
FIRST SECOND THIRD FOURTH
---------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997
Revenues $ 7,161 $ 7,743 $ 9,677 $ 10,265
Net (loss) income $ (143) $(10,989) $ 4,126 $ 4,209
Net (loss) income per pro forma share
(restated for the first and second
quarters)
-basic $ (0.04) $ (1.80) $ 0.36 $ 0.37
-diluted $ (0.04) $ (1.80) $ 0.36 $ 0.36
1996
Revenues $ 2,610 $ 3,163 $ 5,411 $ 6,489
Net income $ 319 $ 448 $ 691 $ 717
Net income per pro forma share
(restated) $ 0.09 $ 0.12 $ 0.19 $ 0.20
12. SUBSEQUENT EVENTS (UNAUDITED)
On various dates subsequent to December 31, 1997 (through March 27, 1998), the
Company acquired 11 Life Science Facilities containing an aggregate of 927,000
rentable square feet for an aggregate purchase price of $109,875,000 and made
a $6,000,000 loan secured by real estate related to one of these Life Science
Facilities. Of these amounts, $103,000,000 was funded through draws on the
Company's line of credit, $12,641,000 through the assumption of existing debt,
and the remainder with working capital.
F-23
Alexandria Real Estate Equities, Inc. and Subsidiaries
Schedule III
Consolidated Financial Statement Schedule of Rental Properties and Accumulated
Depreciation
December 31, 1997
(IN THOUSANDS, EXCEPT SQUARE FOOT DATA)
COSTS
INITIAL COSTS CAPITALIZED TOTAL COSTS
----------------------- SUBSEQUENT TO ---------------------------------
SQUARE BUILDINGS AND ACQUISITION BUILDINGS AND
PROPERTY NAME FOOTAGE LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ---------------------------------------------------------------------------------------------------------------------
10933 N. Torrey Pines 108,133 $ 3,903 $ 5,960 $1,071 $ 3,903 $ 7,031 $ 10,934
11099 N. Torrey Pines 86,962 2,663 10,649 1,620 2,663 12,269 14,932
3535 General Atomics Court 76,084 2,651 18,046 152 2,651 18,198 20,849
3565 General Atomics Court 43,600 1,227 9,554 - 1,227 9,554 10,781
11025 Roselle Street 18,532 463 1,840 8 463 1,848 2,311
Fred Hutchinson 213,397 6,566 23,528 1,502 6,566 25,030 31,596
1311 Harbor Bay Parkway 30,000 775 1,917 134 775 2,051 2,826
1401 Harbor Bay Parkway 47,777 1,200 3,880 35 1,200 3,915 5,115
1431 Harbor Bay Parkway 70,000 1,800 9,731 87 1,800 9,818 11,618
1201 Harbor Bay Parkway 61,100 1,507 5,357 132 1,507 5,489 6,996
1413 Research Boulevard 105,000 2,317 9,611 322 2,317 9,933 12,250
300 Professional Drive 48,440 871 5,362 17 871 5,379 6,250
401 Professional Drive 62,739 1,129 6,940 20 1,129 6,960 8,089
25/35/45 West Watkins 138,938 3,281 14,416 50 3,281 14,466 17,747
1550 East Guide Drive 44,500 775 4,122 149 775 4,271 5,046
1330 Piccard Drive 131,511 2,800 11,533 196 2,800 11,729 14,529
14225 Newbrook Drive 248,186 4,800 27,639 356 4,800 27,995 32,795
708 Quince Orchard 49,225 1,267 3,031 487 1,267 3,518 4,785
940 Clopper Road 44,464 900 2,732 87 900 2,819 3,719
1401 Research Boulevard 48,800 1,533 4,391 104 1,533 4,495 6,028
1500 East Gude Drive 45,989 690 3,609 55 690 3,664 4,354
3 & 3 1/2 Taft Court 24,460 367 1,949 37 367 1,986 2,353
John Hopkins Court - 2,798 - 73 2,798 73 2,871
----------------------------------------------------------------------------------
1,747,837 $46,283 $185,797 $6,694 $46,283 $192,491 $238,774
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
ACCUMULATED YEAR
PROPERTY NAME DEPRECIATION(1) ENCUMBRANCES BUILT
- ------------------------------------------------------------------------------
10933 N. Torrey Pines $ 908 $ - 1971/1994
11099 N. Torrey Pines 1,484 - 1986/1996
3535 General Atomics Court 1,910 11,868 1991
3565 General Atomics Court 969 6,182 1991
11025 Roselle Street 2 - 1993
Fred Hutchinson 1,031 21,267 1975/1997
1311 Harbor Bay Parkway 55 - 1984
1401 Harbor Bay Parkway 110 - 1986/1994
1431 Harbor Bay Parkway 271 8,500 1985/1994
1201 Harbor Bay Parkway 13 - 1983
1413 Research Boulevard 371 - 1967/1996
300 Professional Drive 182 - 1989
401 Professional Drive 240 - 1987
25/35/45 West Watkins 458 - 1989/1997
1550 East Guide Drive 68 - 1981
1330 Piccard Drive 179 - 1978
14225 Newbrook Drive 431 - 1992
708 Quince Orchard 34 - 1992
940 Clopper Road 28 - 1989
1401 Research Boulevard 42 - 1966
1500 East Gude Drive 12 - 1981
3 & 3 1/2 Taft Court 6 - 1981
John Hopkins Court - -
-----------------------
$8,804 $47,817
-----------------------
-----------------------
(1) The depreciable life for buildings and improvements ranges from 30 to 40
years, 20 years for land improvements, and the term of the respective lease for
tenant improvement.
F-24
A summary of activity of consolidated rental properties and accumulated
depreciation is as follows:
RENTAL PROPERTIES
DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
Balance at beginning of period $151,154 $ 56,254 $54,700
Improvements 3,566 1,578 1,554
Acquisition of land, building and improvements 84,054 93,322 -
-------- -------- -------
Balance at end of period $238,774 $151,154 $56,254
-------- -------- -------
-------- -------- -------
ACCUMULATED DEPRECIATION
DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
Balance at beginning of period $4,194 $1,901 $ 333
Depreciation expense 4,610 2,293 1,568
------ ------ ------
Balance at end of period $8,804 $4,194 $1,901
------ ------ ------
------ ------ ------
F-25