Item 1. Business
General
We are a Maryland corporation formed in October 1994 that has elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes. We are engaged primarily in the ownership, operation, management, acquisition, expansion and selective redevelopment and development of high quality, strategically located properties containing office and laboratory space designed and improved for lease principally to pharmaceutical, biotechnology, life science product and services companies, not-for-profit scientific research institutions, universities and related government agencies (collectively, the "life science industry"). Properties leased to tenants in the life science industry typically consist of suburban office buildings containing scientific research and development laboratories and other improvements that are generic to tenants operating in the life science industry. We refer to such properties as "life science facilities." As of December 31, 2003, we owned 89 properties (collectively, the "properties"), containing approximately 5.7 million rentable square feet of office and laboratory space.
Business and Growth Strategy
We focus our property operations and investment activities principally in the following life science markets:
California (in the San Diego, Pasadena and San Francisco Bay areas).
Seattle.
suburban Washington D.C. (including Maryland and Virginia).
eastern Massachusetts.
New Jersey and suburban Philadelphia.
the Southeast (including North Carolina and Georgia).
Our tenant base is broad and diverse within the life science industry and reflects our focus on regional, national and international tenants with substantial financial and operational resources. For a detailed description of our properties and tenants, see "Item 2.
Item 2. Properties
General.
Our properties range in size from approximately 15,000 to 248,000 square feet, are built to accommodate single or multiple tenants and are generally one or two story concrete tilt-up, block and/or steel frame structures. The exteriors typically resemble traditional suburban office properties, but interior infrastructures are designed to accommodate the needs of life science industry tenants. These improvements typically are generic to life science industry tenants rather than being specific to a particular tenant. As a result, we believe that the improvements have long-term value and utility and are usable by a wide range of life science industry tenants. Generic infrastructure improvements include:
reinforced concrete floors.
upgraded roof loading capacity.
increased floor to ceiling heights.
heavy-duty HVAC systems.
enhanced environmental control technology.
significantly upgraded electrical, gas and plumbing infrastructure.
laboratory benches.
We own fee simple title in each of our properties, except with respect to:
three properties in the San Francisco Bay area (Harbor Bay Parkway #2, Harbor Bay Parkway #3 and Harbor Bay Parkway #4), in which we own a commercial condominium interest, together with an undivided interest in the common areas of the project of which the property is a part; and
the properties at Garcia Avenue & Bayshore Parkway, Hanover Street, Alexander Road, Charlestown Navy Yard, Virginia Manor Road and Porter Drive, in which we own ground leasehold interests.
As of December 31, 2003, we had 208 leases with a total of 179 tenants, and 50 of our properties were single-tenant properties. Leases in our multi-tenant buildings typically have terms of three to seven years, while the single-tenant building leases typically have initial terms of 10 to 20 years. As of December 31, 2003:
approximately 88% of our leases (on a square footage basis) were triple net leases, requiring tenants to pay substantially all real estate taxes and insurance, common area and other operating expenses (including increases thereto) in addition to base rent, and, in addition to our triple net leases, approximately 7% of our leases (on a square footage basis) required the tenants to pay a majority of operating expenses;
approximately 93% of our leases (on a square footage basis) contained effective annual rent escalations that are either fixed (generally ranging from 3% to 3.5%) or indexed based on a consumer price index or other index; and
approximately 91% of our leases (on a square footage basis) provided for the recapture of certain capital expenditures (such as HVAC systems maintenance and/or replacement, roof replacement and parking lot resurfacing), which we believe would otherwise typically be borne by the landlord in traditional office leases.
Our leases also typically give us the right to review and approve tenant alterations to the property. Generally, tenant-installed improvements to the facilities remain our property after termination of the lease at our election. However, we are permitted under the terms of most of our leases to require that the tenant remove the improvements and restore the premises to their original condition.
As of December 31, 2003, we managed all of our properties.
The following table sets forth information with respect to our properties as of December 31, 2003:
Annualized Percentage Annualized Net of Base Effective Aggregate Rent Per Rent Per Rentable Annualized Portfolio Leased Leased Year Built/ Square Percentage Base Annualized Square Square Properties Renovated (1) Feet Leased (2) Rent (2) (3) Base Rent Foot (3) Foot (4) Major Tenants ---------------------------------------------- ---------- ---------- ------------ --------- --------- --------- --------------------------------------- San Diego
North Torrey Pines Road #1 1971/2003 107,710 78% $2,430,345 1.8% $28.76 $28.00 Smith & Nephew plc San Diego, CA
Science Park Road 2000 74,557 100% 2,309,667 1.7% 30.98 20.95 Biogen Idec Inc. San Diego, CA
North Torrey Pines Road #2 1986/1996 86,962 100% 2,972,236 2.2% 34.18 32.80 Senomyx, Inc. San Diego, CA
General Atomics Court #1 1986/2000 76,084 100% 2,683,633 2.0% 35.27 34.28 Merck & Co., Inc. San Diego, CA
General Atomics Court #2 1991 43,600 100% 1,805,198 1.4% 41.40 41.37 Pfizer Inc. San Diego, CA
Roselle Street #1 1983/1998 18,173 100% 507,698 0.4% 27.94 27.70 Schering AG San Diego, CA
Nexus Centre Drive 1989 67,050 100% 2,236,108 1.7% 33.35 33.25 Cardinal Health, Inc. San Diego, CA
Nancy Ridge Drive #1 1997 29,333 100% 638,606 0.5% 21.77 15.44 Arena Pharmaceuticals, Inc. San Diego, CA
Roselle Street #2 late 17,603 100% 476,944 0.4% 27.09 23.81 Structural GenomiX, Inc. San Diego, CA 1970's/1999
Tansy Street 1978/1999 15,410 100% 409,171 0.3% 26.55 20.78 Structural GenomiX, Inc. San Diego, CA
John Hopkins Court #1 2000 34,723 100% 671,101 0.5% 19.33 16.79 Merck & Co., Inc. San Diego, CA
John Hopkins Court #2 1999 55,200 100% 1,096,769 0.8% 19.87 18.33 Merck & Co., Inc. San Diego, CA
Towne Centre Drive #1 1987/2003 45,030 100% 1,517,581 1.1% 33.70 25.71 Amylin Pharmaceuticals, Inc. San Diego, CA
Towne Centre Drive #2 1987/2000 52,228 100% 1,527,863 1.1% 29.25 27.58 Amylin Pharmaceuticals, Inc. San Diego, CA Vical Incorporated
Towne Centre Drive #3 1987/2000 41,780 88% 1,087,586 0.8% 29.57 25.72 Conforma Therapeutics, Inc. San Diego, CA TargeGen, Inc.
Roselle Street #3 1981 17,590 0% - 0.0% - - Vacant San Diego, CA
Roselle Street #4 1981/1998 30,147 78% 585,362 0.4% 24.80 24.00 Integra Life Sciences Holdings Corporation San Diego, CA
Roselle Street #5 1981/1995 22,577 100% 639,241 0.5% 28.31 27.61 Cell Geneysys, Inc. San Diego, CA
Roselle Street #6 1981/1999 17,433 100% 249,323 0.2% 14.30 14.29 Biosite Incorporated San Diego, CA
Roselle Street #7 1981/1995 24,208 100% 685,421 0.5% 28.31 27.62 Cell Geneysys, Inc. San Diego, CA
Nancy Ridge Drive #2 early 1980's/ 21,940 100% 481,443 0.4% 21.94 14.98 GeneOhm Sciences, Inc. San Diego, CA 2001
Nancy Ridge Drive #3 1987/2001 56,698 100% 1,586,011 1.2% 27.97 27.97 Arena Pharmaceuticals, Inc. San Diego, CA
Campus Point Drive 1986/1998 71,510 100% 2,390,948 1.8% 33.44 33.44 LION bioscience, Inc. San Diego, CA
Pasadena
North Hill Avenue 1940's/2002 31,343 46% 392,878 0.3% 27.39 25.09 Biocatalytics, Inc. Pasadena, CA
San Francisco Bay Area
Harbor Bay Parkway #1 1983/1999 61,015 100% 1,282,826 1.0% 21.02 19.51 Avigen, Inc. Alameda, CA MiraiBio, Inc.
Harbor Bay Parkway #2 1984/2000 27,745 100% 654,910 0.5% 23.60 18.14 Berkeley HeartLab, Inc. Alameda, CA Applera Corporation
Harbor Bay Parkway #3 1986/1994 47,777 100% 968,645 0.7% 20.27 18.53 Applera Corporation Alameda, CA
Harbor Bay Parkway #4 1985/1994 68,711 100% 1,415,246 1.1% 20.60 19.66 U.S. Food & Drug Administration Alameda, CA
Mitten Road & Malcolm Road (5) 1962/2002 153,837 77% 2,600,817 2.0% 21.98 18.28 Valentis, Inc. (6) Burlingame, CA Berkeley HeartLab, Inc. U.S. Federal Aviation Administration
Hanover Street (6) 1968/2000 32,074 66% 805,173 0.6% 38.21 34.83 Nanosys, Inc. (6) Palo Alto, CA
Garcia Avenue & Bayshore 1980/2003 98,964 78% 2,291,493 1.7% 29.51 27.07 Google Inc. (6) Parkway (6) Vitra Bioscience, Inc. Mountain View, CA
Oyster Point Boulevard #1 2001 53,980 100% 2,812,914 2.1% 52.11 41.33 Sunesis Pharmaceuticals, Inc. S. San Francisco, CA
Oyster Point Boulevard #2 2001 53,980 100% 1,650,085 1.2% 30.57 27.44 diaDexus, Inc. S. San Francisco, CA
Gateway Boulevard #1 2000 110,428 100% 3,765,339 2.8% 34.10 34.10 Theravance, Inc. San Francisco, CA
Gateway Boulevard #2 2002 59,816 100% 2,371,062 1.8% 39.64 35.44 Theravance, Inc. San Francisco, CA
Harbor Bay Parkway #5 1984/2001 67,482 100% 1,505,894 1.1% 22.32 22.32 Avigen, Inc. Alameda, CA
Porter Drive 1962/2002 91,644 100% 3,491,353 2.6% 38.10 38.10 Telik, Inc. Palo Alto, CA
Seattle
Columbia Street #1 1975/1997 163,235 99% 5,501,569 4.1% 33.88 30.34 Corixa Corporation Seattle, WA nura, Inc.
Columbia Street #2 (6) 1975/1997 46,303 51% 371,684 0.3% 15.72 14.44 Corixa Corporation (6) Seattle, WA Anawah, Inc.
Western Avenue 1929/2000 47,746 100% 1,576,856 1.2% 33.03 28.38 University of Washington Seattle, Washington
First Avenue 1980/2000 70,647 100% 2,532,667 1.9% 35.85 29.41 Dendreon Corporation Seattle, Washington
Eastlake Avenue #1 1997 106,003 100% 4,387,383 3.3% 41.39 41.35 ZymoGenetics, Inc. Seattle, Washington
Eastlake Avenue #2 1997 52,333 100% 2,166,023 1.6% 41.39 41.36 ZymoGenetics, Inc. Seattle, Washington
Suburban Washington, D.C.
Professional Drive #1 1989/1999 47,558 74% 878,128 0.7% 24.87 16.37 BioPort Corporation Gaithersburg, MD Wisor Telecom, Inc.
Professional Drive #2 1987 62,739 100% 1,109,289 0.8% 17.68 17.66 The Gillette Company Gaithersburg, MD
West Watkins Mill Road #1 1989/1997 138,938 100% 2,732,255 2.0% 19.67 18.32 MedImmune, Inc. Gaithersburg, MD Wellstat Biologics, Inc.
Quince Orchard Road #1 1982/1997 49,225 100% 1,461,699 1.1% 29.69 18.32 Gene Logic Inc. Gaithersburg, MD
Clopper Road #1 1989 44,464 100% 770,387 0.6% 17.33 14.98 Immunomatrix, Inc. Gaithersburg, MD Fiserv
Research Boulevard 1967/2000 105,000 100% 2,175,071 1.6% 20.71 20.04 U.S. Army Corps of Engineers Rockville, MD
East Gude Drive #1 1981/2003 45,989 100% 755,442 0.6% 16.43 14.75 bioMerieux SA Rockville, MD MacroGenics, Inc.
East Gude Drive #2 1981/1995 44,500 100% 775,000 0.6% 17.42 16.51 Shire Pharmaceuticals Group plc Rockville, MD
Piccard Drive (6) 1978/1994 131,415 48% 1,909,294 1.4% 29.97 27.41 Biosciences Laboratories, Inc. (bioMerieux SA) ( Rockville, MD Midwest Research Institute, Inc.
Newbrook Drive 1992 248,186 100% 4,341,125 3.3% 17.49 17.49 Quest Diagnostics Incorporated Chantilly, VA
Virginia Manor Road 1990/2003 191,884 95% 2,287,524 1.7% 12.58 11.85 Baxter International Inc. Beltsville, MD Bank of America
Old Columbia Road 1983/1997 75,500 100% 1,002,941 0.8% 13.28 10.24 Baxter International Inc. Columbia, MD
Firstfield Road #1 1974/2000 25,175 55% 371,782 0.3% 27.01 26.26 Psychiatric Genomics, Inc. Gaithersburg, MD Tetracore, Inc.
Shady Grove Road (7) 1987 42,142 8% 88,169 0.1% 25.91 19.93 No major tenants (7) Rockville, MD
West Watkins Mill Road #2 1988/2000 57,410 100% 877,790 0.7% 15.29 12.66 Gene Logic Inc. Gaithersburg, MD
Clopper Road #2 2000 92,990 100% 2,634,285 2.0% 28.33 17.31 Digene Corporation Gaithersburg, MD
Firstfield Road #2 1980/2001 53,599 100% 1,347,099 1.0% 25.13 19.39 IOMAI Corporation Gaithersburg, MD Artesian Therapeutics, Inc.
Firstfield Road #3 1980/2003 53,595 61% 711,500 0.5% 21.89 17.96 Provident Bank of Maryland Gaithersburg, MD SAIC - Frederick, Inc.
Quince Orchard Road #2 1981/2003 54,874 100% 812,584 0.6% 14.81 14.37 Montgomery County, Maryland Gaithersburg, MD
Clopper Road #3 1989/1992 59,838 100% 813,334 0.6% 13.59 10.81 Wellstat Biologics, Inc. Gaithersburg, MD
Research Place 1972/2003 58,632 100% 1,087,040 0.8% 18.54 15.46 The Center For The Advancement of Rockville, MD Genomics
Eastern Massachusetts
Charlestown Navy Yard 1880/1991 24,940 100% 907,816 0.7% 36.40 36.17 GenVec, Inc. Charlestown, MA
Pond Street 1965/1990 24,867 0% - 0.0% - - Vacant Randolph, MA
Westview Street (6) 1975 40,000 0% - 0.0% - - Vacant (6) Lexington, MA
Plantation Street #1 1993 92,711 100% 2,174,315 1.6% 23.45 21.82 University of Massachusetts Worcester, MA Athena Diagnostics, Inc.
Innovation Drive 1991 113,956 77% 2,053,217 1.5% 23.37 21.16 ViaCell, Inc. Worcester, MA BioValve Technologies, Inc.
Plantation Street #2 2000 92,423 87% 2,029,473 1.5% 25.24 20.52 Abbott Laboratories Worcester, MA Hypnion, Inc.
Arsenal Street #1 1978/2001 92,500 100% 4,350,486 3.3% 47.03 36.38 Enanta Pharmaceuticals, Inc. Watertown, MA Acusphere, Inc.
Hartwell Avenue #1 1972/2002 59,000 100% 2,644,269 2.0% 44.82 33.63 TransForm Pharmaceuticals, Inc. Lexington, MA
Arsenal Street #2 (6) 1980/2003 96,150 31% 1,031,332 0.8% 34.83 28.91 EnVivo Pharmaceuticals (6) Watertown, MA Protein Forest, Inc.
Hartwell Avenue #2 (6) 1972 51,340 0% - 0.0% - - Vacant (6) Lexington, MA
Memorial Drive #1 2002 51,000 100% 3,330,755 2.5% 65.31 50.83 Infinity Pharmaceuticals, Inc. Cambridge, MA
Memorial Drive #2 2002 47,497 85% 2,725,665 2.0% 67.30 59.08 Infinity Pharmaceuticals, Inc. Cambridge, MA Alnylam Pharmaceuticals, Inc.
New Jersey/Suburban Philadelphia
College Road 1968/1984 106,036 100% 1,793,771 1.3% 16.92 15.45 Synaptic Pharmaceutical Corporation (8) Paramus, NJ Gryphon Development Corporation
Williams Drive 1982/1994 37,000 100% 536,500 0.4% 14.50 14.17 Alteon, Inc. Ramsey, NJ
Phillips Parkway late 1960's/ 78,501 100% 1,756,129 1.3% 22.37 14.38 Memory Pharmaceuticals Corp. Montvale, NJ 1999 Ferolie Corporation
Campus Drive 1989 42,782 100% 646,653 0.5% 15.12 14.43 Genaera Corporation Plymouth Meeting, PA Pharmerica, Inc. (9)
Electronic Drive 1983/1998 40,000 100% 937,527 0.7% 23.44 15.85 OSI Pharmaceuticals, Inc. Horsham, PA
Princeton Parkway 1984/1999 42,600 100% 580,320 0.4% 13.62 9.52 Lexicon Genetics, Inc. Princeton, NJ
Southeast
Capitola Drive #1 1986 65,114 33% 390,257 0.3% 18.81 15.22 Batelle Survey Research, Inc. Durham, NC Johnson Travel Corporation
Capitola Drive #2 (6) 1985 119,916 64% 1,534,354 1.2% 19.93 16.41 RAO Enterprises (dba Integrated Laboratory Durham, NC Systems) (6) Amphora Discovery Corporation
Technology Parkway 1976/1993 37,080 62% 301,099 0.2% 13.07 11.60 CytRx Corporation Norcross, GA Atherogenics, Inc.
Triangle Drive 1981 32,120 75% 408,659 0.3% 16.86 16.55 Mantech Environmental Technology, Inc. Research Triangle Park, NC
Alexander Road 2000 86,239 100% 1,849,188 1.4% 21.44 20.01 Paradigm Genetics, Inc. Research Triangle Park, NC
Kit Creek Road 1995/2003 38,861 97% 829,058 0.6% 22.08 11.96 Norak Biosciences, Inc. Research Triangle Park, NC A.M. Pappas & Associates, L.L.C. ---------- ---------- ------------ --------- --------- --------- Total/Weighted Average (10): 5,668,895 88.4%(11)$133,285,653 100.0% $26.61 $23.53 ========== ========== ============ ========= ========= =========
________________
Includes year in which construction was completed and, where applicable, year of most recent major renovation.
Based on all leases at the respective property in effect as of December 31, 2003.
Annualized base rent means the annualized fixed base rental amount in effect as of December 31, 2003 (using rental revenue computed on a straight-line basis in accordance with GAAP). This amount, divided by the rentable square feet leased at the property as of December 31, 2003, is the annualized base rent per leased square foot.
Annualized net effective rent is the annualized base rent in effect as of December 31, 2003 (using rental revenue computed on a straight-line basis in accordance with GAAP), less (for gross leases) real estate taxes and insurance, common area and other operating expenses and (for all leases) amortization of tenant improvements and leasing commissions. This amount, divided by the rentable square feet leased at the property as of December 31, 2003, is the annualized net effective rent per leased square foot.
Considered as two properties.
All or a portion of this property is currently under redevelopment.
As of December 31, 2003, the property was designated as "held for sale".
Synaptic Pharmaceutical Corporation is a wholly owned subsidiary of H. Lunbeck A/S..
PharMerica, Inc. is a wholly owned subsidiary of AmerisourceBergen Corporation.
Weighted average based on a percentage of aggregate leased square feet.
Weighted average percentage leased includes properties under redevelopment (see footnote 6). Excluding properties under redevelopment, the weighted average percentage leased is 94%.
Location of Properties
The following table sets forth, as of December 31, 2003, the total rentable square footage and annualized base rent of our properties in each of our existing markets.
% of Total % of Number of Total Rentable Rentable Annualized Annualized Geographic Area Properties Square Footage Square Footage Base Rent (1) Base Rent --------------- ---------- -------------- ------------- -------------- -----------
San Diego 23 1,027,546 18.1% $28,988,254 21.7%
Pasadena 1 31,343 0.5% 392,878 0.3%
San Francisco Bay Area 14 927,453 16.4% 25,615,758 19.2%
Seattle 6 486,267 8.6% 16,536,182 12.4%
Suburban Washington D.C 21 1,683,653 29.7% 28,941,737 21.7%
Eastern Massachusetts 12 786,384 13.9% 21,247,329 15.9%
New Jersey/Suburban Philadelphia 6 346,919 6.1% 6,250,900 4.7%
Southeast 6 379,330 6.7% 5,312,615 4.1% ---------- -------------- ------------- -------------- ----------- Total 89 5,668,895 100.0% $133,285,653 100.0% ========== ============== ============= ============== ===========
_______________
Annualized base rent means the annualized fixed base rental amount in effect as of December 31, 2003 (using rental revenue computed on a straight-line basis in accordance with GAAP).
Tenants
Our properties are leased principally to tenants in a broad spectrum of sectors within the life science industry. The following table sets forth information regarding leases with our 20 largest tenants based upon annualized base rent as of December 31, 2003. 20 Largest Tenants
Remaining Percentage Initial Percentage of Aggregate Lease Approximate Percentage of Aggregate Annualized Portfolio Number Term Aggregate of Aggregate Annualized Portfolio Net Effective Annualized of in Rentable Leased Base Rent (in Annualized Rent (in Net Effective Tenant Leases Years Square Feet Square Feet thousands) (1) Base Rent thousands) (2) Rent ---------------------------------------- -------- ------------ ------------ -------------- ------------ -------------- -------------
ZymoGenetics, Inc. 2 13.8 158,336 3.2% $6,553 4.9% $6,548 5.6%
Theravance, Inc. 2 8.3 170,244 3.4% 6,136 4.6% 5,885 5.0%
Merck & Co., Inc. 3 6.8 166,007 3.3% 4,452 3.3% 4,203 3.6%
Quest Diagnostics Incorporated 1 13.0 248,186 5.0% 4,341 3.3% 4,340 3.7%
Infinity Pharmaceuticals, Inc. 2 9.0 60,482 1.2% 4,302 3.2% 3,484 3.0%
Telik, Inc. 1 10.4 91,644 1.8% 3,491 2.6% 3,491 3.0%
Corixa Corporation 3 2.0 (3) 91,934 1.8% 3,301 2.5% 2,938 2.5%
Senomyx, Inc. 1 3.0 86,962 1.7% 2,972 2.2% 2,852 2.4%
Sunesis Pharmaceuticals, Inc. 1 9.5 53,980 1.1% 2,813 2.1% 2,231 1.9%
TransForm Pharmaceuticals, Inc. 1 8.7 59,000 1.2% 2,644 2.0% 1,984 1.7%
Digene Corporation 1 6.0 92,990 1.9% 2,634 2.0% 1,610 1.4%
Dendreon Corporation 1 5.0 70,647 1.4% 2,533 1.9% 2,078 1.8%
Baxter International Inc. 2 5.1 (4) 185,912 3.7% 2,507 1.9% 2,201 1.9%
Avigen, Inc. 2 5.9 (5) 112,830 2.3% 2,458 1.8% 2,433 2.1%
Gene Logic Inc. 3 5.4 (6) 112,271 2.2% 2,420 1.8% 1,699 1.4%
Amylin Pharmaceuticals, Inc. 2 11.1 77,203 1.5% 2,393 1.8% 1,979 1.7%
LION bioscience, Inc. (7) 1 4.3 71,510 1.4% 2,391 1.8% 2,391 2.0%
Acusphere, Inc. 1 8.0 47,500 0.9% 2,340 1.8% 1,834 1.6%
Biogen Idec Inc. 1 6.6 74,557 1.5% 2,310 1.7% 1,562 1.3%
Cardinal Health, Inc. 1 8.9 67,050 1.3% 2,237 1.7% 2,230 1.9%
------- -------- ------------ ------------ -------------- ------------ -------------- ------------- Total/Weighted Average (8): 32 7.9 2,099,245 41.9% $65,228 48.9% $57,973 49.2% ======= ======== ============ ============ ============== ============ ============== =============
________________
Annualized base rent means the annualized fixed base rental amount in effect as of December 31, 2003 (using rental revenue computed on a straight-line basis in accordance with GAAP).
Annualized net effective rent is the annualized base rent in effect as of December 31, 2003 (using rental revenue computed on a straight-line basis in accordance with GAAP), less (for gross leases) real estate taxes and insurance, common area and other operating expenses and (for all leases) amortization of tenant improvements and leasing commissions.
Amount shown is a weighted average of multiple leases with this tenant for 13,883 rentable square feet, 69,997 rentable square feet and 8,054 rentable square feet with remaining lease terms of 7.8 years, 1.0 years and 0.1 years, respectively.
Amount shown is a weighted average of multiple leases with this tenant for 110,412 rentable square feet and 75,500 rentable square feet with remaining lease terms of 8.4 years and 0.2 years, respectively.
Amount shown is a weighted average of multiple leases with this tenant for 67,482 rentable square feet and 45,348 rentable square feet with remaining lease terms of 6.9 years and 4.4 years, respectively.
Amount shown is a weighted average of multiple leases with this tenant for 57,410 rentable square feet, 49,225 rentable square feet and 5,636 rentable square feet with remaining lease terms of 7.1 years, 3.9 years and 0.5 years, respectively.
In February 2004, tenant elected to terminate its lease pursuant to an existing right to terminate.
Weighted average based on percentage of aggregate leased square feet.
Item 3.
Item 3. Legal Proceedings
To our knowledge, no litigation is pending against us, other than routine actions and administrative proceedings, substantially all of which are expected to be covered by liability insurance or which, in the aggregate, are not expected to have a material adverse effect on our financial condition, results of operations or cash flows.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of our security holders in the fourth quarter of the fiscal year ended December 31, 2003.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "ARE". On March 10, 2004, the last reported sales price per share of our common stock was $60.75, and there were approximately 239 holders of record of our common stock (excluding beneficial owners whose shares are held in the name of CEDE & Co.). The following table sets forth the quarterly high and low sales prices per share of our common stock as reported on the NYSE and the distributions paid by us with respect to each such period.
Per Share Period High Low Disribution ------ ------ ------ ------------ Fourth Quarter........................ $58.99 $48.03 $0.58 Third Quarter......................... $48.55 $44.34 $0.56 Second Quarter........................ $45.63 $41.61 $0.53 First Quarter......................... $42.80 $39.81 $0.53
Fourth Quarter........................ $42.79 $37.56 $0.50 Third Quarter......................... $47.69 $36.92 $0.50 Second Quarter........................ $47.85 $42.10 $0.50 First Quarter......................... $42.73 $37.66 $0.50
Future distributions on our common stock will be determined by and at the discretion of our Board of Directors and will be dependent upon a number of factors, including actual cash available for distribution, our financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as our Board of Directors deems relevant. To maintain our qualification as a REIT, we must make annual distributions to stockholders of at least 90% of our taxable income for the current taxable year, determined without regard to deductions for dividends paid and excluding any net capital gains. Under certain circumstances, we may be required to make distributions in excess of cash flow available for distributions to meet these distribution requirements. In such a case, we may borrow funds or may raise funds through the issuance of additional debt or equity capital. We cannot assure you that we will make any future distributions.
Item 6.
Item 6. Selected Financial Data
The following table should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K.
Year Ended December 31, --------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- (Dollars in thousands, except per share amounts) Operating Data: Total revenue ........................................... $ 160,558 $ 142,271 $ 120,861 $ 100,122 $ 79,533 Total expenses .......................................... 112,054 104,000 93,279 76,685 60,030 ----------- ----------- ----------- ----------- ----------- Income from continuing operations........................ 48,504 38,271 27,582 23,437 19,503 Income from discontinued operations, net................ 11,139 1,761 2,695 2,572 2,550 ----------- ----------- ----------- ----------- ----------- Net income............................................... 59,643 40,032 30,277 26,009 22,053
Dividends on preferred stock............................. 8,898 8,579 3,666 3,666 2,036 ----------- ----------- ----------- ----------- ----------- Net income available to common stockholders.............. $ 50,745 $ 31,453 $ 26,611 $ 22,343 $ 20,017 =========== =========== =========== =========== =========== Basic income per common share: Income from continuing operations................. $ 2.55 $ 2.18 $ 1.73 $ 1.62 $ 1.44 =========== =========== =========== =========== =========== Income from discontinued operations, net.......... $ 0.59 $ 0.10 $ 0.17 $ 0.18 $ 0.19 =========== =========== =========== =========== =========== Net income........................................ $ 3.14 $ 2.28 $ 1.90 $ 1.80 $ 1.63 =========== =========== =========== =========== =========== Net income available to common stockholders....... $ 2.67 $ 1.79 $ 1.67 $ 1.55 $ 1.48 =========== =========== =========== =========== ===========
Diluted income per common share: Income from continuing operations................. $ 2.52 $ 2.14 $ 1.70 $ 1.59 $ 1.43 =========== =========== =========== =========== =========== Income from discontinued operations, net.......... $ 0.58 $ 0.10 $ 0.17 $ 0.17 $ 0.19 =========== =========== =========== =========== =========== Net income........................................ $ 3.10 $ 2.24 $ 1.87 $ 1.77 $ 1.61 =========== =========== =========== =========== =========== Net income available to common stockholders....... $ 2.64 $ 1.76 $ 1.64 $ 1.52 $ 1.46 =========== =========== =========== =========== =========== Weighted average shares of common stock outstanding Basic ............................................ 18,993,856 17,594,228 15,953,459 14,460,711 13,525,840 =========== =========== =========== =========== =========== Diluted .......................................... 19,247,790 17,859,787 16,208,178 14,699,478 13,670,568 =========== =========== =========== =========== =========== Cash dividends declared per share of common stock........ $ 2.20 $ 2.00 $ 1.84 $ 1.72 $ 1.69 =========== =========== =========== =========== =========== Balance Sheet Data (at year end): Rental properties - net of accumulated depreciation...... $ 982,297 $ 976,422 $ 796,626 $ 679,653 $ 554,706 Total assets ............................................ $ 1,272,577 $ 1,159,243 $ 962,146 $ 780,984 $ 643,118 Secured notes payable, unsecured line of credit and unsecured term loan............................... $ 709,007 $ 614,878 $ 573,161 $ 431,256 $ 350,512 Total liabilities ....................................... $ 765,442 $ 673,390 $ 629,508 $ 461,832 $ 380,535 Stockholders' equity .................................... $ 507,135 $ 485,853 $ 332,638 $ 319,152 $ 262,583
Other Data: Net income............................................... $ 59,643 $ 40,032 $ 30,277 $ 26,009 $ 22,053 Add: Depreciation and amortization (1)........................ 38,901 34,071 30,578 24,251 18,532 Impairment on investments................................ - 2,545 - - - Subtract: Dividends on preferred stock............................. (8,898) (8,579) (3,666) (3,666) (2,036) Net gain on sales of property (2)........................ (8,286) - - - - ----------- ----------- ----------- ----------- ----------- Funds from operations (3) ............................... $ 81,360 $ 68,069 $ 57,189 $ 46,594 $ 38,549 ----------- ----------- ----------- ----------- ----------- Cash flows from operating activities .................... $ 74,847 67,050 60,340 32,931 46,011 Cash flows from investing activities .................... $ (139,810) (227,840) (192,179) (132,480) (113,549) Cash flows from financing activities .................... $ 66,158 162,204 131,439 98,879 69,430 Number of properties owned at year end .................. 89 89 83 76 59 Rentable square feet of properties owned at year end .......................................... 5,668,895 5,739,987 5,312,910 4,859,820 4,030,083 Occupancy of properties owned at year end ............... 88% 89% 89% 91% 92% Occupancy of properties owned at year end, excluding properties under redevelopment.............. 94% 96% 99% 98% 96%
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Includes depreciation and amortization on assets "held for sale" reflected as discontinued operations (for the periods prior to when such assets were designated as "held for sale").
Net gain on sales of property relates to the disposition of a property in the Suburban Washington D.C. market during the quarter ended December 31, 2003, the disposition of a property in the Eastern Massachusetts market during the quarter ended September 30, 2003 and the disposition of a property in the San Francisco Bay market during the quarter ended March 31, 2003. Net gain on sales of property is included on the income statement in income from discontinued operations.
GAAP basis accounting for real estate assets utilizes historical cost accounting and assumes real estate values diminish over time. In an effort to overcome the miscorrelation between real estate values and historical cost accounting for real estate assets, the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") established the measurement tool of funds from operations ("FFO"). Since its introduction, FFO has become a widely used non-GAAP financial measure by REITs. We believe that FFO is helpful to investors as an additional measure of the performance of an equity REIT. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its April 2002 White Paper (the "White Paper") and related implementation guidance, which may differ from the methodology for calculating FFO utilized by other equity REITs, and, accordingly, may not be comparable to such other REITs. In 2003, NAREIT issued guidance which modifies the calculation of FFO for both past and future periods. In accordance with NAREIT's revised guidance, we now include losses from early extinguishment of debt and real estate impairment charges in our calculation of FFO. As such, the reported amounts of FFO for the year ended December 31, 2002 have been modified from those previously reported. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. While FFO is a relevant and widely used measure of operating performance for REITs, it should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions. We believe that net income is the most directly comparable GAAP financial measure to FFO. For a more detailed discussion of FFO, see "Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The terms "we", "our", "ours" and "us" as used in this Form 10-K refer to Alexandria Real Estate Equities, Inc. and its subsidiaries. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K.
Overview
We are a publicly-traded real estate operating company focused principally on the ownership, operation, management, acquisition, expansion and selective redevelopment and development of high quality, strategically located properties containing a combination of office and laboratory space leased principally to tenants in the life science industry. We refer to these properties as "life science facilities".
In 2003, we:
Acquired four properties with an aggregate of approximately 267,000 rentable square feet.
Expanded our unsecured line of credit from $425 million to $440 million and extended its term to November 2006, which may be further extended at our sole option for an additional one-year period.
Obtained an unsecured term loan for $150 million that is due November 2008.
Sold three properties with an aggregate of approximately 289,000 rentable square feet.
Our primary source of revenue is rental income and tenant recoveries from leases at the properties we own. Of the 89 properties we owned as of December 31, 2003, four were acquired in 1994, nine in 1996, nine in 1997, 27 in 1998, six in 1999, 11 in 2000, five in 2001, four in 2002 and four in 2003. In addition, we completed the development of one property in 1999, five properties in 2000 (together with the 11 properties acquired in 2000, the "2000 Properties"), two properties in 2001 (together with the five properties acquired in 2001, the "2001 Properties") and two properties in 2002 (together with the four properties acquired in 2002, the "2002 Properties"). As a result of these acquisition and development activities, as well as our ongoing leasing and redevelopment activities, there have been significant increases in total revenues and expenses, including significant increases in total revenues and expenses for 2003 as compared to 2002, and for 2002 as compared to 2001.
Critical Accounting Policies
	Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). Our significant accounting policies are described in the notes to our consolidated financial statements. The preparation of these financial statements in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates, judgments and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
REIT Compliance
We have elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code to our operations and financial results and the determination of various factual matters and circumstances not entirely within our control. We believe that our current organization and method of operation comply with the rules and regulations promulgated under the Internal Revenue Code to enable us to qualify, and continue to qualify, as a REIT. However, it is possible that we have been organized or have operated in a manner that would not allow us to qualify as a REIT, or that our future operations could cause us to fail to qualify.
If we fail to qualify as a REIT in any taxable year, then we will be required to pay federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. If we lose our REIT status, then our net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved and we would no longer be required to make distributions to our stockholders.
Rental Properties and Properties Under Development
In accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), we perform the following procedures when making an allocation of the purchase price of real estate: 1) estimate the value of the real estate as of the acquisition date on an "as if vacant" basis, 2) allocate the "as if vacant" value among land, land improvements, buildings, building improvements, tenant improvements and equipment, 3) calculate the value of the intangibles as the difference between the "as if vacant" value and the purchase price, and 4) allocate the intangible value to above, below and at market leases, origination costs associated with in-place leases, tenant relationships and other intangible assets.
The values allocated to land improvements, buildings, building improvements, tenant improvements and equipment are depreciated on a straight-line basis using an estimated life of 20 years for land improvements, 40 years for buildings and building improvements, the respective lease term for tenant improvements and the estimated useful life of equipment. The values of above and below market leases are amortized over the life of the related lease and recorded as either an increase (for below market leases) or a decrease (for above market leases) to rental income. The values of at-market leases and origination costs are classified as leasing costs, included in other assets on our balance sheets and amortized over the remaining life of the lease. The values of other intangible assets are amortized over the estimated useful life.
Rental properties and properties under development are individually evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future undiscounted cash flows is less than its carrying amount. Upon determination that an impairment has occurred, a write- down is recorded to reduce the carrying amount of the property to its estimated fair value.
Capitalization of Costs
We capitalize direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and indirect project costs, including payroll and other costs directly associated with the acquisition, development or construction of a project. Payroll costs not related to the construction, development or redevelopment of a project, or acquisition of a property that will be classified as operating at the date of acquisition, are expensed as incurred. Costs incurred after a project is substantially complete and ready for its intended use are expensed as incurred. Costs previously capitalized related to abandoned acquisition or development opportunities are written-off. Should development activity cease, a portion of interest, property taxes, insurance and certain costs would no longer be eligible for capitalization, and would be expensed as incurred.
	We also capitalize costs directly related and essential to our leasing activities, including broker fees and certain costs related to our leasing personnel. These costs are amortized on a straight-line basis over the terms of the related leases. Costs previously capitalized related to unsuccessful leasing opportunities are written-off.
Accounting of Investments
	We hold equity investments in certain publicly-traded companies and privately held entities primarily involved in the life science industry. All of our investments in publicly-traded companies are considered "available for sale" under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), and are recorded at fair value. Fair value has been determined by the closing trading price at the balance sheet date, with unrealized gains and losses shown as a separate component of stockholders' equity. The classification of investments under SFAS 115 is determined at the time each investment is made, and such determination is reevaluated at each balance sheet date. The cost of investments sold is determined by the specific identification method, with realized gains and losses included in other income.
Investments in privately held entities are generally accounted for under the cost method because we do not influence any operating or financial policies of the entities in which we invest. Certain investments are accounted for under the equity method of accounting under the provisions of Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB 18") and Emerging Issues Task Force ("EITF") Topic D-46, "Accounting for Limited Partnership Investments". Pursuant to APB 18, the equity method of accounting should be used when an investor has "the ability to exercise significant influence over operating and financial policies of an investee even though the investor holds 50% or less of the voting stock". EITF- D-46 further clarifies the Securities and Exchange Commission's position on the accounting for limited partnerships and provides that the equity method of accounting be used unless the investor's interest "is so minor that the limited partner may have virtually no influence over partnership operating and financial policies". Under the equity method of accounting, we record our investment initially at cost and adjust the carrying amount of the investment to recognize our share of the earnings or losses of the investee subsequent to the date of our investment.
For all of our investments, if a decline in the fair value of an investment below its carrying value is determined to be other than temporary, such investment is written down to its estimated fair value with a non-cash charge to current earnings.
The factors that we consider in making these assessments include, but are not limited to, market prices, market conditions, prospects for favorable or unfavorable clinical trial results, new product initiatives and new collaborative agreements.
Interest Rate Swap Agreements
	We utilize interest rate swap agreements to hedge a portion of our exposure to variable interest rates associated with our unsecured line of credit and unsecured term loan. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount. Interest received under all of our swap agreements is based on the one- month LIBOR rate. The net difference between the interest paid and the interest received is reflected as an adjustment to interest expense.
	We reflect our interest rate swap agreements on the balance sheet at their estimated fair values. We use a variety of methods and assumptions based on market conditions and risks existing at each balance sheet date to determine the fair values of our interest rate swap agreements. These methods of assessing fair value result in a general approximation of value, and such value may never be realized.
	All of our interest rate swap agreements meet the criteria to be deemed "highly effective" under Statement of Financial Accounting Standards No. 133 in reducing our exposure to variable interest rates. Accordingly, we have categorized these instruments as cash flow hedges. While we intend to continue to meet the conditions for such hedge accounting, if hedges did not qualify as "highly effective", the changes in the fair value of the derivatives used as hedges would be reflected in earnings.
	We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate swap agreements as our counterparties are established, well-capitalized financial institutions.
Recognition of Rental Income
Rental income from leases with scheduled rent increases, free rent and other rent adjustments are recognized on a straight-line basis over the respective lease terms. We maintain an allowance for estimated losses that may result from the inability of our tenants to make required payments. If a tenant fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the amount of unpaid rent and deferred rent.
Discontinued Operations
	The determination of whether a property qualifies as an asset "held for sale" and should be classified as discontinued operations requires an evaluation of certain criteria, some of which require the use of judgment. A property is classified as "held for sale" when all of the following criteria for a plan of sale have been met: 1) management, having the authority to approve the action, commits to a plan to sell the property, 2) the property is available for immediate sale in its present condition, subject only to the terms that are usual and customary, 3) an active program to locate a buyer, and other actions required to complete the plan to sell, have been initiated, 4) the sale of the property is probable and is expected to be completed within one year, 5) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and 6) actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. When all of these criteria have been met, the property is classified as "held for sale" and its operations are classified as discontinued operations in our consolidated statements of income. When a property is designated as "held for sale", amounts for all prior periods presented are reclassified from continuing operations to discontinued operations. A loss is recognized for any initial adjustment of the asset's carrying amount to fair value less costs to sell in the period the asset qualifies as "held for sale". Depreciation of assets is discontinued commencing on the date they are designated as "held for sale".
Results of Operations
Comparison of the Year Ended December 31, 2003 to the Year Ended December 31, 2002
Rental revenue increased by $14.7 million, or 13%, to $126.4 million for 2003 compared to $111.7 million for 2002. The increase resulted primarily from the 2002 Properties being owned for a full year and the addition of the 2003 Properties. Rental revenue from properties operating for a full year during 2003 and 2002 (the "2003 Same Properties") increased by $1.7 million, or 2.1%, due to increases in rental rates and offset by a slight decrease in occupancy. The average occupancy level of the 2003 Same Properties was 96.7% as of December 31, 2003, compared to 97.2% as of December 31, 2002.
Tenant recoveries increased by $3.1 million, or 11%, to $32.1 million for 2003 compared to $29.0 million for 2002. The increase resulted primarily from the 2002 Properties being owned for a full year and the addition of the 2003 Properties. Tenant recoveries for the 2003 Same Properties increased by $659,000, or 2.9%, primarily due to increases in certain recoverable operating expenses.
Other income increased by $511,000, or 33%, to $2.1 million for 2003 compared to $1.6 million for 2002, primarily due to an increase in realized gains on investments and from a general increase in miscellaneous sources of income.
Rental operating expenses increased by $3.7 million, or 13%, to $32.8 million for 2003 compared to $29.1 million for 2002. The increase resulted primarily from the 2002 Properties being owned for a full year and the addition of the 2003 Properties. Operating expenses for the 2003 Same Properties increased by $871,000, or 4.1%, primarily due to an increase in property insurance and property taxes (substantially all of which are recoverable from our tenants through tenant recoveries).
General and administrative expenses increased by $775,000, or 6%, to $14.2 million for 2003 compared to $13.4 million for 2002, mainly due to general increases in administrative costs, primarily payroll and related expenses.
Interest expense increased by $1.4 million, or 6%, to $26.4 million for 2003 compared to $25.0 million for 2002. The increase resulted primarily from an increase in indebtedness on our unsecured line of credit, unsecured term loan and secured notes payable. These borrowings were utilized to finance the acquisition of the 2002 and 2003 Properties and the development and redevelopment of properties. The increase in interest expense was partially offset by a decrease in the floating interest rate on our unsecured line of credit and unsecured term loan. The weighted average effective interest rate on our borrowings (not including the effect of swap agreements) decreased from 3.07% as of December 31, 2002 to 2.64% as of December 31, 2003. We have entered into certain swap agreements to hedge a portion of exposure to variable interest rates with our unsecured line of credit and unsecured term loan (see "Liquidity and Capital Resources - Unsecured Line of Credit and Unsecured Term Loan").
Depreciation and amortization increased by $5.7 million, or 17%, to $38.6 million for 2003 compared to $32.9 million for 2002. The increase resulted primarily from depreciation associated with the 2002 Properties being owned for a full year and the addition of the 2003 Properties.
Income from discontinued operations of $11.1 million for 2003 reflects the results of operations of one property that was designated as "held for sale" as of December 31, 2003 and three properties that were sold during 2003. In the fourth quarter of 2003, we sold one property in the Suburban Washington D.C. market. In the third quarter of 2003, we sold one property in the Eastern Massachusetts market. In the first quarter of 2003, we sold one property in the San Francisco Bay market. In connection with these sales, we recorded a net gain of approximately $8.3 million during 2003.
Comparison of the Year Ended December 31, 2002 to the Year Ended December 31, 2001
Rental revenue increased by $18.1 million, or 19%, to $111.7 million for 2002 compared to $93.6 million for 2001. The increase resulted primarily from the 2001 Properties being owned for a full year and the addition of the 2002 Properties. Rental revenue from properties operating for a full year during 2002 and 2001 (the "2002 Same Properties") increased by $2.7 million, or 3.7%, due to increases in rental rates and offset by a slight decrease in occupancy. The average occupancy level of the 2002 Same Properties was 97.6% as of December 31, 2002, compared to 98.2% as of December 31, 2001.
Tenant recoveries increased by $4.9 million, or 20%, to $29.0 million for 2002 compared to $24.1 million for 2001. The increase resulted primarily from the 2001 Properties being owned for a full year and the addition of the 2002 Properties. Tenant recoveries for the 2002 Same Properties increased by $915,000, or 4.6%, generally due to an increase in certain recoverable operating expenses.
Other income decreased by $1.6 million, or 50%, to $1.6 million for 2002 compared to $3.1 million for 2001, primarily due to a decrease in interest income resulting from a decline in interest rates, the repayment of a $6 million secured note receivable in 2002 and a decrease in realized gains on investments.
Rental operating expenses increased by $4.5 million, or 18%, to $29.1 million for 2002 compared to $24.7 million for 2001. The increase resulted primarily from the 2001 Properties being owned for a full year and the addition of the 2002 Properties. Operating expenses for the 2002 Same Properties increased by $1.2 million, or 6.4%, primarily due to an increase in property insurance and property taxes (substantially all of which are recoverable from our tenants through tenant recoveries).
General and administrative expenses increased by $1.7 million, or 15%, to $13.4 million for 2002 compared to $11.7 million for 2001 due to the continued increase in the scope of our operations. From January 1, 2001 to December 31, 2002, we expanded our scope of operations to include an additional 13 properties containing approximately 880,000 rentable square feet for a total of 89 properties located in nine states with approximately 5.7 million rentable square feet as of December 31, 2002. To assist in managing this increase in the size of the operating portfolio, we added personnel and offices in certain of the markets where we have properties.
Interest expense decreased by $2.7 million, or 10%, to $25.0 million for 2002 compared to $27.7 million for 2001. The decrease resulted primarily from a reduction in the floating interest rate on our unsecured line of credit. The weighted average interest rate on our borrowings (not including the effect of swap agreements) decreased from 3.92% as of December 31, 2001 to 3.07% as of December 31, 2002. We have entered into certain swap agreements to hedge a portion of our borrowings at variable interest rates (see "Liquidity and Capital Resources - Unsecured Line of Credit and Unsecured Term Loan"). The decrease in interest expense caused by this factor was partially offset by an increase in indebtedness incurred to acquire the 2001 and 2002 Properties and indebtedness incurred to finance the development and redevelopment of properties.
Depreciation and amortization increased by $3.6 million, or 12%, to $32.9 million for 2002 compared to $29.3 million for 2001. The increase resulted primarily from depreciation associated with the 2001 Properties being owned for a full year and the addition of the 2002 Properties.
During 2002, we recognized a non-cash impairment charge of $2.5 million associated with a decline in the value of certain investments below their carrying value determined to be other than temporary.
Loss on early extinguishment of debt of $1.0 million was incurred as the result of the early retirement of a $7.2 million secured loan in connection with a refinancing of an asset. This loss is related to prepayment penalties and the write-off of loan costs. In 2002, this loss was classified as an extraordinary item as previously required under SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt". In 2003, pursuant to SFAS 145, "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections", we reclassified the 2002 loss on early extinguishment of debt to continuing operations.
Income from discontinued operations decreased by $934,000, or 35%, to $1.8 million for 2002 compared to $2.7 million for 2001. Income from discontinued operations reflects the results of operations of four properties that have been designated as "held for sale". In connection with these prospective sales, we recorded a non-cash impairment charge of $1,150,000 related to a property in the San Francisco Bay market which cannot be redeveloped pursuant to its original strategic objectives. This charge has been included in income from discontinued operations for 2002.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities for 2003 increased by $7.8 million to $74.8 million compared to $67.1 million for 2002. The increase resulted primarily from increases in cash flows from our portfolio of operating properties, partially offset by the net gain on sales of property.
Net cash used in investing activities decreased by $88.0 million to $139.8 million for 2003 compared to $227.8 million for 2002. This decrease was primarily due to proceeds from the sales of rental properties and a lower level of property acquisitions in 2003.
Net cash provided by financing activities decreased by $96.0 million to $66.2 million for 2003 compared to $162.2 million for 2002. Cash provided by financing activities decreased primarily due to the net proceeds from our common stock and preferred stock offerings in 2002, partially offset by net proceeds from our unsecured line of credit and unsecured term loan and from secured notes payable.
Off-Balance Sheet Arrangements
	As of December 31, 2003, we have no off-balance sheet arrangements.
Contractual Obligations and Commitments
Contractual obligations as of December 31, 2003, consists of the following (dollars in thousands):
Payments by Period --------------------------------------------- Total 2004 2005-2006 2007-2008 Thereafter ------------------------------------------------------------ Secured notes payable (1) $ 319,755 $ 9,415 $ 53,941 $ 52,982 $ 203,417
Ground lease obligations 65,420 1,666 3,529 3,631 56,594
Other obligations 737 495 242 - - ------------------------------------------------------------ Total $ 385,912 $ 11,576 $ 57,712 $ 56,613 $ 260,011 ============================================================
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(1) Excludes unamortized premium of $252,000 as of December 31, 2003. 	Secured notes payable as of December 31, 2003 includes 16 notes secured by 39 properties.
	Ground lease obligations as of December 31, 2003 include leases at six of our properties and one land development parcel. These lease obligations have remaining lease terms of 29 to 51 years, exclusive of extension options.
	In addition to the above, we were committed under the terms of construction contracts to complete the construction of properties under development at a remaining aggregate cost of $11.7 million.
As of December 31, 2003, we were also committed to fund approximately $12.5 million for the construction of building infrastructure improvements under the terms of leases and/or construction contracts and approximately $19.5 million for certain investments.
Tenant Security Deposits and Other Restricted Cash
	Tenant security deposits and other restricted cash consists of the following (in thousands):
December 31, ---------------------- 2003 2002 ---------- ---------- Funds held in trust under the terms of certain secured notes payable $ 8,665 $ 5,692
Security deposit funds based on the terms of certain lease agreements 2,029 1,967
Other funds held in escrow 363 361 ---------- ---------- $ 11,057 $ 8,020 ========== ==========
Secured Debt
Secured debt as of December 31, 2003, consists of the following (dollars in thousands):
Balance at Stated December 31, Interest Collateral 2003 Rate Maturity Date ------------------------------------------ ------------ ------------- ---------------
Lexington, MA $3,342 8.45% August 2004
San Francisco, CA (two properties) 22,520 LIBOR + 1.70% January 2005 (1)
Worcester, MA 9,735 (2) 8.75% January 2006
Durham, NC (two properties) 11,880 8.68% December 2006
Gaithersburg, MD (three properties) 9,700 8.25% August 2007
Chantilly, VA and Seattle, WA 34,410 7.22% May 2008
San Diego, CA (four properties) 40,225 6.95% July 2009
Worcester, MA and San Diego, CA 18,396 8.71% January 2010
Gaithersburg, MD (two properties) 24,131 8.33% November 2010
San Diego, CA (six properties) 23,633 7.75% July 2011
Gaithersburg, MD (three properties) 27,778 7.40% January 2012
Alameda, CA (three properties) and San Dieg 33,564 6.21% March 2013
Rockville, MD (two properties) and Beltsvil 29,898 6.36% September 2013
Alameda, CA 2,138 7.165% January 2014
Seattle, WA (two properties) 17,318 7.75% June 2016
San Diego, CA 11,339 7.50% August 2021 ------------ $320,007 ============
__________
The loan may be extended, at our option, for an additional year.
The balance shown includes an unamortized premium of $252,000. The effective interest rate of the loan is 7.25%.
The following is a summary of the scheduled principal payments for our secured debt and the weighted average interest rates as of December 31, 2003 (in thousands):
Weighted Average Year Amount Interest Rates ------------------ ----------- -------------
2004 $ 9,415 7.69% 2005 28,370 3.82%(1) 2006 25,571 7.89%(1) 2007 15,123 7.86% 2008 37,859 7.22% Thereafter 203,417 7.29% ----------- ------------- Subtotal 319,755 7.06% Unamortized premium 252 ============= ----------- $ 320,007 ===========
__________
We have a loan related to a property we developed in the San Francisco Bay market, which has a maturity date of 2005 that may be extended for an additional year. If we extend the maturity date of this loan to 2006, the weighted average interest rates for 2005 and 2006 would be 7.29% and 5.57%, respectively.
Unsecured Line of Credit and Unsecured Term Loan
We have an unsecured line of credit that provides for borrowings of up to $440 million. Borrowings under our unsecured line of credit, as amended, bear interest at a floating rate based on our election of either a LIBOR-based rate or the higher of the bank's reference rate and the Federal Funds rate, plus 0.5%. For each LIBOR-based advance, we must elect a LIBOR period of one, two, three or six months.
Our unsecured line of credit contains financial covenants, including, among other things, maintenance of minimum net worth, a total liabilities to gross asset value ratio and a fixed charge coverage ratio. In addition, the terms of the unsecured line of credit restrict, among other things, certain investments, indebtedness, distributions and mergers. The unsecured line of credit expires November 2006 and may be extended at our sole option for an additional one-year period. As of December 31, 2003, borrowings outstanding on the unsecured line of credit carried a weighted average interest rate of 2.65%.
In November 2003, we obtained a $150 million unsecured term loan which bears interest at a floating rate based on our election of either a LIBOR based rate or the higher of the bank's reference rate and the Federal Funds rate, plus 0.5%. For each LIBOR based advance, we must elect to fix for a period of one, two, three or six months. The unsecured term loan contains financial covenants substantially similar to those in our unsecured line of credit. The unsecured term loan expires in November 2008. As of December 31, 2003, the unsecured term loan carried a weighted average interest rate of 2.62%.
Aggregate borrowings under the unsecured line of credit and unsecured term loan may be limited to an amount based on the net operating income derived from a pool of unencumbered properties. Accordingly, as we acquire or complete the development or redevelopment of additional unencumbered properties, aggregate borrowings available under the unsecured line of credit and unsecured term loan will increase up to a maximum of $590 million. Under these provisions, as of December 31, 2003, aggregate borrowings under our unsecured line of credit and unsecured term loan were limited to $479 million.
We utilize interest rate swap agreements to hedge a portion of our exposure to variable interest rates associated with our unsecured line of credit and unsecured term loan. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one-month LIBOR rate. The net difference between the interest paid and the interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements (dollars in thousands):
Notional Effective at Interest Termination Fair Transaction Dates Effective Dates Amounts December 31, 2003 Pay Rates Dates Values ---------------- ---------------- --------- ----------------- -------- ---------------- -------- Hedges for Unsecured Line of Credit ---------------------------------
March 2002 December 31, 2002 $50,000 $ 50,000 5.364% December 31, 2004 $(2,004)
July 2002 January 1, 2003 25,000 25,000 3.855% June 30, 2005 (805)
July 2002 January 1, 2003 25,000 25,000 3.865% June 30, 2005 (809)
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 (567)
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 (567)
November 2002 June 1, 2003 25,000 25,000 3.115% December 31, 2005 (523)
November 2002 June 1, 2003 25,000 25,000 3.155% December 31, 2005 (543) ----------------- $ 200,000 Hedges for Unsecured Term Loan ----------------------------- December 2003 December 31, 2003 $50,000 $ 50,000 1.53% December 31, 2004 (74)
December 2003 December 31, 2004 50,000 - 3.00% December 30, 2005 (119)
December 2003 December 30, 2005 50,000 - 4.15% December 29, 2006 (121)
December 2003 December 29, 2006 50,000 - 5.09% October 31, 2008 (167) ----------------- -------- $ 50,000 $(6,299) ----------------- ======== Total Interest Rate Swap Agreements in Effect at December 31, 2003 $ 250,000 =================
We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate swap agreements as our counterparties are established, well-capitalized financial institutions. In addition, we have entered into master derivative agreements with each counterparty. These master derivative agreements (all of which are on the standard International Swaps & Derivatives Association, Inc. form) define certain terms between us and each counterparty to address and minimize certain risks associated with our swap agreements, including a default by a counterparty.
As of December 31, 2003 and 2002, our interest rate swap agreements have been reported in the accompanying balance sheets at their fair value as other liabilities of approximately $6.3 million and $9.0 million, respectively. The offsetting adjustments were reflected as deferred losses in accumulated other comprehensive income of $6.3 million and $9.0 million, respectively. Balances in accumulated other comprehensive income are recognized in earnings as swap payments are made.
Other Resources and Liquidity Requirements
In January 2002, we completed a public offering of 2,300,000 shares of our 9.10% Series B cumulative redeemable preferred stock. The shares were issued at a price of $25.00 per share, resulting in aggregate proceeds of approximately $55.1 million, net of offering costs. In February 2002, we sold 418,970 shares of our common stock. The shares were issued at a price of $39.46 per share, resulting in aggregate proceeds of approximately $16.1 million, net of offering costs. In July 2002, we sold 2,000,000 shares of our common stock. The shares were issued at a price of $41.07 per share, resulting in aggregate proceeds of approximately $81.4 million, net of offering costs.
We expect to continue meeting our short-term liquidity and capital requirements generally through our working capital and net cash provided by operating activities. We believe that the net cash provided by operating activities will continue to be sufficient to enable us to make distributions necessary to continue qualifying as a REIT. We also believe that net cash provided by operating activities will be sufficient to fund our recurring non- revenue enhancing capital expenditures, tenant improvements and leasing commissions.
We expect to meet certain long-term liquidity requirements, such as property acquisitions, property development and redevelopment activities, scheduled debt maturities, expansions and other non-recurring capital improvements, through excess net cash provided by operating activities, long-term secured and unsecured borrowings, including borrowings under the unsecured line of credit and unsecured term loan and the issuance of additional debt and/or equity securities.
Exposure to Environmental Liabilities
In connection with the acquisition of all of our properties, we have obtained Phase I environmental assessments to ascertain the existence of any environmental liabilities or other issues. The Phase I environmental assessments of our properties have not revealed any environmental liabilities that we believe would have a material adverse effect on our financial condition or results of operations taken as a whole, nor are we aware of any material environmental liabilities that have occurred since the Phase I environmental assessments were completed. In addition, we carry a policy of pollution legal liability insurance covering exposure to certain environmental losses at all of our properties.
Capital Expenditures, Tenant Improvements and Leasing Costs
The following table shows total and weighted average per square foot property related capital expenditures, tenant improvements and leasing costs (all of which are added to the basis of the properties) related to our life science facilities (excluding capital expenditures and tenant improvements that are recoverable from tenants, revenue-enhancing or related to properties that have undergone redevelopment) for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, attributable to leases that commenced at our properties after our acquisition.
Total/ Weighted Average 2003 2002 2001 2000 1999 ----------- ----------- ---------- ---------- ---------- ---------- Capital expenditures: Major capital expenditures (1) $ 3,346,000 $ 1,632,000(2) $ 959,000 $ 616,000 $ 139,000 $ - Recurring capital expenditures $ 4,056,000 $ 853,000 $1,472,000(3) $ 614,000 $ 639,000 $ 478,000 Weighted average square feet in portfolio 24,611,677 5,708,635 5,499,660 5,131,176 4,448,916 3,823,290 Per weighted average square foot in portfolio Major capital expenditures (1) $ 0.14 $ 0.29(2) $ 0.17 $ 0.12 $ 0.03 $ - Recurring capital expenditures $ 0.16 $ 0.15 $ 0.27(3) $ 0.12 $ 0.14 $ 0.13
Tenant improvements and leasing costs: Retenanted space (4) Tenant improvements and leasing costs $ 6,104,000 $ 2,890,000 $ 498,000 $ 466,000 $ 796,000 $1,454,000 Retenanted square feet 1,050,974 248,488 318,642 151,161(4) 112,286(4) 220,397 Per square foot leased of retenanted space $ 5.81 $ 11.63 $ 1.56 $ 3.08 $ 7.09 $ 6.60
Renewal space Tenant improvements and leasing costs $ 1,355,000 $ 105,000 $ 526,000 $ 451,000 $ 124,000 $ 149,000 Renewal square feet 1,286,615 271,236 255,978 432,717 233,017 93,667 Per square foot leased of renewal space $ 1.05 $ 0.39 $ 2.05 $ 1.04 $ 0.53 $ 1.59
__________
Major capital expenditures consist of roof replacements and HVAC systems which are typically identified and considered at the time a property is acquired. Major capital expenditures also include one-time costs related to the implementation of our national branding and signage program in 2001, 2002 and 2003.
Major capital expenditures for 2003 include $1,072,000 ($0.19 per square foot in portfolio) in one-time costs related to the implementation of our national branding and signage program.
Recurring capital expenditures for 2002 include $552,000 ($0.10 per square foot in portfolio) related to a fully leased property in San Diego, California that underwent substantial renovation in 2002.
Excludes space that has undergone redevelopment before retenanting.
Capital expenditures fluctuate in any given period due to the nature, extent and timing of improvements required and the extent to which they are recoverable from our tenants. Approximately 91% of our leases provide for the recapture of certain capital expenditures (such as HVAC systems maintenance and/or replacement, roof replacement and parking lot resurfacing). In addition, we maintain an active preventative maintenance program at each of our properties to minimize capital expenditures required.
Tenant improvements and leasing costs also fluctuate in any given year depending upon factors such as the timing and extent of vacancies, property age, location and characteristics, the type of lease (renewal tenant or retenanted space), the involvement of external leasing agents and overall competitive market conditions.
Inflation
As of December 31, 2003, approximately 88% of our leases (on a square footage basis) were triple net leases, requiring tenants to pay substantially all real estate taxes and insurance, common area and other operating expenses (including increases thereto). In addition, approximately 7% of our leases (on a square footage basis) require the tenants to pay a majority of operating expenses. Approximately 93% of our leases (on a square footage basis) contain effective annual rent escalations that are either fixed (generally ranging from 3% to 3.5%) or indexed based on the consumer price index or another index. Accordingly, we do not believe that our earnings or cash flow from real estate operations are subject to any significant risk of inflation. An increase in inflation, however, could result in an increase in the cost of our variable rate borrowings, including our unsecured line of credit and unsecured term loan.
Funds from Operations
GAAP basis accounting for real estate assets utilizes historical cost accounting and assumes real estate values diminish over time. In an effort to overcome the miscorrelation between real estate values and historical cost accounting for real estate assets, the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") established the measurement tool of funds from operations ("FFO"). Since its introduction, FFO has become a widely used non-GAAP financial measure by REITs. We believe that FFO is helpful to investors as an additional measure of the performance of an equity REIT. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its April 2002 White Paper (the "White Paper") and related implementation guidance, which may differ from the methodology for calculating FFO utilized by other equity REITs, and, accordingly, may not be comparable to such other REITs. In 2003, NAREIT issued guidance which modifies the calculation of FFO for both past and future periods. In accordance with NAREIT's revised guidance, we now include losses from early extinguishment of debt and real estate impairment charges in our calculation of FFO. As such, the reported amounts of FFO for the year ended December 31, 2002 have been modified from those previously reported. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. While FFO is a relevant and widely used measure of operating performance for REITs, it should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions. (See "Cash Flows" for information regarding these measures of cash flow.) We believe that net income is the most directly comparable GAAP financial measure to FFO.
The following table presents our FFO for the years ended December 31 (in thousands):
Year Ended December 31, ----------------------------------- 2003 2002 2001 ----------- ---------- ----------
Net income $59,643 $40,032 $30,277 Add: Depreciation and amortization (1) 38,901 34,071 30,578 Impairment on investments - 2,545 - Less: Dividends on preferred stock (8,898) (8,579) (3,666) Net gain on sales of property (2) (8,286) - - ----------- ---------- ---------- Funds from operations $81,360 $68,069 $57,189 =========== ========== ==========
__________
Includes depreciation and amortization on assets "held for sale" reflected as discontinued operations (for the periods prior to when such assets were designated as "held for sale").
Net gain on sales of property relates to the disposition of a property in the Suburban Washington D.C. market during the quarter ended December 31, 2003, the disposition of a property in the Eastern Massachusetts market during the quarter ended September 30, 2003 and the disposition of a property in the San Francisco Bay market during the quarter ended March 31, 2003. Net gain on sales of property is included on the income statement in income from discontinued operations.
Property and Lease Information
The following table is a summary of our property portfolio as of December 31, 2003 (dollars in thousands):
Rentable Annualized Number of Square Base Occupancy Properties Feet Rent Percentage(1) ---------- ----------- --------- -----------
California - Pasadena 1 31,343 $393 45.8%(2) California - San Diego 23 1,027,546 28,988 94.9% California - San Francisco Bay 10 642,578 19,918 100.0% Eastern Massachusetts 9 598,894 21,247 88.3% New Jersey/Suburban Philadelphia 6 346,919 6,251 100.0% Southeast 5 259,414 3,778 74.1%(2) Suburban Washington D.C. 20 1,552,238 27,033 94.0%(3) Washington - Seattle 5 439,964 16,165 99.8% ---------- ----------- --------- ----------- Total (1) 79 4,898,896 $123,773 93.9%(3) ========== =========== ========= ===========
__________
Excludes 10 properties under full or partial redevelopment. Including properties under full or partial redevelopment, occupancy as of December 31, 2003 was 88.4%.
All, or substantially all, of the vacant space is office or warehouse space.
Includes one office property classified as "held for sale" and included in discontinued operations as of December 31, 2003. Excluding this property, which was under a binding sales contract as of December 31, 2003, the average occupancy percentage for the Suburban Washington D.C. market is 96.4% and the average total occupancy percentage is 94.6%.
	The following table summarizes certain information with respect to the lease expirations of our properties as of December 31, 2003:
Square Square Footage Annualized Base Year of Number of Footage of as a Percentage Rent of Expiring Lease Expiring Expiring of Leased Leases (Per Expiration Leases Leases Portfolio Square Foot) ---------- ----------- ---------- -------------- ---------------
2004 67 614,052 12.3% $21.30 2005 28 318,596 6.4% $28.00 2006 34 809,876 16.2% $24.21 2007 15 340,068 6.8% $24.16 2008 14 391,070 7.8% $29.10 Thereafter 50 2,535,437 50.6% $28.43
The following table is a summary of our lease activity for the year ended December 31, 2003, computed on a GAAP Basis and on a Cash Basis:
Rental TI's/Lease Average Number Square Expiring New Rate Commissions Lease of Leases Footage Rates Rates Changes Per Foot Terms ----------- --------- --------- --------- --------- ------------ ----------- Lease Activity
Lease Expirations Cash Basis 76 882,564 $23.44 - - - - GAAP Basis 76 882,564 $22.80 - - - - Renewed / Releasable Space Leased Cash Basis 37 519,724 $24.32 $23.78 -2.2%(1) $5.76 4.1 Years GAAP Basis 37 519,724 $23.60 $24.97 5.8%(1) $5.76 4.1 Years Month-to-Month Leases In Effect Cash Basis 17 64,510 $19.95 $20.04 0.5% - - GAAP Basis 17 64,510 $19.75 $20.04 1.5% - -
Redeveloped/Developed/ Vacant Space Leased Cash Basis 29 265,366 - $22.43 - $6.40 4.5 Years GAAP Basis 29 265,366 - $23.77 - $6.40 4.5 Years
Leasing Activity Summary
Excluding Month-to-Month Leases Cash Basis 66 785,090 - $23.32 - - - GAAP Basis 66 785,090 - $24.56 - - -
Including Month-to-Month Leases Cash Basis 83 849,600 - $23.07 - - - GAAP Basis 83 849,600 - $24.22 - - -
__________
Excluding a lease for 21,316 square feet in the San Francisco Bay market, rental rates for renewed or released space were on average 2.5% higher than expiring rates on a Cash Basis and 9.7% higher than expiring rates on a GAAP Basis.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we believe we are exposed is interest rate risk, which may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks, such as counter-party credit risk and the legal enforceability of hedging contracts.
Our future earnings, cash flows and fair values relating to financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBOR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. Based on interest rates at, and our swap agreements in effect on, December 31, 2003, we estimate that a 1% increase in interest rates on our unsecured line of credit and unsecured term loan, after considering the effect of our interest rate swap agreements, would decrease annual future earnings and cash flows by approximately $1.4 million. We further estimate that a 1% decrease in interest rates on our unsecured line of credit and unsecured term loan, after considering the effect of our interest rate swap agreements in effect December 31, 2003, would increase annual future earnings and cash flows by approximately $1.4 million. A 1% increase in interest rates on our secured debt and interest rate swap agreements would decrease their aggregate fair value by approximately $15.3 million. A 1% decrease in interest rates on our secured debt and interest rate swap agreements would increase their aggregate fair value by approximately $16.4 million.
These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate swap agreements in effect on December 31, 2003. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.
We have exposure to equity price market risk because of our equity investments in certain publicly-traded companies and privately held entities. We classify investments in publicly-traded companies as available-for-sale and, consequently, record them on our balance sheet at fair value with unrealized gains or losses reported as a component of comprehensive income or loss. Investments in privately held entities are generally accounted for under the cost method because we do not influence any of the operating or financial policies of the entities in which we invest. For all investments, we recognize other than temporary declines in value against earnings in the same period the decline in value was deemed to have occurred. In 2002, we recorded non-cash impairment charges of $2,545,000 to write down certain investments for which we deemed the decline in fair value to be other than temporary. There is no assurance that future declines in values will not have a material adverse impact on our future results of operations. By way of example, a 10% decrease in the fair value of our equity investments as of December 31, 2003 would decrease their fair value by approximately $4.7 million.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data The consolidated financial statements and supplementary data required by Regulation S-X are included in this Report on Form 10-K beginning on page. Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9a.
Item 9a. Controls and Procedures
	As of December 31, 2003, we performed an evaluation, under the supervision of our chief executive officer ("CEO") and chief financial officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on our evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2003. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to December 31, 2003.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Board of Directors, Executive Officers and Senior Management" in our definitive proxy statement for our 2004 annual meeting of stockholders to be filed pursuant to Regulation 14A within 120 days after the end of our 2003 fiscal year (the "2004 Proxy Statement") is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information set forth under the caption "Board of Directors, Executive Officers and Senior Management - Executive Compensation" in our 2004 Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Equity Compensation Plan Information
Number of Securities to be issued upon exercise of outstanding options and awards (a)
Weighted-average exercise price of outstanding options and awards (b)
Number of securities remaining available for future issuance under the Stock Plan (excluding securities reflected in column a) (c)
Equity Compensation Plan Approved by Stockholders - 1997 Incentive Plan
809,583
$35.39
308,536
The information set forth under the captions "Equity Compensation Plan Information" and "Security Ownership of Management and Principal Stockholders" in our 2004 Proxy Statement is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
	None.
Item 14.
Item 14. Principal Accounting Fees and Services
	The information set forth under the caption "Principal Accounting Fees and Services" in our 2004 Proxy Statement is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits, Consolidated Financial Statements Schedules and Reports on Form 8-K
(a)	Consolidated Financial Statements and Schedules
The following consolidated financial information is included as a separate section of this Annual Report on Form 10-K:
Page
Report of Independent Auditors
Audited Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2003, 2002 and 2001
Schedule III - Consolidated Financial Statement of Rental Properties
(b)	Reports on Form 8-K
We filed a Current Report on Form 8-K, dated November 5, 2003, pursuant to which we furnished the Securities and Exchange Commission our earnings release dated November 5, 2003, regarding our third quarter 2003 financial results.
(c)	Exhibits.
Exhibit Number
Exhibit Title
3.1 *
Articles of Amendment and Restatement of Alexandria, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on August 14, 1997
3.2 *
Certificate of Correction of Alexandria, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on August 14, 1997
3.3*
Bylaws of Alexandria (as amended, adopted February 4, 2000; effective February 16, 2000), filed as an exhibit to Alexandria's current report on Form 8-K filed with the Commission on February 10, 2000
3.4 *
Articles Supplementary, dated February 10, 2000, relating to the election to be subject to Subtitle 8 of Title 3 of the Maryland General Corporation Law, filed as an exhibit to Alexandria's current report on Form 8-K filed with the Commission on February 10, 2000
3.5 *
Articles Supplementary, dated February 10, 2000, relating to the Series A Junior Participating Preferred Stock , filed as an exhibit to Alexandria's current report on Form 8-K filed with the Commission on February 10, 2000
3.6 *
Articles Supplementary, dated June 9, 1999, relating to the 9.50% Series A Cumulative Redeemable Preferred Stock, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on August 13, 1999
3.7 *
Articles Supplementary, dated January 28, 2002, relating to the 9.10% Series B Cumulative Redeemable Preferred Stock, filed as an exhibit to Alexandria's current report on Form 8-A filed with the Commission on February 17, 2002
4.1 *
Rights Agreement, dated as of February 10, 2000, between the Company and American Stock Transfer & Trust Company, as Rights Agent, including the forms of Articles Supplementary setting forth the terms of the Series A Junior Participating Preferred Stock, par value $.01 per share, Rights Certificate and the Summary of Rights to Purchase Preferred Stock attached as exhibits to the Rights Agreement. Pursuant to the Rights Agreement, printed Rights Certificates will not be mailed until after the Distribution Date (as defined in the Rights Agreement), filed as an exhibit to Alexandria's current report on Form 8-K filed with the Commission on February 10, 2000
4.2 *
Specimen certificate representing shares of Common Stock, filed as an exhibit to Alexandria's Registration Statement on Form S-11 (No. 333- 23545)
4.3 *
Specimen certificate representing shares of 9.50% Series A Cumulative Redeemable Preferred Stock, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on August 13, 1999
4.4 *
Specimen certificate representing shares of 9.10% Series B Cumulative Redeemable Preferred Stock, filed as an exhibit to Alexandria's current report on Form 8-A filed with the Commission on February 17,
10.1 *
Second Amendment to Executive Employment Agreement and General and Special Release by and between Alexandria and Jerry M. Sudarsky, dated May 30, 1997, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 31, 1998
10.2 *
Amended and Restated Executive Employment Agreement between Alexandria and Joel S. Marcus, dated January 5, 1994, and amended as of March 28, 1997, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 31, 1998
10.3 *
Executive Employment Agreement between Alexandria and James H. Richardson, dated July 31, 1997, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 14, 1997
10.4 *
Amended and Restated Executive Employment Agreement between Alexandria and Peter J. Nelson, dated May 20, 1998, filed as an exhibit to Alexandria's quarterly report on Form 10-Q/A filed with the Commission on August 18, 1998
10.5 *
Amendment to Amended and Restated Executive Employment Agreement between Alexandria and Peter J. Nelson, dated August 31, 1999, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 15, 1999
10.6 *
Executive Employment Agreement between Alexandria and Vincent R. Ciruzzi, dated April 20, 1998, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 15, 1999
10.7 *
Amendment to Executive Employment Agreement between Alexandria and Vincent R. Ciruzzi, dated August 31, 1999, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 15, 1999
10.8 *
Employment Letter Agreement between Alexandria and Tom Andrews, dated June 1, 1999, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 15, 1999
10.9 *
Amended and Restated 1997 Stock Award and Incentive Plan of Alexandria, dated December 29, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 29, 2002
10.10 *
Form of Non-Employee Director Stock Option Agreement for use in connection with options issued pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's Registration Statement on Form S-11 (No. 333-23545)
10.11 *
Form of Incentive Stock Option Agreement for use in connection with options issued pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's Registration Statement on Form S-11 (No. 333-23545)
10.12 *
Form of Nonqualified Stock Option Agreement for use in connection with options issued pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's Registration Statement on Form S-11 (No. 333-23545)
10.13 *
Form of Employee Restricted Stock Agreement for use in connection with shares of restricted stock issued to employees pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 15, 1999
10.14 *
Form of Independent Contractor Restricted Stock Agreement for use in connection with shares of restricted stock issued to independent contractors pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 15, 1999
10.15
Fourth Amended and Restated Revolving Loan Agreement, dated as of November 3, 2003, among Alexandria Real Estate Equities, Inc., Alexandria Real Estate Equities, L.P., ARE-QRS Corp., ARE Acquisitions, LLC, the other borrowers then and thereafter a party thereto, the banks therein named, the other banks which may become parties thereto, Fleet National Bank, as Administrative Agent, Fleet Securities, Inc. and JP Morgan Securities, Inc., as Co-Lead Arrangers, JP Morgan Securities, Inc. and Societe Generale, as Co- Syndication Agents, CommerzBank AG, New York and Grand Cayman Branches and KeyBank National Association, as Co-Documentation Agents and Eurohypo AG, New York Branch, as Senior Managing Agent
10.16 *
Amendment to Amended and Restated Executive Employment Agreement between Alexandria and Joel S. Marcus, dated September 4, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 30, 2001
10.17 *
Amendment to Executive Employment Agreement between Alexandria and James H. Richardson, dated September 4, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 30,
10.18 *
Second Amendment to Amended and Restated Executive Employment Agreement between Alexandria and Peter J. Nelson, dated September 4, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 30, 2001
10.19 *
Amended and Restated Executive Employment Agreement between Alexandria and Vincent R. Ciruzzi, dated June 27, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 30,
10.20 *
Term Loan Agreement among Alexandria, the Operating Partnership, ARE-QRS Corp., ARE Acquisitions, LLC, the Other Borrowers Then or Thereafter a Party Thereto, the Banks therein named, the Other Banks Which May Become Parties Thereto, Fleet National Bank, as Managing Agent, and Fleet Securities, Inc., as Arranger, dated October 17, 2001, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 29, 2002
10.21 *
Alexandria's 2000 Deferred Compensation Plans, effective December 1, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 29, 2002
10.22
Term Loan Agreement, dated as of November 3, 2003, among Alexandria Real Estate, Inc., Alexandria Real Estate Equities, L.P., ARE-QRS Corp., ARE Acquisitions, LLC, the other borrowers then and thereafter a party thereto, the banks therein named, the other banks which may become parties thereto, Fleet National Bank, as Administrative Agent, Fleet Securities, Inc. and Commerzbank AG, New York and Grand Cayman Branches, as Co-Lead Arrangers, Commerzbank AG, New York and Grand Cayman Branches, as Syndication Agent, J.P. Morgan Chase Bank and Bank One, NA, as Co-Documentation Agents, Keybank National Association and Societe Generale, as Co-Managing Agents
12.1
Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
14.1
Alexandria Real Estate Equities, Inc. Business Integrity Policy and Procedures for Reporting Non-Compliance (code of ethics pursuant to Item 406 Regulation S-K)
21.1
List of Subsidiaries of Alexandria
23.1
Consent of Ernst & Young LLP
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
___________________
(*) Incorporated by reference. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KNOW ALL THOSE BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jerry M. Sudarsky, Joel S. Marcus and Peter J. Nelson, and each of them, as his true and lawful attorneys- in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, if any, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents of their substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JERRY M. SUDARSKY
Jerry M. Sudarsky
Chairman of the Board of Directors
March 10, 2004
/s/ JOEL S. MARCUS
Joel S. Marcus
Chief Executive Officer (Principal Executive Officer) and Director
March 12, 2004
/s/ JAMES H. RICHARDSON
James H. Richardson
President and Director
March 11, 2004
/s/ PETER J. NELSON
Peter J. Nelson
Chief Financial Officer, Senior Vice President, Treasurer and Secretary (Principal Financial and Accounting Officer)
March 12, 2004
/s/ RICHARD H. KLEIN
Richard H. Klein
Director
March 11, 2004
/s/ RICHARD B. JENNINGS
Richard B. Jennings
Director
March 10, 2004
/s/ ANTHONY M. SOLOMON
Anthony M. Solomon
Director
March 10, 2004
/s/ ALAN G. WALTON
Alan G. Walton
Director
March 10, 2004
/s/ RICHMOND A. WOLF
Richmond A. Wolf
Director
March 12, 2004
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, 2003 and 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the index at item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alexandria Real Estate Equities, Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California
February 2, 2004
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands, Except Per Share Amounts)
December 31, ---------------------- 2003 2002 ---------- ---------- Assets Rental properties, net $ 982,297 $ 976,422 Properties under development 153,379 68,386 Cash and cash equivalents 4,985 3,790 Tenant security deposits and other restricted cash 11,057 8,020 Tenant receivables 1,969 2,641 Deferred rent 31,503 26,063 Investments 47,126 39,650 Other assets 40,261 34,271 ---------- ---------- Total assets $1,272,577 $1,159,243 ========== ==========
Liabilities and Stockholders' Equity Secured notes payable $ 320,007 $ 276,878 Unsecured line of credit and unsecured term loan 389,000 338,000 Accounts payable, accrued expenses and tenant security deposits 43,408 47,118 Dividends payable 13,027 11,394 ---------- ---------- 765,442 673,390
Commitments and contingencies
Stockholders' equity: 9.50% Series A cumulative redeemable preferred stock, $0.01 par value per share, 1,610,000 shares authorized; 1,543,500 shares issued and outstanding at December 31, 2003 and 2002; $25.00 liquidation value 38,588 38,588 9.10% Series B cumulative redeemable preferred stock, $0.01 par value per share, 2,300,000 shares authorized; 2,300,000 shares issued and outstanding at December 31, 2003 and 2002; $25.00 liquidation value 57,500 57,500 Common stock, $0.01 par value per share, 100,000,000 shares authorized; 19,264,023 and 18,973,957 shares issued and outstanding at December 31, 2003 and 2002, respectively 193 190 Additional paid-in capital 409,926 399,831 Deferred compensation (2,232) (1,432) Retained earnings 8,635 - Accumulated other comprehensive income (5,475) (8,824) ---------- ---------- Total stockholders' equity 507,135 485,853 ---------- ---------- Total liabilities and stockholders' equity $1,272,577 $1,159,243 ========== ==========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars In Thousands, Except Per Share Amounts)
Year Ended December 31, -------------------------------------- 2003 2002 2001 ----------- ----------- ----------- Revenues Rental $ 126,414 $ 111,694 $ 93,596 Tenant recoveries 32,076 29,020 24,143 Other income 2,068 1,557 3,122 ----------- ----------- ----------- 160,558 142,271 120,861 Expenses Rental operations 32,794 29,135 24,655 General and administrative 14,211 13,436 11,694 Interest 26,416 24,984 27,666 Depreciation and amortization 38,633 32,898 29,264 Impairment on investments - 2,545 - Loss on early extinguishment of debt - 1,002 - ----------- ----------- ----------- 112,054 104,000 93,279 ----------- ----------- ----------- Income from continuing operations 48,504 38,271 27,582
Income from discontinued operations, net 11,139 1,761 2,695 ----------- ----------- ----------- Net income $ 59,643 $ 40,032 $ 30,277 =========== =========== ===========
Dividends on preferred stock $ 8,898 $ 8,579 $ 3,666 ----------- ----------- ----------- Net income allocated to common stockholde $ 50,745 $ 31,453 $ 26,611 =========== =========== =========== Basic income per common share: Income from continuing operations $ 2.55 $ 2.18 $ 1.73 Income from discontinued operations 0.59 0.10 0.17 Net income 3.14 2.28 1.90 Net income available to common stockholders $ 2.67 $ 1.79 $ 1.67
Diluted income per common share: Income from continuing operations $ 2.52 $ 2.14 $ 1.70 Income from discontinued operations 0.58 0.10 0.17 Net income 3.10 2.24 1.87 Net income available to common stockholders $ 2.64 $ 1.76 $ 1.64
Weighted average shares of common stock outstanding: Basic 18,993,856 17,594,228 15,953,459 ============ =========== =========== Diluted 19,247,790 17,859,787 16,208,178 ============ =========== ===========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars In Thousands)
Accumulated Series A Series B Number of Additional Other Preferred Preferred Common Common Paid-In Deferred Retained Comprehensive Stock Stock Shares Stock Capital Compensation Earnings Income Total ---------- ---------- ----------- ------- --------- ----------- ----------- ------------ ---------- Balance at December 31, 2000 $ 38,588 - 15,548,356 $ 155 $ 278,868 $ (296) $ - $ 1,837 $ 319,152 FAS 133 transition adjustment - - - - - - - (3,461) (3,461) Net income - - - - - - 30,277 - 30,277 Unrealized loss on marketable securities - - - - - - - (1,008) (1,008) Unrealized loss on swap agreements - - - - - - - (3,517) (3,517) ---------- Comprehensive income - - - - - - - - 25,752 Issuance of common stock, net of offering costs - - 500,000 5 16,746 - - - 16,751 Stock compensation expense - - 122,555 1 4,326 (4,327) - - - Amortization of stock compensation expense - - - - - 2,841 - - 2,841 Exercise of stock options - - 183,630 2 5,198 - - - 5,200 Dividends declared on preferred stock - - - - - - (3,666) - (3,666) Dividends declared on common stock - - - - (3,320) - (26,611) - (29,931) ---------- ---------- ----------- ------- --------- ----------- ----------- ------------ ---------- Balance at December 31, 2001 38,588 - 16,354,541 163 301,818 (1,782) - (6,149) 332,638 Net income - - - - - - 40,032 - 40,032 Reclassification adjustment - - - - - - - 96 96 Unrealized loss on marketable securities - - - - - - - (712) (712) Unrealized loss on swap agreements - - - - - - - (2,059) (2,059) ---------- Comprehensive income - - - - - - - - 37,357 Issuance of common stock, net of offering costs - - 2,418,970 25 97,521 - - - 97,546 Issuance of Series B preferred stock, net of offering - 57,500 - - (2,371) - - - 55,129 Stock compensation expense - - 76,075 1 3,642 (3,643) - - - Amortization of stock compensation expense - - - - - 3,993 - - 3,993 Exercise of stock options - - 124,371 1 3,693 - - - 3,694 Dividends declared on preferred stock - - - - - - (8,625) - (8,625) Dividends declared on common stock - - - - (4,472) - (31,407) - (35,879) ---------- ---------- ----------- ------- --------- ----------- ----------- ------------ ---------- Balance at December 31, 2002 38,588 57,500 18,973,957 $ 190 $ 399,831 $ (1,432) $ - $ (8,824) $ 485,853 Net income - - - - - - 59,643 - 59,643 Unrealized gain on marketable securities - - - - - - - 610 610 Unrealized gain on swap agreements - - - - - - - 2,739 2,739 ---------- Comprehensive income - - - - - - - - 62,992 Stock compensation expense - - 92,483 1 4,153 (4,154) - - - Amortization of stock compensation expense - - - - - 3,354 - - 3,354 Exercise of stock options - - 197,583 2 5,942 - - - 5,944 Dividends declared on preferred stock - - - - - - (8,898) - (8,898) Dividends declared on common stock - - - - - - (42,110) - (42,110) ---------- ---------- ----------- ------- --------- ----------- ----------- ------------ ---------- Balance at December 31, 2003 $ 38,588 $ 57,500 19,264,023 $ 193 $ 409,926 $ (2,232) $ 8,635 $ (5,475) $ 507,135 ========== ========== =========== ======= ========= =========== =========== ============ ==========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Year Ended December 31, ----------- ------------- ----------- 2003 2002 2001 ----------- ----------- ----------- Operating Activities Net income 59,643 $ 40,032 $ 30,277 Adjustments to reconcile net income to net cash provided by operating activities: Loss on early extinguishment of debt - 1,002 - Non-cash impairment charges - 3,695 - Net gain on sales of property (8,286) - - Depreciation and amortization 38,901 34,071 30,578 Amortization of loan fees and costs 2,133 2,379 1,275 Amortization of premiums on secured notes payable (290) (360) (343) Stock compensation expense 2,734 3,651 2,841 Changes in operating assets and liabilities: Tenant security deposits and other restricted cash (3,037) 3,508 (4,533) Tenant receivables 672 482 (288) Deferred rent (6,826) (5,470) (5,648) Other assets (10,828) (12,942) (11,774) Accounts payable, accrued expenses and tenant security deposits 31 (2,998) 17,955 ----------- ----------- ----------- Net cash provided by operating activities 74,847 67,050 60,340
Investing Activities Purchase of rental properties (48,729) (103,295) (55,746) Proceeds from sales of rental properties 42,376 - - Additions to rental properties (48,264) (61,695) (69,530) Additions to properties under development (78,327) (48,479) (57,390) Additions to investments, net (6,866) (14,371) (9,513) ----------- ----------- ----------- Net cash used in investing activities (139,810) (227,840) (192,179)
Financing Activities Proceeds from secured notes payable 64,667 44,663 57,293 Net proceeds from issuances of common stock - 97,546 16,751 Net proceeds from issuance of preferred stock - 55,129 - Exercise of stock options 5,941 3,693 5,200 Net borrowings from unsecured line of credit and unsecured term loan 51,000 10,000 97,000 Principal reductions on secured notes payable (6,125) (13,427) (12,042) Proceeds from repayment of note receivable - 6,000 - Dividends paid on common stock (40,427) (33,912) (29,097) Dividends paid on preferred stock (8,898) (7,488) (3,666) Repurchase of common stock - - - ----------- ----------- ----------- Net cash provided by financing activities 66,158 162,204 131,439
Net increase (decrease) in cash and cash equivalents 1,195 1,414 (400) Cash and cash equivalents at beginning of year 3,790 2,376 2,776 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 4,985 $ 3,790 $ 2,376 =========== =========== =========== Supplemental Disclosure of Cash Flow Information Cash paid during the year for interest, net of interest capitalized $ 28,143 $ 28,130 $ 29,447 =========== =========== ===========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Background
Alexandria Real Estate Equities, Inc. is a real estate investment trust ("REIT") formed in 1994. We are engaged primarily in the ownership, operation, management, acquisition, expansion and selective redevelopment and development of properties containing a combination of office and laboratory space. We refer to these properties as "life science facilities." Our life science facilities are designed and improved for lease primarily to pharmaceutical, biotechnology, life science product and service companies, not- for-profit scientific research institutions, universities and related government agencies. As of December 31, 2003, our portfolio consisted of 89 properties in nine states with approximately 5,669,000 rentable square feet, compared to 89 properties in nine states with approximately 5,740,000 rentable square feet as of December 31, 2002.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Alexandria and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of the following (in thousands):
December 31, ----------------------- 2003 2002 ----------- ----------- Unrealized gain on marketable securities $ 824 $ 214 Unrealized loss on interest rate swap agreements (6,299) (9,038) ----------- ----------- $ (5,475) $ (8,824) =========== ===========
The following table provides a reconciliation of comprehensive income (in thousands):
Year Ended December 31, ----------------------- 2003 2002 ----------- -----------
Net income $ 59,643 $ 40,032 Reclassification adjustment - 96 Unrealized gain (loss) on marketable securities 610 (712) Unrealized gain (loss) on interest rate swap agreements 2,739 (2,059) ----------- ----------- Comprehensive income $ 62,992 $ 37,357 =========== ===========
Investments
We hold equity investments in certain publicly- traded companies and privately held entities primarily involved in the life science industry. All of our investments in publicly-traded companies are considered "available for sale" under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), and are recorded at fair value. Fair value has been determined by the closing trading price at the balance sheet date, with unrealized gains and losses shown as a separate component of stockholders' equity. The classification of investments under SFAS 115 is determined at the time each investment is made, and such determination is reevaluated at each balance sheet date. The cost of investments sold is determined by the specific identification method, with realized gains and losses included in other income.
Investments in privately held entities are generally accounted for under the cost method because we do not influence any operating or financial policies of the entities in which we invest. Certain investments are accounted for under the equity method of accounting under the provisions of Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB 18") and Emerging Issues Task Force ("EITF") Topic D-46, "Accounting for Limited Partnership Investments". Pursuant to APB 18, the equity method of accounting should be used when an investor has "the ability to exercise significant influence over operating and financial policies of an investee even though the investor holds 50% or less of the voting stock". EITF-D-46 further clarifies the Securities and Exchange Commission's position on the accounting for limited partnerships and provides that the equity method of accounting be used unless the investor's interest "is so minor that the limited partner may have virtually no influence over partnership operating and financial policies". Under the equity method of accounting, we record our investment initially at cost and adjust the carrying amount of the investment to recognize our share of the earnings or losses of the investee subsequent to the date of our investment.
For all of our investments, if a decline in the fair value of an investment below its carrying value is determined to be other than temporary, such investment is written down to its estimated fair value with a non-cash charge to current earnings.
The factors that we consider in making these assessments include, but are not limited to, market prices, market conditions, prospects for favorable or unfavorable clinical trial results, new product initiatives and new collaborative agreements. As a result of these assessments, during 2002 we recognized aggregate non-cash impairment charges of $2,545,000 for other than temporary declines in the fair value of investments.
Rental Properties and Properties Under Development
In accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), we perform the following procedures when making an allocation of the purchase price of real estate: 1) estimate the value of the real estate as of the acquisition date on an "as if vacant" basis, 2) allocate the "as if vacant" value among land, land improvements, buildings, building improvements, tenant improvements and equipment, 3) calculate the value of the intangibles as the difference between the "as if vacant" value and the purchase price, and 4) allocate the intangible value to above, below and at market leases, origination costs associated with in-place leases, tenant relationships and other intangible assets.
The values allocated to land improvements, buildings, building improvements, tenant improvements and equipment are depreciated on a straight-line basis using an estimated life of 20 years for land improvements, 40 years for buildings and building improvements, the respective lease term for tenant improvements and the estimated useful life of equipment. The values of above and below market leases are amortized over the life of the related lease and recorded as either an increase (for below market leases) or a decrease (for above market leases) to rental income. The values of at-market leases and origination costs are classified as leasing costs, included in other assets on our balance sheets and amortized over the remaining life of the lease. The values of other intangible assets are amortized over the estimated useful life.
Rental properties and properties under development are individually evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future undiscounted cash flows is less than its carrying amount. Upon determination that an impairment has occurred, a write- down is recorded to reduce the carrying amount of the property to its estimated fair value.
We capitalize direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and indirect project costs, including payroll and other costs directly associated with the acquisition, development or construction of a project. Payroll costs not related to the construction, development or redevelopment of a project, or acquisition of a property that will be classified as operating at the date of acquisition, are expensed as incurred. Costs incurred after a project is substantially complete and ready for its intended use are expensed as incurred. Costs previously capitalized related to abandoned acquisition or development opportunities are written-off. Should development activity cease, a portion of interest, property taxes, insurance and certain costs would no longer be eligible for capitalization, and would be expensed as incurred.
As of December 31, 2003, we had one property designated as "held for sale" under the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). During the year ended December 31, 2003, we sold three properties, two of which were designated as "held for sale" as of December 31, 2002. See Note 13, Discontinued Operations.
Tenant Security Deposits and Restricted Cash
Tenant security deposits and restricted cash consists of the following (in thousands):
December 31, ---------------------- 2003 2002 ---------- ---------- Funds held in trust under the terms of certain secured notes payable $ 8,665 $ 5,692
Security deposit funds based on the terms of certain lease agreements 2,029 1,967
Other funds held in escrow 363 361 ---------- ---------- $ 11,057 $ 8,020 ========== ==========
Loan Fees and Costs
Fees and costs incurred in obtaining long-term financing are amortized over the terms of the related loans and included in interest expense. Loan fees and costs, net of related amortization, totaled $11,556,000 and $8,545,000 as of December 31, 2003 and 2002, respectively, and are included in other assets on our balance sheets.
Rental Income
Rental income from leases with scheduled rent increases, free rent and other rent adjustments are recognized on a straight-line basis over the respective lease terms. We include amounts currently recognized as income, and expected to be received in later years, in deferred rent on our balance sheets. Amounts received currently, but recognized as income in future years, are included in accrued expenses as unearned rent on our balance sheets.
Interest Income
Interest income was $108,000, $298,000 and $923,000 in 2003, 2002 and 2001, respectively, and is included in other income in the accompanying statements of income.
Leasing Costs
Leasing costs are amortized on a straight-line basis over the terms of the related leases. Leasing costs, net of related amortization, totaled $18,665,000 and $16,189,000 as of December 31, 2003 and 2002, respectively, and are included in other assets on our balance sheets.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and unsecured line of credit and unsecured term loan approximate fair value.
The fair value of our secured notes payable was estimated using discounted cash flows analyses based on borrowing rates we believe we could obtain with similar terms and maturities. As of December 31, 2003 and 2002, the fair value of our secured notes payable was approximately $338,620,000 and $292,745,000, respectively.
Net Income Per Share
The following table shows the computation of income per common share and dividends declared per share of common stock:
Year Ended December 31, ------------------------------------ 2003 2002 2001 ----------- ----------- ----------- (Dollars in thousands, except per share amounts)
Net income available to common stockholders $ 50,745 $ 31,453 $ 26,611 =========== =========== =========== Weighted average shares of common stock outstanding - basic 18,993,856 17,594,228 15,953,459 Add: dilutive effect of stock op 253,934 265,559 254,719 ----------- ----------- ----------- Weighted average shares of common stock outstanding - diluted 19,247,790 17,859,787 16,208,178 =========== =========== =========== Net income per common share - basic $ 2.67 $ 1.79 $ 1.67 =========== =========== =========== Net income per common share - diluted $ 2.64 $ 1.76 $ 1.64 =========== =========== ===========
Common dividends declared per sh $ 2.20 $ 2.00 $ 1.84 =========== =========== ===========
Operating Segments
We view our operations as principally one segment and the financial information disclosed herein represents all of the financial information related to our principal operating segment.
Income Taxes
As a REIT, we are not subject to federal income taxation as long as we meet a number of organizational and operational requirements and make distributions greater than or equal to 100% of our taxable income to our stockholders. Since we believe we have met these requirements and our distributions exceeded taxable income, no federal income tax provision has been reflected in the accompanying consolidated financial statements for the years ended December 31, 2003, 2002 and 2001. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate tax rates.
During 2003, 2002 and 2001, we declared dividends on our common stock of $2.20, $2.00 and $1.84 per share, respectively. During 2003, 2002 and 2001, we declared dividends on our Series A preferred stock of $2.375, $2.375 and $2.375 per share, respectively. During 2003 and 2002, we declared dividends on our Series B preferred stock of $2.275 and $1.662 per share, respectively.
Impact of Recently Issued Accounting Standards
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150"), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. We adopted SFAS 150 in the third quarter of 2003. The adoption of SFAS 150 did not have an impact on the accompanying financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and clarifies financial accounting and reporting for derivative instruments and hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 149, among other things, clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component and amends the definition of an "underlying" to conform it to language used in FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". SFAS 149 is effective for contracts entered into or modified after September 30, 2003 and for hedging relationships designated after September 30, 2003. The adoption of SFAS 149 did not have an impact on the accompanying financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities", an interpretation of Accounting Research Bulletin No. 51 ("FIN 46"), which requires the consolidation of entities with respect to which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, an entity is generally consolidated by an enterprise when it has a controlling financial interest through ownership of a majority voting interest in the entity. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and is generally effective December 31, 2003 for variable interest entities acquired before February 1, 2003. The adoption of FIN 46 did not have an impact on the accompanying financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"), which addresses alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), prospectively to all employee awards granted, modified or settled after January 1, 2003 pursuant to the transition and disclosure guidance under SFAS 148. The cost related to stock-based employee compensation included in the determination of net income for 2002 and 2001 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective dates of SFAS 123. See Note 11, Stock Option Plans and Stock Grants.
In April 2002, FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"), which requires any gain or loss on early extinguishment of debt that was classified as an extraordinary item that does not meet certain criteria, be reclassified from extraordinary item to continuing operations. In accordance with SFAS 145, the extraordinary loss on early extinguishment of debt recognized in 2002 was reclassified to continuing operations in 2003.
3. Rental Properties and Properties Under Development
Rental properties consist of the following (in thousands):
December 31, ------------------------ 2003 2002 ----------- -----------
Land $ 147,425 $ 151,297 Building and improvements 854,152 829,739 Tenant and other improvements 122,280 108,863 ----------- ----------- 1,123,857 1,089,899 Less accumulated depreciation (141,560) (113,477) ----------- ----------- $ 982,297 $ 976,422 =========== ===========
As of December 31, 2003, 39 of our rental properties are encumbered by deeds of trust and assignments of rents and leases associated with the properties (see Note 6). The net book value of encumbered properties as of December 31, 2003 and 2002 is $369,731,000 and $354,895,000, respectively.
We lease space under noncancelable leases with remaining terms of one to 15 years.
As of December 31, 2003, approximately 88% of our leases (on a square footage basis) require that the lessee pay substantially all taxes, maintenance, insurance and certain other operating expenses applicable to the leased properties.
Included in rental properties as of December 31, 2003 are ten properties in our redevelopment program that contained a total of 770,000 square feet. Of this total, 359,000 square feet are under redevelopment and currently vacant, and the remaining 411,000 square feet are currently leased. The allocated net book value of the portion of these properties undergoing redevelopment as of December 31, 2003 was $65,559,000. Depreciation ceases on the portion of a property undergoing redevelopment during the period of redevelopment.
We capitalize interest to properties under development or redevelopment during the period the asset is undergoing activities to prepare it for its intended use. Total interest capitalized for the years ended December 31, 2003, 2002 and 2001 was $13,941,000, $13,519,000 and $11,371,000, respectively. Total interest incurred for the years ended December 31, 2003, 2002 and 2001 was $41,571,000, $40,294,000 and $40,840,000, respectively.
Minimum lease payments to be received under the terms of the operating lease agreements, excluding expense reimbursements, as of December 31, 2003, are as follows (in thousands):
Year Amount ------------------------- ------------- 2004 $ 118,729 2005 114,490 2006 106,551 2007 90,799 2008 82,476 Thereafter 338,122 ----------- $ 851,167 ===========
4. Investments
We hold equity investments in certain publicly-traded companies and privately held entities primarily involved in the life science industry. All of our investments in publicly-traded companies are considered "available for sale" under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The following table summarizes our available-for-sale securities (in thousands):
December 31, -------------------- 2003 2002 --------- --------- Adjusted cost of available-for- $ 1,257 $ 3,210 securities
Non-cash impairment charges - (1,334)
Gross unrealized gains 837 214
Gross unrealized losses (13) - --------- --------- Fair value of available-for-sale securities $ 2,081 $ 2,090 ========= =========
Investments in privately held entities as of December 31, 2003 and 2002, totaled $45,045,000 and $37,560,000, respectively. Of these totals, $42,331,000 and $35,356,000 are accounted for under the cost method. The remainder ($2,714,000 and $2,204,000 for 2003 and 2002, respectively) is accounted for under the equity method in accordance with Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB 18") and Emerging Issues Task Force ("EITF") Topic D-46, "Accounting for Limited Partnership Investments". Equity in income for the year ended December 31, 2003 related to investments accounted for under the equity method of accounting was $306,000 and is included in other income in the accompanying consolidated statements of income. During 2002, we recognized an impairment charge of $1,211,000 for other than temporary declines in the fair value of our investments in privately held entities.
Net investment income of $536,000 was recognized in 2003 and is included in other income in the accompanying consolidated statements of income. Net investment income during 2003 consists of equity in income of $306,000 related to investments accounted for under the equity method of accounting, gross realized gains of $532,000 and gross realized losses of $302,000.
5. Unsecured Line of Credit and Unsecured Term Loan
We have an unsecured line of credit that provides for borrowings of up to $440 million. Borrowings under our unsecured line of credit, as amended, bear interest at a floating rate based on our election of either a LIBOR-based rate or the higher of the bank's reference rate and the Federal Funds rate, plus 0.5%. For each LIBOR-based advance, we must elect a LIBOR period of one, two, three or six months.
Our unsecured line of credit contains financial covenants, including, among other things, maintenance of minimum net worth, a total liabilities to gross asset value ratio and a fixed charge coverage ratio. In addition, the terms of the unsecured line of credit restrict, among other things, certain investments, indebtedness, distributions and mergers. The unsecured line of credit expires November 2006 and may be extended at our sole option for an additional one-year period. As of December 31, 2003, borrowings outstanding on the unsecured line of credit carried a weighted average interest rate of 2.65%.
In November 2003, we obtained a $150 million unsecured term loan which bears interest at a floating rate based on our election of either a LIBOR based rate or the higher of the bank's reference rate and the Federal Funds rate, plus 0.5%. For each LIBOR based advance, we must elect to fix for a period of one, two, three or six months. The unsecured term loan contains financial covenants substantially similar to those in our unsecured line of credit. The unsecured term loan expires in November 2008. As of December 31, 2003, the unsecured term loan carried a weighted average interest rate of 2.62%.
Aggregate borrowings under the unsecured line of credit and unsecured term loan may be limited to an amount based on the net operating income derived from a pool of unencumbered properties. Accordingly, as we acquire or complete the development or redevelopment of additional unencumbered properties, aggregate borrowings available under the unsecured line of credit and unsecured term loan will increase up to a maximum of $590 million. Under these provisions, as of December 31, 2003, aggregate borrowings under our unsecured line of credit and unsecured term loan were limited to $479 million.
We utilize interest rate swap agreements to hedge a portion of our exposure to variable interest rates associated with our unsecured line of credit and unsecured term loan. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one-month LIBOR rate. The net difference between the interest paid and the interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements (dollars in thousands):
Notional Effective at Interest Termination Fair Transaction Dates Effective Dates Amounts December 31, 2003 Pay Rates Dates Values ---------------- ---------------- --------- ----------------- -------- ---------------- -------- Hedges for Unsecured Line of Credit ---------------------------------
March 2002 December 31, 2002 $50,000 $ 50,000 5.364% December 31,2004 $(2,004)
July 2002 January 1, 2003 25,000 25,000 3.855% June 30, 2005 (805)
July 2002 January 1, 2003 25,000 25,000 3.865% June 30, 2005 (809)
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 (567)
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 (567)
November 2002 June 1, 2003 25,000 25,000 3.115% December 31, 2005 (523)
November 2002 June 1, 2003 25,000 25,000 3.155% December 31, 2005 (543) ----------------- $ 200,000 Hedges for Unsecured Term Loan ----------------------------- December 2003 December 31, 2003 $50,000 $ 50,000 1.53% December 31, 2004 (74)
December 2003 December 31, 2004 50,000 - 3.00% December 30, 2005 (119)
December 2003 December 30, 2005 50,000 - 4.15% December 29, 2006 (121)
December 2003 December 29, 2006 50,000 - 5.09% October 31, 2008 (167) ----------------- -------- $ 50,000 $(6,299) ----------------- ======== Total Interest Rate Swap Agreements in Effect at December 31, 2003 $ 250,000 =================
Effective January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," as amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 133, as amended, establishes accounting and reporting standards for derivative financial instruments such as our interest rate swap agreements. Specifically, SFAS 133 requires us to reflect our interest rate swap agreements on the balance sheet at their estimated fair values. We use a variety of methods and assumptions based on market conditions and risks existing at each balance sheet date to determine the fair values of our interest rate swap agreements. These methods of assessing fair value result in a general approximation of value, and such value may never be realized.
All of our interest rate swap agreements meet the criteria to be deemed "highly effective" under SFAS 133 in reducing our exposure to variable interest rates. Accordingly, we have categorized these instruments as cash flow hedges. While we intend to continue to meet the conditions for such hedge accounting, if hedges did not qualify as "highly effective", the changes in the fair value of the derivatives used as hedges would be reflected in earnings.
We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate swap agreements as our counterparties are established, well-capitalized financial institutions.
As of December 31, 2003 and 2002, our interest rate swap agreements have been reported in the accompanying balance sheets at their fair value as other liabilities of approximately $6.3 million and $9.0 million, respectively. The offsetting adjustments were reflected as deferred losses in accumulated other comprehensive income of $6.3 million and $9.0 million, respectively. Balances in accumulated other comprehensive income are recognized in earnings as swap payments are made.
6. Secured Notes Payable
Secured notes payable consist of the following (in thousands):
December 31, --------------------- 2003 2002 ---------- ---------- 8.45% note, due in August 2004, secured by one property in Lexington, MA $ 3,342 $ - Loan at LIBOR plus 1.7%, due January 2005, secured by two properties in San Francisco, CA 22,520 21,853 8.75% note, due January 2006, with an effective interest rate of 7.25% (includes unamortized premium of $252 and $374 at December 31, 2003 and 2002, respectively), secured by one property in Worcester, MA 9,735 10,286 8.68% note, due December 2006, secured by two properties in Durham, NC 11,880 12,038 8.25% note, due August 2007, secured by three properties in Gaithersburg, MD 9,700 9,808 9.125% note, due October 2007, with an effective interest rate of 7.25% (includes unamortized premium of $1,379 at December 31, 2002), secured by one property in Cambridge, MA - 18,777 7.22% note, due May 2008, secured by two properties, one in Chantilly, VA and the other in Seattle, WA 34,410 34,852 6.95% note, due July 2009, secured by four properties in San Diego, CA 40,225 41,259 8.71% note, due January 2010, secured by two properties, one in Worcester, MA and the other in San Diego, CA 18,396 18,542 8.33% note, due November 2010, secured by two properties in Gaithersburg, MD 24,131 24,327 7.75% note, due July 2011, secured by six properties in San Diego, CA 23,633 23,839 7.40% note, due January 2012, secured by three properties in Gaithersburg, MD 27,778 28,031 6.21% note, due March 2013, secured by four properties, three in Alameda, CA and one in San Diego, CA 33,564 - 6.36% note, due in September 2013, secured by three properties, two in Rockville, MD and one in Beltsville, MD 29,898 - 7.165% note, due January 2014, secured by one property in Alameda, CA 2,138 3,520 7.75% note, due June 2016, secured by two properties in Seattle, WA 17,318 18,109 7.50% note, due August 2021, secured by one property in San Diego, CA 11,339 11,637 ----------------------
$ 320,007 $ 276,878
======================
As of December 31, 2003, all of our secured notes payable, except for the 7.165% note, require monthly payments of principal and interest. The 7.165% note requires monthly payments of interest and semi-annual payments of principal. The LIBOR-based loan secured by the two properties in San Francisco, CA, may be extended, at our option, for an additional year.
Future principal payments due on secured notes payable as of December 31, 2003, are as follows (in thousands):
Weighted Average Year Amount Interest Rates ------------------ ----------- -------------
2004 $ 9,415 7.69% 2005 28,370 3.82%(1) 2006 25,571 7.89%(1) 2007 15,123 7.86% 2008 37,859 7.22% Thereafter 203,417 7.29% ----------- ------------- Subtotal 319,755 7.06% Unamortized premium 252 ============= ----------- $ 320,007 ===========
A loan related to a property developed in the San Francisco Bay market has a maturity date of 2005, which may be extended at our option for an additional year. If we extend the maturity date of this loan, the weighted average interest rates for 2005 and 2006 would be 7.29% and 5.57%, respectively.
7. Issuances of Common Stock
In February 2002, we sold 418,970 shares of our common stock. The shares were issued at a price of $39.46 per share, resulting in aggregate proceeds of approximately $16.1 million (after deducting underwriting discounts and other offering costs).
In July 2002, we sold 2,000,000 shares of our common stock. The shares were issued at a price of $41.07 per share, resulting in aggregate proceeds of approximately $81.4 million (after deducting underwriting discounts and other offering costs).
8. Non-Cash Transactions
In connection with the acquisition of a property in Lexington, Massachusetts in 2003, we assumed a secured note payable. The following table summarizes this transaction (in thousands):
----------- -----------
Aggregate purchase price $ 6,900 Secured note payable assumed 3,384 ----------- Cash paid for the property $ 3,516 ===========
In connection with the sale of a property in Cambridge, Massachusetts in August 2003, the buyer assumed a secured note payable totaling $17.3 million.
In 2003 and 2002, we incurred $3,354,000 and $3,993,000, respectively, in non-cash stock compensation expense.
9. Preferred Stock and Excess Stock
Series A Cumulative Redeemable Preferred Stock
There are 1,543,500 shares of our 9.50% Series A cumulative redeemable preferred stock outstanding. The shares were issued in 1999 at a price of $25.00 per share. We pay dividends quarterly in arrears at an annual rate of $2.375 per share. Our Series A preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not redeemable prior to June 11, 2004, except in order to preserve our status as a REIT. Investors in our Series A preferred stock generally have no voting rights. On or after June 11, 2004, we may, at our option, redeem our Series A preferred stock, in whole or in part, at any time with proceeds from the sale of equity securities at a redemption price of $25.00 per share, plus accrued and unpaid dividends.
Series B Cumulative Redeemable Preferred Stock
In January 2002, we completed a public offering of 2,300,000 shares of our 9.10% Series B cumulative redeemable preferred stock (including the shares issued upon exercise of the underwriters' over-allotment option). The shares were issued at a price of $25.00 per share, resulting in aggregate proceeds of approximately $55.1 million, net of underwriters' discounts and other offering costs. The dividends on our Series B preferred stock are cumulative and accrue from the date of original issuance. We pay dividends quarterly in arrears at an annual rate of $2.275 per share. Our Series B preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not redeemable prior to January 22, 2007, except in order to preserve our status as a REIT. Investors in our Series B preferred stock generally have no voting rights. On or after January 22, 2007, we may, at our option, redeem our Series B preferred stock, in whole or in part, at any time with proceeds from the sale of equity securities at a redemption price of $25.00 per share, plus accrued and unpaid dividends.
Preferred Stock and Excess Stock Authorizations
Our charter authorizes the issuance of up to 100,000,000 shares of preferred stock, of which 3,843,500 shares were issued and outstanding as of December 31, 2003. In addition, 200,000,000 shares of "excess stock" (as defined) are authorized, none of which were issued and outstanding at December 31, 2003.
Redemption of Preferred Stock
Emerging Issues Task Force ("EITF") Topic D-42, "The Effect on the Calculation of Earnings Per Share for the Redemption or Induced Conversion of Preferred Stock", provides, among other things, that any excess of (1) the fair value of the consideration transferred to the holders of preferred stock redeemed over (2) the carrying amount of the preferred stock, should be subtracted from net earnings to determine net income available to common stockholders in the calculation of earnings per share. The cost to issue our preferred stock totaling $1.7 million and $2.4 million for our Series A and Series B preferred stock, respectively, was recorded as a reduction to additional paid-in capital in the years that the preferred stock was issued. Upon any redemption of our Series A and Series B preferred stock, the respective offering costs, representing the excess of the fair value of the consideration transferred to the holders over the carrying amount of the preferred stock, will be recognized as a dividend to preferred stockholders. Dividends on preferred stock are deducted from net income to arrive at net income allocable to common stockholders.
10. Commitments and Contingencies
Employee Retirement Savings Plan
We have a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code whereby our employees may contribute a portion of their compensation to their respective retirement accounts, in an amount not to exceed the maximum allowed under the Internal Revenue Code. We have elected to provide discretionary profit sharing contributions (subject to statutory limitations), which amounted to $461,000, $428,000 and $353,000, respectively, for the years ended December 31, 2003, 2002 and 2001. Employees who participate in the plan are immediately vested in their contributions and in the contributions of the company.
Concentration of Credit Risk
We maintain our cash and cash equivalents at insured financial institutions. The combined account balances at each institution periodically exceed FDIC insurance coverage, and, as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. We believe that the risk is not significant.
We are dependent on rental income from relatively few tenants in the life science industry. The inability of any single tenant to make its lease payments could adversely affect our operations. As of December 31, 2003, we held leases with a total of 179 tenants and 50 of our 89 properties were each leased to a single tenant. At December 31, 2003, our three largest tenants accounted for approximately 12.8% of our aggregate annualized base rent.
We generally do not require collateral or other security from our tenants, other than security deposits. In addition to security deposits held in cash, we held $24.1 million in irrevocable letters of credit available from certain tenants as security deposits for 59 leases as of December 31, 2003.
Commitments
In addition to above, as of December 31, 2003, we were committed under the terms of construction contracts to complete the construction of properties under development at a remaining aggregate cost of $11.7 million.
As of December 31, 2003, we were also committed to fund approximately $12.5 million for the construction of building infrastructure improvements under the terms of leases and/or construction contracts and approximately $19.5 million for certain investments.
Ground lease obligations as of December 31, 2003 include leases at six of our properties and one land development parcel. These lease obligations, of approximately $65.4 million, have remaining lease terms of 29 to 51 years, exclusive of extension options.
11. Stock Option Plans and Stock Grants
1997 Stock Plan
In 1997, we adopted a stock option and incentive plan (the "Stock Plan") for the purpose of attracting and retaining the highest quality personnel, providing for additional incentives and promoting the success of the company by providing employees the opportunity to acquire common stock pursuant to (i) options to purchase common stock; and (ii) share awards. As of December 31, 2003, a total of 308,536 shares were reserved for the granting of future options and share awards under the Stock Plan.
Options under our plan have been granted at prices that are equal to the market value of the stock on the date of grant and expire ten years after the date of grant. Employee options vest ratably in three annual installments from the date of grant. Non-employee director options vest immediately on the date of grant. The options outstanding under the Stock Plan expire at various dates through October 2012.
In addition, the Stock Plan permits us to issue share awards to our employees and non-employee directors. A share award is an award of common stock which (i) may be fully vested upon issuance or (ii) may be subject to the risk of forfeiture under Section 83 of the Internal Revenue Code. Shares issued generally vest over a one to three year period from the date of issuance and the sale of the shares is restricted prior to the date of vesting. During 2003, we awarded 92,483 shares of common stock. These shares were recorded at fair value with a corresponding charge to stockholders' equity. The unearned portion is amortized as stock compensation expense on a straight-line basis over the vesting period.
For 2002 and all prior years, we have elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for our employee and non- employee director stock options, stock grants and stock appreciation rights. Effective January 1, 2003, the Company has adopted the fair value recognition provisions of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), prospectively to all employee awards granted, modified or settled after January 1, 2003. We granted no new stock options in 2003. Under APB 25, because the exercise price of the options we granted equals the market price of the underlying stock on the date of grant, no compensation expense has been recognized. Although we have elected to follow APB 25, pro forma information regarding net income and net income per share is required by SFAS 123. This information has been determined as if we had accounted for our stock options under the fair value method under SFAS 123. The fair value of the options issued under the Stock Plan was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2003, 2002 and 2001:
Year Ended December 31, ------------------------------------ 2003 2002 2001 ----------- ----------- -----------
Risk-free interest rate 3.65% 2.69% 4.68% Dividend yield 3.95% 4.04% 4.49% Volatility factor of the expected market price 21.20% 22.04% 22.37% Weighted average expected life of the options 7.0 years 4.8 years 5.2 years
For purposes of the following pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods (in thousands, except per share information):
Year Ended December 31, ----------- ------------ ----------- 2003 2002 2001 ----------- ----------- -----------
Pro forma net income available to common stockholders $ 49,422 $ 30,279 $ 25,690 Pro forma net income per common share: - Basic $ 2.60 $ 1.72 $ 1.61 - Diluted $ 2.57 $ 1.70 $ 1.59
A summary of the stock option activity under our Stock Plan and related information for the years ended December 31, 2003, 2002 and 2001 follows:
2003 2002 2001 ---------------------- ---------------------- -----------------------
Weighted Weighted Weighted Average Average Average Stock Exercise Stock Exercise Stock Exercise Options Price Options Price Options Price ---------- ---------- ---------- ---------- ---------- ---------- Outstanding-beginning of year 1,011,166 $ 34.39 849,870 $ 29.68 901,000 $ 27.73 Granted - - 337,000 44.44 193,500 38.27 Exercised (197,583) 30.08 (124,371) 29.70 (183,630) 27.58 Forfeited (4,000) 43.23 (51,333) 33.75 (61,000) 34.48 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding-end of year 809,583 $ 35.39 1,011,166 $ 34.39 849,870 $ 29.68 ========== ========== ========== ========== ========== ==========
Exercisable at end of year 533,420 $ 31.35 514,169 $ 26.89 497,040 $ 25.29 ========== ========== ========== ========== ========== ========== Weighted average fair value of options granted $ - $ 6.05 $ 6.19 ========== ========== ==========
The following table summarizes information about stock options outstanding at December 31, 2003:
Options Outstanding Options Exercisable ---------------------------------- ----------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 12/31/03 Life Price at 12/31/03 Price ------------- ------------- ---------- -------- ----------- --------- $20.00-$32.06 290,550 3.84 $24.07 290,550 $24.07 $32.94-$43.00 281,033 7.47 $38.70 175,536 $37.93 $43.24-$47.69 238,000 8.35 $45.31 67,334 $45.60
12. Quarterly Financial Data (Unaudited)
Following is a summary of consolidated financial information on a quarterly basis for 2003 and 2002:
Quarter ---------------------------------------------------------- First Second Third Fourth ------------- ------------- ------------- ------------- (In thousands, except per share amounts)
---- Revenues $ 40,039 $ 39,455 $ 40,085 $ 40,979 Net income available to common stockholders $ 9,925 $ 10,324 $ 19,369 $ 11,127
Basic income per share: Income from continuing operations $ 0.62 $ 0.61 $ 0.63 $ 0.69 Income from discontinued operations, net $ 0.03 $ 0.05 $ 0.50 $ 0.01 Net income $ 0.64 $ 0.66 $ 1.14 $ 0.70 Net income available to common stockholders $ 0.53 $ 0.54 $ 1.02 $ 0.58 Diluted income per share: Income from continuing operations $ 0.61 $ 0.60 $ 0.63 $ 0.68 Income from discontinued operations, net $ 0.03 $ 0.05 $ 0.49 $ 0.01 Net income $ 0.63 $ 0.65 $ 1.12 $ 0.69 Net income available to common stockholders $ 0.52 $ 0.54 $ 1.00 $ 0.57
---- Revenues $ 33,098 $ 34,253 $ 36,236 $ 38,684 Net income available to common stockholders $ 7,698 $ 7,996 $ 8,530 $ 7,229
Basic income per share: Income from continuing operations $ 0.54 $ 0.57 $ 0.55 $ 0.52 Income (loss) from discontinued operations,net $ 0.04 $ 0.04 $ 0.04 $ (0.02) Net income $ 0.59 $ 0.61 $ 0.59 $ 0.50 Net income available to common stockholders $ 0.47 $ 0.48 $ 0.47 $ 0.38
Diluted income per share: Income from continuing operations $ 0.53 $ 0.56 $ 0.54 $ 0.51 Income (loss) from discontinued operations,net $ 0.04 $ 0.04 $ 0.04 $ (0.02) Net income $ 0.57 $ 0.60 $ 0.58 $ 0.50 Net income available to common stockholders $ 0.46 $ 0.47 $ 0.46 $ 0.38
13. Discontinued Operations
On January 1, 2002, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") became effective. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Under SFAS 144, a property is classified as "held for sale" when all of the following criteria for a plan of sale have been met: 1) management, having the authority to approve the action, commits to a plan to sell the property, 2) the property is available for immediate sale in its present condition, subject only to the terms that are usual and customary, 3) an active program to locate a buyer, and other actions required to complete the plan to sell, have been initiated, 4) the sale of the property is probable and is expected to be completed within one year, 5) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and 6) actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. When all of these criteria have been met, the property is classified as "held for sale" and its operations are classified as discontinued operations in our consolidated statements of income. When a property is designated as "held for sale", amounts for all prior periods presented are reclassified from continuing operations to discontinued operations. A loss is recognized for any initial adjustment of the asset's carrying amount to fair value less costs to sell in the period the asset qualifies as "held for sale". Depreciation of assets is discontinued commencing on the date they are designated as "held for sale". The accompanying statements have been presented in compliance with SFAS 144.
Income from discontinued operations, net includes the results of three properties we sold during 2003, and one property that had been designated as "held for sale" as of December 31, 2003 under the provisions of SFAS 144. We sold one property located in the Suburban Washington D.C. market that had been designated as "held for sale" during the fourth quarter of 2003. The total sale price for the property was approximately $9.0 million. In connection with the sale, we recorded a loss on sale of property of approximately $36,000. During the third quarter of 2003, we sold one property located in the Eastern Massachusetts market that had been previously designated as "held for sale" as of December 31, 2002. The total sale price for the property was approximately $46.5 million. In connection with this sale, we recorded a gain on sale of property of approximately $8.8 million. Interest expense included in discontinued operations represents interest related to a secured note payable which was assumed by the buyer in connection with the sale of this property. During the first quarter of 2003, we sold one property located in the San Francisco Bay market which could not be redeveloped pursuant to our original strategic objectives and that had been designated as "held for sale" as of December 31, 2002. The total sale price for the property was approximately $6.8 million. In connection with this sale, we recorded a loss on sale of property of approximately $455,000 in 2003. Gains and losses on sales of these properties are included on the income statement in income from discontinued operations in 2003.
The following is a summary of operations and net assets of the properties included in discontinued operations (in thousands):
Year Ended December 31, ------------------------------------ 2003 2002 2001 ----------- ----------- ----------- Total revenue $ 5,449 $ 7,207 $ 6,929 Operating expenses 1,404 1,692 1,460 ----------- ----------- ----------- Revenue less operating expenses 4,045 5,515 5,469 Interest 924 1,431 1,460 Depreciation 268 1,173 1,314 Income before net gain on sales of ----------- ----------- ----------- property and non-cash impairment charge 2,853 2,911 2,695 Net gain on sales of property 8,286 - - Non-cash impairment charge - (1,150) - Income from discontinued ----------- ----------- ----------- operations $ 11,139 $ 1,761 $ 2,695 =========== =========== ===========
December 31, ------------------------- 2003 2002 ----------- ----------- Properties held for sale, net $ 3,518 $ 55,539 Cash and cash equivalents - 3 Tenant security deposits and other restricted cash 6 121 Tenant receivables 82 94 Deferred rent 8 1,348 Other assets 66 308 ----------- ----------- Total assets $ 3,680 $ 57,413
Secured note payable $ - $ 18,777 Accounts payable, accrued expenses and tenant security deposits 79 1,266 ----------- ----------- Total liabilities 79 20,043 ----------- ----------- Net assets of discontinued operations $ 3,601 $ 37,370 ============ ============
14. Subsequent Events
In February 2004, we sold an office property in the Suburban Washington D.C. market that had been designated as "held for sale" during the fourth quarter of 2003. The total sale price for the property was approximately $5.7 million.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Schedule III
Consolidated Financial Statement Schedule of Rental Properties
and Accumulated Depreciation
December 31, 2003
(In Thousands, Except Square Foot Data)
Initial Costs Costs Total Costs ----------------------- Capitalized ---------------------- Square Buildings and Subsequent to Buildings and Accumulated Year Built/ Property Name Footage Land Improvements Acquisition Land Improvements Total Depreciation (1) Encumbrances Renovated ------------- ---------- -------- ------------- ------------ -------- ------------ --------- ---------------- ----------- ------------------- North Torrey Pines Road #1 107,710 $ 1,321 $ 5,960 $ 5,698 $ 1,321 $ 11,658 $ 12,979 $ 2,484 $ - 1971/2003 Science Park Road 74,557 1,013 - 16,755 1,013 16,755 17,768 2,787 - 2000 North Torrey Pines Road #2 86,962 2,663 10,649 4,677 2,663 15,326 17,989 4,506 - 1986/1996 General Atomics Court #1 76,084 2,651 18,046 1,447 2,651 19,493 22,144 5,740 40,225 (2) 1986/2000 General Atomics Court #2 43,600 1,227 9,554 18 1,227 9,572 10,799 2,891 - (2) 1991 Roselle Street #1 18,173 463 1,840 850 463 2,690 3,153 1,058 - (3) 1983/1998 Nexus Centre Drive 67,050 2,548 13,638 31 2,548 13,669 16,217 3,719 33,564 (4) 1989 Nancy Ridge Drive #1 29,333 733 2,273 1,867 733 4,140 4,873 1,208 - (5) 1997 Roselle Street #2 17,603 444 1,699 1,798 444 3,497 3,941 773 - late 1970's/1999 Tansy Street 15,410 651 1,375 1,886 651 3,261 3,912 901 - 1978/1999 John Hopkins Court #1 34,723 1,122 - 3,882 1,122 3,882 5,004 362 - (2) 2000 John Hopkins Court #2 55,200 1,683 - 5,648 1,683 5,648 7,331 749 - (2) 1999 Towne Centre Drive #1 45,030 275 8,621 3,502 275 12,123 12,398 1,106 - 1987/2003 Towne Centre Drive #2 52,228 320 10,070 836 320 10,906 11,226 1,629 - 1987/2000 Towne Centre Drive #3 41,780 258 8,170 7,490 258 15,660 15,918 1,720 - 1987/2000 Roselle Street #3 17,590 455 2,581 688 455 3,269 3,724 174 23,633 (3) 1981 Roselle Street #4 30,147 754 4,288 134 754 4,422 5,176 392 - (3) 1981/1998 Roselle Street #5 22,577 564 3,224 20 564 3,244 3,808 316 - (3) 1981/1995 Roselle Street #6 17,433 436 2,480 21 436 2,501 2,937 239 - (3) 1981/1999 Roselle Street #7 24,208 605 3,459 20 605 3,479 4,084 339 - (3) 1981/1995 Nancy Ridge Drive #2 21,940 515 1,566 2,399 515 3,965 4,480 445 - early 1980's/2001 Campus Point Drive 71,510 4,246 16,165 125 4,246 16,290 20,536 1,091 11,339 1986/1998 Nancy Ridge Drive #3 56,698 1,984 10,397 - 1,984 10,397 12,381 - - 1987/2001 North Hill Avenue 31,343 2,172 812 9,045 2,172 9,857 12,029 870 - 1940's/2002 Harbor Bay Parkway #1 61,015 1,506 5,357 2,324 1,506 7,681 9,187 2,325 - (4) 1983/1999 Harbor Bay Parkway #2 27,745 775 1,917 1,525 775 3,442 4,217 796 - (4) 1984/2000 Harbor Bay Parkway #3 47,777 1,200 3,880 444 1,200 4,324 5,524 766 - (4) 1986/1994 Harbor Bay Parkway #4 68,711 1,800 9,731 490 1,800 10,221 12,021 1,818 2,138 1985/1994 Mitten Road & Malcolm Road 153,837 4,751 12,612 10,432 4,751 23,044 27,795 3,044 - 1962/2002 Hanover Street 32,074 - 6,628 5,169 - 11,797 11,797 3,405 - 1968/2000 Garcia Avenue & Bayshore Parkway 98,964 - 21,323 5,397 - 26,720 26,720 4,541 - 1980/2003 Oyster Point Boulevard #1 53,980 3,519 - 12,933 3,519 12,933 16,452 1,822 22,520 (6) 2001 Oyster Point Boulevard #2 53,980 3,519 - 7,665 3,519 7,665 11,184 781 - (6) 2001 Gateway Boulevard #1 110,428 7,730 24,397 11 7,730 24,408 32,138 1,041 - 2002 Gateway Boulevard #2 59,816 4,187 14,020 12 4,187 14,032 18,219 910 - 2000 Harbor Bay Parkway #5 67,482 1,349 9,915 - 1,349 9,915 11,264 30 - 1984/2001 Porter Drive 91,644 - 19,154 - - 19,154 19,154 18 - 1962/2002 Columbia Street #1 163,235 5,654 22,916 11,419 5,654 34,335 39,989 7,847 17,318 (7) 1975/1997 Columbia Street #2 46,303 912 612 2,370 912 2,982 3,894 12 - (7) 1975/1997 Western Avenue 47,746 1,432 7,497 2,381 1,432 9,878 11,310 2,328 34,410 (8) 1929/2000 First Avenue 70,647 2,119 11,275 4,580 2,119 15,855 17,974 3,337 - 1980/2000 Eastlake Avenue #1 106,003 4,240 31,232 12 4,240 31,244 35,484 976 - 1997 Eastlake Avenue #2 52,333 1,570 15,917 8,083 1,570 24,000 25,570 497 - 1997 Professional Drive #1 47,558 871 5,362 3,046 871 8,408 9,279 1,809 - 1989/1999 Professional Drive #2 62,739 1,129 6,940 48 1,129 6,988 8,117 1,318 - 1987 West Watkins Mill Road #1 138,938 3,281 14,416 189 3,281 14,605 17,886 2,758 24,131 (9) 1989/1997 Quince Orchard Road #1 49,225 1,267 3,031 5,168 1,267 8,199 9,466 3,486 - (9) 1982/1997 Clopper Road #1 44,464 900 2,732 1,519 900 4,251 5,151 1,578 - (10) 1989 East Gude Drive #1 45,989 748 3,609 1,095 748 4,704 5,452 899 - (11) 1981/1986 Research Boulevard 105,000 1,733 9,611 590 1,733 10,201 11,934 2,000 - 1967/2000 East Gude Drive #2 44,500 775 4,122 329 775 4,451 5,226 767 - (11) 1981/2003 Piccard Drive 131,415 2,800 11,533 6,603 2,800 18,136 20,936 1,548 - 1978/1994 Newbrook Drive 248,186 4,800 27,639 390 4,800 28,029 32,829 4,797 - (8) 1992 Virginia Manor Road 191,884 - 13,679 558 - 14,237 14,237 2,431 29,898 (11) 1990/2003 Old Columbia Road 75,500 1,510 5,210 1,627 1,510 6,837 8,347 1,688 - 1983/1997 Firstfield Road #1 25,175 376 3,192 2,107 376 5,299 5,675 628 - 1974/2000 Shady Grove Road 42,142 840 3,115 116 840 3,231 4,071 553 - 1987 West Watkins Mill Road #2 57,410 859 4,149 1,544 859 5,693 6,552 896 - 1988/2000 Clopper Road #2 92,990 2,463 493 17,893 2,463 18,386 20,849 4,783 27,778 (10) 2000 Firstfield Road #2 53,599 971 5,141 4,886 971 10,027 10,998 1,099 - (12) 1980/2001 Firstfield Road #3 53,595 947 5,092 2,751 947 7,843 8,790 571 - (12) 1980/2003 Quince Orchard Road #2 54,874 970 5,138 1,387 970 6,525 7,495 504 9,700 (12) 1981/2003 Clopper Road #3 59,838 983 6,638 90 983 6,728 7,711 655 - (10) 1989/1992 Research Place 58,632 1,466 5,708 3,641 1,466 9,349 10,815 156 - 1972/2003 Charlestown Navy Yard 24,940 - 6,247 389 - 6,636 6,636 995 - 1880/1991 Pond Street 24,867 622 3,053 58 622 3,111 3,733 353 - 1965/1990 Westview Street 40,000 960 3,032 4,703 960 7,735 8,695 313 - 1975 Plantation Street #1 92,711 2,352 14,173 651 2,352 14,824 17,176 2,067 18,396 (5) 1993 Innovation Drive 113,956 2,734 14,567 1,833 2,734 16,400 19,134 2,391 9,735 (13) 1991 Plantation Street #2 92,423 651 - 15,727 651 15,727 16,378 5,268 - 2000 Arsenal Street #1 92,500 3,360 7,316 14,440 3,360 21,756 25,116 2,698 - 1978/2001 Hartwell Avenue #1 59,000 1,475 7,194 11,370 1,475 18,564 20,039 1,139 - 1972/2002 Arsenal Street #2 96,150 6,413 5,457 18,045 6,413 23,502 29,915 115 - 1980/2003 Memorial Drive #1 51,000 6,507 - 21,605 6,507 21,605 28,112 1,023 - 2002 Memorial Drive #2 47,497 6,058 - 20,977 6,058 20,977 27,035 800 - 2002 Hartwell Avenue #2 51,340 2,567 4,522 442 2,567 4,964 7,531 52 3,342 1972 College Road 106,036 1,943 9,764 1,444 1,943 11,208 13,151 1,900 - 1968/1984 Williams Drive 37,000 740 4,506 62 740 4,568 5,308 690 - 1982/1994 Phillips Parkway 78,501 1,840 2,298 11,076 1,840 13,374 15,214 2,370 - late 1960's/1999 Campus Drive 42,782 654 4,234 302 654 4,536 5,190 736 - 1989 Electronic Drive 40,000 600 3,110 3,289 600 6,399 6,999 2,172 - 1983/1998 Princeton Road 42,600 1,075 1,438 2,973 1,075 4,411 5,486 2,252 - 1984/1999 Capitola Drive #1 65,114 337 5,795 482 337 6,277 6,614 1,134 - (14) 1986 Capitola Drive #2 119,916 577 11,688 7,256 577 18,944 19,521 3,155 11,880 (14) 1985 Technology Parkway 37,080 370 4,191 684 370 4,875 5,245 671 - 1976/1993 Triangle Drive 32,120 161 3,410 202 161 3,612 3,773 559 - 1981 Alexander Road 86,239 - 376 11,630 - 12,006 12,006 1,252 - 2000 Kit Creek Road 38,861 374 3,383 5,577 374 8,960 9,334 738 - 1995/2003 ---------- -------- ------------- ------------ -------- ------------ --------- ---------------- ----------- 5,668,895 $147,425 $ 621,554 $ 354,878 $ 147,425 $ 976,432 $1,123,857 $ 141,560 $ 320,007 ========== ======== ============= ============ ======== ============ ========= ================ ===========
_______________
The depreciable life ranges from 30 to 40 years for buildings and improvements, 20 years for land improvements, and the term of the respective lease for tenant improvements.
Loan secured by General Atomics Court #1, General Atomics Court #2, John Hopkins Court #1 and John Hopkins Court #2 is shown under General Atomics Court #1.
Loan secured by Roselle Street #1, Roselle Street #3, Roselle Street #4, Roselle Street #5, Roselle Street #6 and Roselle Street #7 is shown under Roselle Street #3.
Loan secured by Nexus Centre Drive, Harbor Bay Parkway #1, Harbor Bay Parkway #2 and Harbor Bay Parkway #3 is shown under Nexus Centre Drive.
Loan secured by Nancy Ridge Drive #1 and Plantation Street #1 is shown under Plantation Street #1.
Loan secured by Oyster Point Boulevard #1 and Oyster Point Boulevard #2 is shown under Oyster Point Boulevard #1.
Loan secured by Columbia Street #1 and Columbia Street #2 is shown under Columbia Street #1.
Loan secured by Western Avenue and Newbrook Drive is shown under Western Avenue.
Loan secured by West Watkins Mill Road #1 and Quince Orchard Road #1 is shown under West Watkins Mill Road #1.
Loan secured by Clopper Road #1, Clopper Road #2 and Clopper Road #3 is shown under Clopper Road #2.
Loan secured by East Gude Drive #1, East Gude Drive #2 and Virginia Manor is shown under Virginia Manor.
Loan secured by Firstfield Road #2, Firstfield Road #3 and Quince Orchard Road #2 is shown under Quince Orchard Road #2.
The balance shown includes an unamortized premium of $252,000.
Loan secured by Capitola Drive #1 and Capitola Drive #2 is shown under Capitola Drive #2.
A summary of activity of consolidated rental properties and accumulated depreciation is as follows (in thousands):
Rental Properties Year Ended December 31, ------------------------------------ 2003 2002 2001 ----------- ----------- ----------- Balance at beginning of period $ 1,089,899 $ 880,716 $ 737,207 Purchase of rental properties 48,729 103,295 55,746 Sale of properties (56,741) - - Additions to rental properties 48,264 61,695 69,530 Transfer of costs (to) from properties under development (6,294) 44,193 18,233 ----------- ----------- ----------- Balance at end of period $ 1,123,857 $ 1,089,899 $ 880,716 =========== =========== ===========
Accumulated Depreciation December 31, ------------------------------------ 2003 2002 2001 ----------- ----------- -----------
Balance at beginning of period $113,477 $84,090 $57,554 Depreciation expense on rental properties 32,786 29,387 26,536 Accumulated depreciation on properties sold (4,703) - - ----------- ----------- ----------- Balance at end of period $141,560 $113,477 $84,090 =========== =========== ===========