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| ARE > SEC Filings for ARE > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
Certain information and statements included in this quarterly report on
Form 10-Q, including, without limitation, statements containing the words
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimates" or "anticipates," or the negative of these words
or similar words, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements involve
inherent risks and uncertainties regarding events, conditions and financial
trends that may affect our future plans of operation, business strategy, results
of operations and financial position. A number of important factors could cause
actual results to differ materially from those included within or contemplated
by the forward-looking statements, including, but not limited to the following:
† negative worldwide economic, financial and banking conditions;
† worldwide economic recession and lack of confidence;
† financial, banking and credit market conditions;
† the seizure or illiquidity of credit markets;
† our inability to obtain capital (debt, construction financing and or equity) or refinance debt maturities;
† increased interest rates and operating costs;
† adverse economic or real estate developments in our markets;
† our failure to successfully complete and lease our existing space held for redevelopment and new properties acquired for that purpose and any properties undergoing development;
† significant decreases in our active development, active redevelopment or preconstruction activities resulting in significant increases in our interest, operating and payroll expenses;
† our failure to successfully operate or lease acquired properties;
† the financial condition of our insurance carriers;
† general and local economic conditions;
† decreased rental rates or increased vacancy rates/failure to renew or replace expiring leases;
† defaults on or non-renewal of leases by tenants;
† our failure to comply with laws or changes in law;
† compliance with environmental laws;
† our failure to maintain our status as a real estate investment trust ("REIT");
† certain ownership interests outside the United States may subject us to different or greater risks than those associated with our domestic operations; and
† fluctuations in foreign currency exchange rates.
This list of risks and uncertainties, however, is only a summary and is not intended to be exhaustive. Additional information regarding risk factors that may affect us is included under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the fiscal year ended December 31, 2008. Readers of this quarterly report on Form 10-Q should also read our Securities and Exchange Commission ("SEC") and other publicly filed documents for further discussion regarding such factors.
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes appearing elsewhere in this quarterly report on Form 10-Q.
Overview
We are a Maryland corporation formed in October 1994 that has elected to be taxed as a REIT for federal income tax purposes. We are the largest owner and pre-eminent first-in-class REIT focused principally on science-driven cluster formation. We are the leading provider of high-quality environmentally sustainable real estate, technical infrastructure, and services to the broad and diverse life science industry. Client tenants include institutional (universities and independent not-for-profit institutions), pharmaceutical, biopharmaceutical, medical device, product, service and translational entities, as well as government agencies. Our operating platform is based on the principle of "clustering," with assets and operations located in key life science markets.
As of September 30, 2009, we had 157 properties containing approximately 11.8 million rentable square feet (including spaces undergoing active redevelopment) of office/laboratory space. As of that date, our properties were approximately 94.4% leased, excluding spaces at properties undergoing a permanent change in use to office/laboratory space through redevelopment, including the conversion of single tenancy space to multi-tenancy spaces. Our primary sources of revenue are rental income and tenant recoveries from leases of our properties. The comparability of financial data from period to period is affected by the timing of our property development, redevelopment and acquisition activities.
For the three months ended September 30, 2009, we:
† Executed 29 leases for approximately 450,000 rentable square feet.
† Reported operating margins at approximately 73%.
† Reported occupancy at 94.4%.
† Reduced $104 million of secured debt obligations.
† Entered into 15-year lease with Eli Lilly and Company as anchor tenant at Alexandria Center for Life Science at East River Science Park - NYCTM.
† Closed follow-on common stock offering with net proceeds of approximately $233 million.
† Completed ground-up development of one property at Mission Bay, San Francisco aggregating 102,000 rentable square feet pursuant to a 15-year lease with Pfizer Inc.
We continue to demonstrate the solidity and durability of our core operations providing office/laboratory space to the broad and diverse life science industry. Our core operating results were steady for the first nine months of 2009, during the continuing extraordinary and unprecedented United States and worldwide economic, financial, banking and credit market crises, significant worldwide economic recession and drastic decline in consumer confidence and the consumer driven economy. Financial systems throughout the world have recently highlighted significant periods of illiquidity with banks much less willing to lend substantial amounts to other banks and borrowers.
The current economic, financial and banking environment, worldwide economic recession and lack of consumer confidence have improved since the fourth quarter of 2008 and first quarter of 2009. Even with the recent improvements, we remain cautious over the economic, financial and banking environment. We intend to continue to focus on the completion of existing active redevelopment projects aggregating approximately 641,242 rentable square feet and our existing active development projects aggregating approximately an additional 980,000 rentable square feet. Additionally, we intend to continue with preconstruction activities for certain land parcels for future ground-up/vertical above ground development in order to preserve and create value. These important preconstruction activities add significant value to our land for future ground-up development and are required for the ultimate vertical construction of the buildings. We also intend to be very careful and prudent with any future decisions to add new projects to our active ground-up/vertical developments. Future ground-up/vertical development projects will likely require significant pre-leasing from high quality/credit entities. We also intend to reduce debt as a percentage of our overall capital structure over a multi-year period. During this period, we may also extend and/or refinance certain debt maturities. We expect the source of funds for construction activities and repayment of outstanding debt to be provided over several years by opportunistic sales of real estate, joint ventures, cash flows from operations, new secured or unsecured debt and the issuance of additional equity securities, as appropriate.
Properties
The locations of our properties are diversified among a number of life science markets. The following table sets forth, as of September 30, 2009, the rentable square footage, annualized base rent and occupancy of our properties in each of our existing markets (dollars in thousands):
Rentable Square Feet Annualized
Number of Base Occupancy
Markets Properties Operating Redevelopment Total Rent (1) Percentages (1) (2)
California-San Diego 32 1,538,931 123,728 1,662,659 $ 42,053 90.2 %
California-San Francisco
Bay 18 1,526,963 53,980 1,580,943 53,584 96.2
Eastern Massachusetts 36 3,047,897 257,500 3,305,397 112,225 94.7
New Jersey/Suburban
Philadelphia 8 459,904 - 459,904 8,563 88.0
Southeast 13 716,174 40,390 756,564 15,831 92.6
Suburban Washington,
D.C. 30 2,281,959 165,644 2,447,603 47,690 94.6
Washington-Seattle 12 975,121 - 975,121 30,044 99.1
International-Canada 4 342,394 - 342,394 7,936 100.0
Total Properties
(Continuing Operations) 153 10,889,343 641,242 11,530,585 $ 317,926 94.4 %
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(1) Annualized base rent means the annualized fixed base rental amount in effect as of September 30, 2009 (using rental revenue computed on a straight-line basis in accordance with GAAP). Excludes spaces at properties totaling approximately 641,242 rentable square feet undergoing a permanent change in use to office/laboratory space through redevelopment, including the conversion of single tenancy space to multi-tenancy spaces or multi-tenancy spaces to single tenancy space, and four properties with approximately 269,196 rentable square feet that are classified as "held for sale."
(2) Including spaces undergoing a permanent change in use to office/laboratory space through redevelopment, occupancy as of September 30, 2009 was 89.1%.
Our average occupancy rate as of December 31st from 1997 to 2008 was approximately 95.5%.
Leasing
As of September 30, 2009, approximately 88% of our leases (on a rentable 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 rentable square footage basis) required the tenants to pay a majority of operating expenses. Additionally, approximately 92% of our leases (on a rentable square footage basis) provided for the recapture of certain capital expenditures, and approximately 93% of our leases (on a rentable square footage basis) contained effective annual rent escalations that were either fixed or indexed based on the consumer price index or another index. Our leases also typically give us the right to review and approve tenant alterations to the property. Generally, tenant-installed improvements to the properties 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, at its expense, remove the improvements and restore the premises to their original condition.
The following table provides information with respect to lease expirations at our properties as of September 30, 2009:
Rentable Square Percentage of Annualized Base
Number of Footage of Aggregate Rent of Expiring
Leases Expiring Leased Leases (per
Year of Lease Expiration Expiring Leases Square Feet rentable square foot)
2009 16 (1) 246,420 (1) 2.4 % $27.09
2010 76 974,125 9.5 25.93
2011 76 1,759,082 17.1 28.27
2012 67 1,385,630 13.5 33.34
2013 47 974,635 9.5 30.08
2014 43 998,180 9.7 28.39
2015 25 590,534 5.7 27.36
2016 17 987,095 9.6 30.76
2017 12 606,057 5.9 37.26
2018 11 737,172 7.2 44.60
Thereafter 18 997,837 9.7 32.22
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(1) Excludes seven month-to-month leases for approximately 20,000 rentable square feet.
Value Add Activities Construction in progress includes the following value add activities as of September 30, 2009 (in thousands): Value Add Activities Amount Square Feet Redevelopment projects $ 133,437 641,242 Development projects 370,164 980,000 Preconstruction projects 598,538 5,260,000 New markets and other projects 247,517 1,057,000 Total $ 1,349,656 7,938,242 |
A key component of our business is our value add redevelopment and development programs. These programs are focused on providing high quality generic office/laboratory space to meet the real estate requirements of various life science industry tenants. Redevelopment projects consist of the permanent change in use of office, warehouse and shell space into generic office/laboratory space, including the conversion of single tenancy space to multi-tenancy spaces or multi-tenancy spaces to single tenancy space. Development projects consist of the ground-up development of generic office/laboratory facilities. We also have certain significant value add projects undergoing important and substantial preconstruction activities to bring these assets to their intended use. These critical activities add significant value for future ground-up development (which are projected to yield substantial revenues) and are required for the ultimate vertical construction of buildings. We are required to capitalize construction and preconstruction costs directly related and essential to the construction of a project while activities are ongoing to prepare an asset for its intended use. The interest rate required for the purpose of calculating capitalization of interest was approximately 5.69% for the three months ended September 30, 2009.
Redevelopment projects
The following table summarizes total rentable square footage undergoing redevelopment as of September 30, 2009:
Estimated Rentable Square Footage
In-Service Undergoing Redevelopment/
Markets/Submarkets Dates Total Property
California - San Diego/Torrey Pines 2010 84,504 / 84,504
California - San Diego/Torrey Pines 2009 39,224 / 76,084
California - San Francisco Bay 2010 53,980 / 53,980
Eastern Massachusetts/Cambridge 2009 24,177 / 177,101
Eastern Massachusetts/Cambridge 2010 90,278 / 369,831
Eastern Massachusetts/Suburban 2010 113,045 / 113,045
Eastern Massachusetts/Suburban 2010 30,000 / 30,000
Southeast/Florida 2009 40,390 / 44,855
Suburban Washington, D.C./Shady Grove 2010 58,632 / 58,632
Suburban Washington, D.C./Shady Grove 2009 50,633 / 123,501
Suburban Washington, D.C./Shady Grove 2011 56,379 / 56,379
641,242 / 1,187,912
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As of September 30, 2009, our estimated cost to complete was approximately $90 per rentable square foot for the 641,242 rentable square feet undergoing a permanent change in use to office/laboratory space through redevelopment. Our final costs for these projects will ultimately depend on many factors, including construction and infrastructure requirements for each tenant, final lease negotiations and the amount of costs funded by each tenant.
Development projects
The following table summarizes our properties undergoing ground-up development as of September 30, 2009:
Estimated
Estimated Investment Rentable
Building In-Service Leased/ Per Square Square
Markets/Submarkets Description Dates Committed Foot Feet Leasing Status
California - San Multi-tenant 2010 97% $350 158,000 158,000 Rentable
Francisco Bay/ Bldg. Square Feet Leased or
Mission Bay with 3% Committed to UCSF and
Retail a Large Cap Life
Science Company
California - San Single or 2011 77% $350 105,000 Negotiating Lease for
Francisco Bay/ Multi-tenant Significant Amount of
Mission Bay Bldg. with 4% Space with a Large
Retail Cap Life Science
Company
California - San Two Bldgs., 2010 0% $350 162,000 Marketing/Moving
Francisco Bay/ Single or Former 16% Tenant to
So. San Francisco Multi-tenant Another Property
California - San Single Tenant 2009 55% $350 130,000 72,000 Rentable
Francisco Bay/ Bldg. Square Feet Leased to
So. San Francisco Exelixis Inc. with
Option for Remaining
Space Through 2009
New York - New Multi-tenant 2010/2011 51% $500 310,000 100,000 Rentable
York City - Bldg. Square Feet Leased to
East Tower with 6% Eli Lilly and
Retail Company; Leasing
57,000 Rentable
Square Feet for Food,
Conference and Core
Services; Current
Office/Laboratory
Negotiations in
Excess of 300,000
Rentable Square Feet
Washington - Single Tenant 2010 (1) 92% $390 115,000 106,000 Rentable
Seattle Bldg. with 5% Square Feet Leased to
Retail Gilead Sciences, Inc.
58% 980,000
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(1) We anticipate delivery of this space to Gilead Sciences, Inc. in the first quarter of 2010.
Our original estimated investment per square foot includes hard and soft shell construction and certain office/laboratory improvements and excludes book basis related to land and land improvements and certain amenities which benefit the specific property under development and other adjacent properties. Our final costs for these projects will ultimately depend on many factors, including construction and infrastructure requirements for each tenant, final lease negotiations and the amount of costs funded by each tenant.
As of September 30, 2009, our estimated cost to complete the approximately 980,000 rentable square feet undergoing ground-up development was approximately $166 per rentable square foot. This estimate includes costs related to tenant infrastructure costs, including requirements for executed leases with Eli Lilly and Company, Exelixis Inc., Gilead Sciences, Inc. and UCSF. This estimate also includes certain costs related to incremental investment by the Company with incremental returns which are beyond the original estimated investment anticipated at the beginning of each project.
Preconstruction projects
The following table summarizes our current and embedded future development and redevelopment square footage including preconstruction projects. Preconstruction projects include significant value add projects undergoing important and substantial activities to bring these assets to their intended use. These critical activities add significant value for future ground-up development (which are projected to yield substantial revenues) and are required for the ultimate vertical construction of buildings. We are required to capitalize construction and preconstruction costs directly related and essential to the construction of a project while activities are ongoing to prepare an asset for its intended use.
Square Footage
Construction in Progress
New Markets Total Value
and Other Future Add Square
Markets Redevelopment Development Preconstruction Projects Land Redevelopment Footage
California - San
Diego 123,728 - 298,000 - 145,000 178,000 744,728
California - San
Francisco Bay/
Mission Bay - 263,000 2,320,000 - - - 2,583,000
California - San
Francisco Bay/ So.
San Francisco 53,980 292,000 144,000 - 1,051,000 25,000 1,565,980
Eastern Massachusetts 257,500 - 2,050,000 - 225,000 540,000 3,072,500
Suburban Washington,
D.C. 165,644 - - - 787,000 457,000 1,409,644
Washington - Seattle - 115,000 248,000 - 1,049,000 165,000 1,577,000
International -
Canada - - - - 827,000 - 827,000
Other 40,390 310,000 200,000 1,057,000 741,000 222,000 2,570,390
Total 641,242 980,000 5,260,000 1,057,000 4,825,000 (1) 1,587,000 (2) 14,350,242
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(1) In addition, we have the right to develop an additional parcel with approximately 442,000 rentable square feet in New York City. We also have the right to purchase 924,000 developable square feet in Edinburgh, Scotland. The square footage related to these parcels is not included in the embedded future development square footage shown above.
(2) Square footage related to future redevelopment is included in our operating asset base and represents non-laboratory uses (office, industrial or warehouse).
Our significant value add projects include preconstruction activities at certain land parcels including: a) approximately 2.5 million developable square feet in San Francisco, including approximately 2.3 million developable square feet at Mission Bay, b) approximately 2.1 million developable square feet in Eastern Massachusetts, including approximately 1.7 million developable square feet located along Binney Street in Kendall Square and c) approximately 1.3 million developable square feet located in other key life science cluster markets.
San Francisco Bay - Mission Bay and South San Francisco Value Add Preconstruction Activities
The value add preconstruction activities in Mission Bay and South San Francisco will create high quality space in state-of-the-art environmentally sustainable facilities for our clients generating net operating income for the Company. The entitlement process includes a multitude of activities necessary for the vertical construction of these high quality facilities including, among other items, regulatory approval, mapping, conceptual design, schematic design, design development, permitting, construction drawings and estimating. Our value add projects in Mission Bay and South San Francisco, that have been completed or are now under construction, have attracted Merck & Co., Inc., Celgene Corporation, Pfizer Inc., Roche Holdings Ltd and University of California, San Francisco.
The ability to provide significant additional space in high quality state-of-the-art environmentally sustainable facilities at Mission Bay is a unique opportunity to enhance our current high quality client tenant roster. In addition to the opportunities located at Mission Bay, our asset base contains a broad pipeline of opportunities located in South San Francisco. This includes, among others, a high quality facility with entitlements completed or in process . . .
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