ARE-2013.6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission file number 1-12993
ALEXANDRIA REAL ESTATE EQUITIES, INC.
(Exact name of registrant as specified in its charter)
|
| | |
Maryland | | 95-4502084 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
385 East Colorado Boulevard, Suite 299, Pasadena, California 91101
(Address of principal executive offices) (Zip code)
(626) 578-0777
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| |
Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of July 31, 2013, 71,439,254 shares of common stock, par value $.01 per share, were outstanding.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
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Item 1. | FINANCIAL STATEMENTS (UNAUDITED) |
Alexandria Real Estate Equities, Inc.
Consolidated Balance Sheets
(In thousands)
(Unaudited)
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Assets | | | |
Investments in real estate, net | $ | 6,453,379 |
| | $ | 6,424,578 |
|
Cash and cash equivalents | 302,205 |
| | 140,971 |
|
Restricted cash | 30,914 |
| | 39,947 |
|
Tenant receivables | 7,577 |
| | 8,449 |
|
Deferred rent | 177,507 |
| | 170,396 |
|
Deferred leasing and financing costs, net | 164,362 |
| | 160,048 |
|
Investments | 122,605 |
| | 115,048 |
|
Other assets | 120,740 |
| | 90,679 |
|
Total assets | $ | 7,379,289 |
| | $ | 7,150,116 |
|
| | | |
Liabilities, Noncontrolling Interests, and Equity | | | |
Secured notes payable | $ | 711,029 |
| | $ | 716,144 |
|
Unsecured senior notes payable | 1,048,395 |
| | 549,805 |
|
Unsecured senior line of credit | — |
| | 566,000 |
|
Unsecured senior bank term loans | 1,200,000 |
| | 1,350,000 |
|
Accounts payable, accrued expenses, and tenant security deposits | 368,249 |
| | 423,708 |
|
Dividends payable | 52,141 |
| | 41,401 |
|
Total liabilities | 3,379,814 |
| | 3,647,058 |
|
| | | |
Commitments and contingencies |
|
| |
|
|
| | | |
Redeemable noncontrolling interests | 14,505 |
| | 14,564 |
|
| | | |
Alexandria Real Estate Equities, Inc.’s stockholders’ equity: |
|
| |
|
|
Series D Cumulative Convertible Preferred Stock | 250,000 |
| | 250,000 |
|
Series E Cumulative Redeemable Preferred Stock | 130,000 |
| | 130,000 |
|
Common stock | 710 |
| | 632 |
|
Additional paid-in capital | 3,596,477 |
| | 3,086,052 |
|
Accumulated other comprehensive loss | (39,565 | ) | | (24,833 | ) |
Alexandria’s stockholders’ equity | 3,937,622 |
| | 3,441,851 |
|
Noncontrolling interests | 47,348 |
| | 46,643 |
|
Total equity | 3,984,970 |
| | 3,488,494 |
|
Total liabilities, noncontrolling interests, and equity | $ | 7,379,289 |
| | $ | 7,150,116 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Revenues: |
|
| |
|
| |
|
| | |
Rental | $ | 114,743 |
| | $ | 104,329 |
| | $ | 226,519 |
| | $ | 205,530 |
|
Tenant recoveries | 35,923 |
| | 31,881 |
| | 71,534 |
| | 63,763 |
|
Other income | 3,569 |
| | 9,383 |
| | 6,562 |
| | 12,011 |
|
Total revenues | 154,235 |
| | 145,593 |
| | 304,615 |
| | 281,304 |
|
| | | | | | | |
Expenses: |
|
| |
|
| | | | |
Rental operations | 46,323 |
| | 42,102 |
| | 91,547 |
| | 82,555 |
|
General and administrative | 12,472 |
| | 12,298 |
| | 24,120 |
| | 22,655 |
|
Interest | 15,978 |
| | 17,922 |
| | 33,998 |
| | 34,148 |
|
Depreciation and amortization | 46,580 |
| | 50,741 |
| | 92,645 |
| | 92,527 |
|
Loss on early extinguishment of debt | 560 |
| | 1,602 |
| | 560 |
| | 2,225 |
|
Total expenses | 121,913 |
| | 124,665 |
| | 242,870 |
| | 234,110 |
|
| | | | | | | |
Income from continuing operations | 32,322 |
| | 20,928 |
| | 61,745 |
| | 47,194 |
|
| | | | | | | |
Income from discontinued operations, net | 243 |
| | 4,713 |
| | 1,057 |
| | 9,358 |
|
| | | | | | | |
Gain on sale of land parcel | 772 |
| | — |
| | 772 |
| | 1,864 |
|
Net income | 33,337 |
| | 25,641 |
| | 63,574 |
| | 58,416 |
|
| | | | | | | |
Net income attributable to noncontrolling interests | 980 |
| | 851 |
| | 1,962 |
| | 1,562 |
|
Dividends on preferred stock | 6,471 |
| | 6,903 |
| | 12,942 |
| | 14,386 |
|
Preferred stock redemption charge | — |
| | — |
| | — |
| | 5,978 |
|
Net income attributable to unvested restricted stock awards | 403 |
| | 271 |
| | 745 |
| | 506 |
|
Net income attributable to Alexandria’s common stockholders | $ | 25,483 |
| | $ | 17,616 |
| | $ | 47,925 |
| | $ | 35,984 |
|
Earnings per share attributable to Alexandria’s common stockholders – basic and diluted: |
|
| |
|
| | | | |
Continuing operations | $ | 0.38 |
| | $ | 0.21 |
| | $ | 0.72 |
| | $ | 0.43 |
|
Discontinued operations, net | — |
| | 0.08 |
| | 0.02 |
| | 0.15 |
|
Earnings per share – basic and diluted | $ | 0.38 |
| | $ | 0.29 |
| | $ | 0.74 |
| | $ | 0.58 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net income | $ | 33,337 |
| | $ | 25,641 |
| | $ | 63,574 |
| | $ | 58,416 |
|
Other comprehensive income: |
|
| |
|
| | | | |
Unrealized gains (losses) on marketable securities: |
|
| |
|
| | | | |
Unrealized holding gains (losses) arising during the period | 44 |
| | (107 | ) | | 360 |
| | 567 |
|
Reclassification adjustment for (gains) losses included in net income | 42 |
| | 238 |
| | (230 | ) | | (686 | ) |
Unrealized gains (losses) on marketable securities, net | 86 |
| | 131 |
| | 130 |
| | (119 | ) |
| | | | | | | |
Unrealized gains (losses) on interest rate swaps: |
|
| |
|
| | | | |
Unrealized interest rate swap gains (losses) arising during the period | 105 |
| | (3,091 | ) | | (28 | ) | | (7,164 | ) |
Reclassification adjustment for amortization of interest expense included in net income | 3,834 |
| | 5,895 |
| | 8,142 |
| | 11,670 |
|
Unrealized gains on interest rate swap agreements, net | 3,939 |
| | 2,804 |
| | 8,114 |
| | 4,506 |
|
| | | | | | | |
Foreign currency translation losses | (20,698 | ) | | (17,192 | ) | | (23,057 | ) | | (7,233 | ) |
| | | | | | | |
Total other comprehensive income | (16,673 | ) | | (14,257 | ) | | (14,813 | ) | | (2,846 | ) |
Comprehensive income | 16,664 |
| | 11,384 |
| | 48,761 |
| | 55,570 |
|
Less: comprehensive income attributable to noncontrolling interests | (1,008 | ) | | (875 | ) | | (1,906 | ) | | (1,574 | ) |
Comprehensive income attributable to Alexandria’s common stockholders | $ | 15,656 |
| | $ | 10,509 |
| | $ | 46,855 |
| | $ | 53,996 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests
(Dollars in thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Alexandria Real Estate Equities, Inc.’s Stockholders’ Equity | | | | | | |
| Series D Cumulative Convertible Preferred Stock | | Series E Cumulative Redeemable Preferred Stock | | Number of Common Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests |
Balance as of December 31, 2012 | $ | 250,000 |
| | $ | 130,000 |
| | 63,244,645 |
| | $ | 632 |
| | $ | 3,086,052 |
| | $ | — |
| | $ | (24,833 | ) | | $ | 46,643 |
| | $ | 3,488,494 |
| | $ | 14,564 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 61,612 |
| | — |
| | 1,425 |
| | 63,037 |
| | 537 |
|
Unrealized gain on marketable securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 130 |
| | — |
| | 130 |
| | — |
|
Unrealized gain on interest rate swap agreements | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,114 |
| | — |
| | 8,114 |
| | — |
|
Foreign currency translation loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,976 | ) | | (81 | ) | | (23,057 | ) | | — |
|
Contributions by noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (639 | ) | | (639 | ) | | (596 | ) |
Issuance of common stock | — |
| | — |
| | 7,590,000 |
| | 76 |
| | 534,774 |
| | — |
| | — |
| | — |
| | 534,850 |
| | — |
|
Issuances pursuant to stock plan | — |
| | — |
| | 162,745 |
| | 2 |
| | 11,661 |
| | — |
| | — |
| | — |
| | 11,663 |
| | — |
|
Dividends declared on common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (84,680 | ) | | — |
| | — |
| | (84,680 | ) | | — |
|
Dividends declared on preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | (12,942 | ) | | — |
| | — |
| | (12,942 | ) | | — |
|
Distributions in excess of earnings | — |
| | — |
| | — |
| | — |
| | (36,010 | ) | | 36,010 |
| | — |
| | — |
| | — |
| | — |
|
Balance as of June 30, 2013 | $ | 250,000 |
| | $ | 130,000 |
| | 70,997,390 |
| | $ | 710 |
| | $ | 3,596,477 |
| | $ | — |
| | $ | (39,565 | ) | | $ | 47,348 |
| | $ | 3,984,970 |
| | $ | 14,505 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2013 | | 2012 |
Operating Activities |
|
| |
|
|
Net income | $ | 63,574 |
| | $ | 58,416 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
| |
|
|
Depreciation and amortization | 93,575 |
| | 95,760 |
|
Loss on early extinguishment of debt | 560 |
| | 2,225 |
|
Gain on sale of land parcel | (772 | ) | | (1,864 | ) |
Loss (gain) on sale of real estate | 121 |
| | (2 | ) |
Amortization of loan fees and costs | 4,813 |
| | 4,857 |
|
Amortization of debt premiums/discounts | 237 |
| | 289 |
|
Amortization of acquired above and below market leases | (1,660 | ) | | (1,578 | ) |
Deferred rent | (14,437 | ) | | (13,991 | ) |
Stock compensation expense | 7,812 |
| | 6,567 |
|
Equity in loss related to investments | — |
| | 26 |
|
Gain on sales of investments | (2,666 | ) | | (11,126 | ) |
Loss on sales of investments | 529 |
| | 1,089 |
|
Changes in operating assets and liabilities: |
|
| |
|
|
Restricted cash | 392 |
| | (610 | ) |
Tenant receivables | 847 |
| | 1,366 |
|
Deferred leasing costs | (23,109 | ) | | (13,791 | ) |
Other assets | 5,043 |
| | (9,331 | ) |
Accounts payable, accrued expenses, and tenant security deposits | 8,215 |
| | 25,225 |
|
Net cash provided by operating activities | 143,074 |
| | 143,527 |
|
| | | |
Investing Activities |
|
| |
|
|
Proceeds from sale of properties | 101,815 |
| | 1,905 |
|
Additions to properties | (298,927 | ) | | (259,480 | ) |
Purchase of properties | — |
| | (42,171 | ) |
Change in restricted cash related to construction projects | (8,889 | ) | | (11,532 | ) |
Distribution from unconsolidated real estate entity | 274 |
| | 22,250 |
|
Contributions to unconsolidated real estate entity | (5,163 | ) | | (4,918 | ) |
Loss in investments from unconsolidated entity | (293 | ) | | — |
|
Additions to investments | (14,833 | ) | | (16,344 | ) |
Proceeds from investments | 9,544 |
| | 17,559 |
|
Net cash used in investing activities | $ | (216,472 | ) | | $ | (292,731 | ) |
Alexandria Real Estate Equities, Inc.
Consolidated Statements of Cash Flows (continued)
(In thousands)
(Unaudited)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2013 | | 2012 |
Financing Activities |
|
| |
|
|
Borrowings from secured notes payable | $ | 26,114 |
| | $ | — |
|
Repayments of borrowings from secured notes payable | (31,436 | ) | | (4,525 | ) |
Proceeds from issuance of unsecured senior notes payable | 495,310 |
| | 544,649 |
|
Principal borrowings from unsecured senior line of credit | 305,000 |
| | 529,147 |
|
Repayments of borrowings from unsecured senior line of credit | (871,000 | ) | | (520,147 | ) |
Repayment of unsecured senior bank term loan | (150,000 | ) | | (250,000 | ) |
Repurchase of unsecured senior convertible notes | — |
| | (84,801 | ) |
Redemption of Series C Cumulative Redeemable Preferred Stock | — |
| | (129,638 | ) |
Proceeds from issuance of Series E Cumulative Redeemable Preferred Stock | — |
| | 124,868 |
|
Change in restricted cash related to financings | 16,634 |
| | (7,714 | ) |
Deferred financing costs paid | (1,457 | ) | | (15,739 | ) |
Proceeds from common stock offering | 535,536 |
| | 37,385 |
|
Proceeds from exercise of stock options | — |
| | 155 |
|
Dividends paid on common stock | (73,932 | ) | | (60,791 | ) |
Dividends paid on preferred stock | (12,942 | ) | | (14,178 | ) |
Distributions to redeemable noncontrolling interests | (596 | ) | | (630 | ) |
Contributions by noncontrolling interests | — |
| | 1,125 |
|
Distributions to noncontrolling interests | (639 | ) | | (598 | ) |
Net cash provided by financing activities | 236,592 |
| | 148,568 |
|
| | | |
Effect of foreign exchange rate changes on cash and cash equivalents | (1,960 | ) | | 3,034 |
|
| | | |
Net increase in cash and cash equivalents | 161,234 |
| | 2,398 |
|
Cash and cash equivalents at beginning of period | 140,971 |
| | 78,539 |
|
Cash and cash equivalents at end of period | $ | 302,205 |
| | $ | 80,937 |
|
| | | |
Supplemental Disclosure of Cash Flow Information |
|
| |
|
|
Cash paid during the period for interest, net of interest capitalized | $ | 29,259 |
| | $ | 22,693 |
|
| | | |
Non-Cash Investing Activities |
|
| |
|
|
Note receivable from sale of real estate | $ | 38,820 |
| | $ | — |
|
Change in accrued capital expenditures | $ | (48,198 | ) | | $ | 4,370 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
As used in this quarterly report on Form 10-Q, references to the “Company,” “Alexandria,” “we,” “our,” and “us” refer to Alexandria Real Estate Equities, Inc. and its subsidiaries.
Alexandria Real Estate Equities, Inc. (NYSE: ARE), a self-administered and self-managed investment-grade real estate investment trust (“REIT”), is the largest and leading REIT focused principally on owning, operating, developing, redeveloping, and acquiring high-quality, sustainable real estate for the broad and diverse life science industry. Alexandria’s client tenants span the life science industry, including renowned academic and medical institutions, multinational pharmaceutical companies, public and private biotechnology entities, United States (“U.S.”) government research agencies, medical device companies, industrial biotech companies, venture capital firms, and life science product and service companies. For additional information on Alexandria Real Estate Equities, Inc., please visit www.are.com.
We have prepared the accompanying interim consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”). In our opinion, the interim consolidated financial statements presented herein reflect all adjustments that are necessary to fairly present the interim consolidated financial statements. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2012.
The accompanying consolidated financial statements include the accounts of Alexandria Real Estate Equities, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
We hold interests, together with certain third parties, in companies that we consolidate in our financial statements. We consolidate the companies because we exercise significant control over major decisions by these entities, such as investment activity and changes in financing.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and equity; the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements; and the amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
| |
2. | Basis of presentation (continued) |
Investments in real estate, net, and discontinued operations
We recognize assets acquired (including the intangible value of above or below market leases, acquired in-place leases, client tenant relationships, and other intangible assets or liabilities), liabilities assumed, and any noncontrolling interest in an acquired entity at their fair value as of the acquisition date. If there is a bargain fixed rate renewal option for the period beyond the non-cancelable lease term, we evaluate factors such as the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, in order to determine the likelihood that the lessee will renew. When we determine there is reasonable assurance that such bargain purchase option will be exercised, we consider its impact in determining the intangible value of such lease and its related amortization period. The value of tangible assets acquired is based upon our estimation of value on an “as if vacant” basis. The value of acquired in-place leases includes the estimated carrying costs during the hypothetical lease-up period and other costs that would have been incurred in the execution of similar leases, considering market conditions at the acquisition date of the acquired in-place lease. We assess the fair value of tangible and intangible assets based on numerous factors, including estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors, including the historical operating results, known trends, and market/economic conditions that may affect the property. We also recognize the fair values of assets acquired, the liabilities assumed, and any noncontrolling interest in acquisitions of less than a 100% interest when the acquisition constitutes a change in control of the acquired entity. Acquisition-related costs and restructuring costs are expensed as incurred.
The values allocated to land improvements, tenant improvements, equipment, buildings, and building improvements are depreciated on a straight-line basis using an estimated life of 20 years for land improvements, the respective lease term for tenant improvements, the estimated useful life for equipment, and the shorter of the term of the respective ground lease and up to 40 years for buildings and building improvements. The values of acquired above and below market leases are amortized over the lives of the related leases and recognized as either an increase (for below market leases) or a decrease (for above market leases) to rental income. The values of acquired in-place leases are classified in other assets in the accompanying consolidated balance sheets, and amortized over the remaining terms of the related leases.
We are required to capitalize project costs, including predevelopment costs, interest, property taxes, insurance, and other costs directly related and essential to the acquisition, development, redevelopment, or construction of a project. Capitalization of development, redevelopment, and construction costs is required while activities are ongoing to prepare an asset for its intended use. Fluctuations in our development, redevelopment, and construction activities could result in significant changes to total expenses and net income. Costs incurred after a project is substantially complete and ready for its intended use are expensed as incurred. Should development, redevelopment, or construction activity cease, interest, property taxes, insurance, and certain other costs would no longer be eligible for capitalization and would be expensed as incurred. Expenditures for repairs and maintenance are expensed as incurred.
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 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.” If (1) the operations and cash flows of the property have been or will be eliminated from the ongoing operations; and (2) we will not have any significant continuing involvement in the operations of the property after the sale, then its operations, including any interest expense directly attributable to it, are classified as discontinued operations in our consolidated statements of income, and amounts for all prior periods presented are reclassified from continuing operations to discontinued operations. Depreciation of assets ceases upon designation of a property as “held for sale.”
| |
2. | Basis of presentation (continued) |
Impairment of long-lived assets
Long-lived assets to be held and used, including our rental properties, land held for future development, construction in progress, and intangibles, are individually evaluated for impairment when conditions exist that may indicate that the carrying amount of a long-lived asset may not be recoverable. The carrying amount of a long-lived asset to be held and used is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Impairment indicators or triggering events for long-lived assets to be held and used, including our rental properties, land held for future development, and construction in progress, are assessed by project and include significant fluctuations in estimated net operating income, occupancy changes, significant near-term lease expirations, current and historical operating and/or cash flow losses, construction costs, estimated completion dates, rental rates, and other market factors. We assess the expected undiscounted cash flows based upon numerous factors, including, but not limited to, construction costs, available market information, current and historical operating results, known trends, current market/economic conditions that may affect the property, and our assumptions about the use of the asset, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value. If an impairment loss is not required to be recognized, the recognition of depreciation is adjusted prospectively, as necessary, to reduce the carrying amount of the real estate to its estimated disposition value over the remaining period that the real estate is expected to be held and used. We may adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives.
We use a “held for sale” impairment model for our properties classified as “held for sale.” The “held for sale” impairment model is different from the held and used impairment model. Under the “held for sale” impairment model, an impairment loss is recognized if the carrying amount of the long-lived asset classified as “held for sale” exceeds its fair value less cost to sell. Because of these two different models, it is possible for a long-lived asset previously classified as held and used to require the recognition of an impairment charge upon classification as “held for sale.”
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 actively traded public companies are considered “available for sale” and are reflected in the accompanying consolidated balance sheets at fair value. Fair value has been determined based upon the closing price as of each balance sheet date, with unrealized gains and losses shown as a separate component of comprehensive income. The classification of each investment is determined at the time each investment is made, and such determination is reevaluated at each balance sheet date. The cost of each investment sold is determined by the specific identification method, with net realized gains or losses classified in other income in the accompanying consolidated statements of income. Investments in privately held entities are generally accounted for under the cost method when our interest in the entity is so minor that we have virtually no influence over the entity’s operating and financial policies. Certain investments in privately held entities are accounted for under the equity method when our interest in the entity is not deemed so minor that we have virtually no influence over the entity’s operating and financial policies. Under the equity method of accounting, we recognize 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. Additionally, we limit our ownership percentage in the voting stock of each individual entity to less than 10%. As of June 30, 2013, and December 31, 2012, our ownership percentage in the voting stock of each individual entity was less than 10%.
Individual investments are evaluated for impairment when changes in conditions may indicate an impairment exists. The factors that we consider in making these assessments include market prices, market conditions, available financing, prospects for favorable or unfavorable clinical trial results, new product initiatives, and new collaborative agreements. If there are no identified events or changes in circumstances that would have an adverse effect on our cost method investments, we do not estimate the investment’s fair value. For all of our investments, if a decline in the fair value of an investment below the 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.
| |
2. | Basis of presentation (continued) |
Income taxes
We are organized and qualify as a REIT pursuant to the Internal Revenue Code of 1986, as amended (the “Code”). Under the Code, a REIT that distributes 100% of its REIT taxable income as a dividend to its shareholders each year and that meets certain other conditions is not subject to federal income taxes, but could be subject to certain state and local taxes. We have distributed 100% or more of our taxable income. Therefore, no provision for federal income taxes is required. We file tax returns, including returns for our subsidiaries, with federal, state, and local jurisdictions, including jurisdictions located in the U.S., Canada, India, China, and other international locations. Our tax returns are subject to examination in various jurisdictions for the calendar years 2008 through 2012.
We recognize tax benefits of uncertain tax positions only if it is more likely than not that the tax position will be sustained, based solely on its technical merits, with the taxing authority having full knowledge of all relevant information. The measurement of a tax benefit for an uncertain tax position that meets the “more likely than not” threshold is based on a cumulative probability model under which the largest amount of tax benefit recognized is the amount with a greater than 50% likelihood of being realized upon ultimate settlement with the taxing authority having full knowledge of all the relevant information. As of June 30, 2013, there were no unrecognized tax benefits. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Interest expense and penalties, if any, would be recognized in the first period during which the interest or penalty would begin accruing, according to the provisions of the relevant tax law at the applicable statutory rate of interest. We did not incur any material tax-related interest expense or penalties for the three and six months ended June 30, 2013 and 2012.
Interest income
Interest income was approximately $1.0 million and $0.8 million during the three months ended June 30, 2013 and 2012, respectively. Interest income was approximately $2.3 million and $1.4 million during the six months ended June 30, 2013 and 2012, respectively. Interest income is classified in other income in the accompanying consolidated statements of income.
Recognition of rental income and tenant recoveries
Rental income from leases is recognized on a straight-line basis over the respective lease terms. We classify amounts currently recognized as income, and expected to be received in later years, as an asset in deferred rent in the accompanying consolidated balance sheets. Amounts received currently, but recognized as income in future years, are classified in accounts payable, accrued expenses, and tenant security deposits in the accompanying consolidated balance sheets. We commence recognition of rental income at the date the property is ready for its intended use and the client tenant takes possession of or controls the physical use of the property.
Tenant recoveries related to reimbursement of real estate taxes, insurance, utilities, repairs and maintenance, and other operating expenses are recognized as revenue in the period during which the applicable expenses are incurred.
Tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes, and other expenses recoverable from client tenants. Tenant receivables are expected to be collected within one year. We maintain an allowance for estimated losses that may result from the inability of our client tenants to make payments required under the terms of the lease and for tenant recoveries due. If a client tenant fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the amount of uncollectible rent and deferred rent receivables arising from the straight-lining of rent. As of June 30, 2013, and December 31, 2012, we had no allowance for estimated losses.
As of June 30, 2013, approximately 94% of our leases (on a rentable square footage basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses, and other operating expenses (including increases thereto) in addition to base rent. Approximately 95% of our leases (on a rentable square footage basis) contained effective annual rent escalations that were either fixed or based on a consumer price index or another index. Additionally, approximately 92% of our leases (on a rentable square footage basis) provided for the recapture of certain capital expenditures.
| |
3. | Investments in real estate |
Our investments in real estate, net, consisted of the following as of June 30, 2013, and December 31, 2012 (in thousands):
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Rental properties: | | | |
Land (related to rental properties) | $ | 512,915 |
| | $ | 522,664 |
|
Buildings and building improvements | 5,006,987 |
| | 4,933,314 |
|
Other improvements | 166,894 |
| | 189,793 |
|
Rental properties | 5,686,796 |
| | 5,645,771 |
|
Less: accumulated depreciation | (878,199 | ) | | (875,035 | ) |
Rental properties, net | 4,808,597 |
| | 4,770,736 |
|
| | | |
Construction in progress (“CIP”)/current value-added projects: |
|
| |
|
|
Active development in North America | 673,461 |
| | 431,578 |
|
Investment in unconsolidated joint venture | 33,838 |
| | 28,656 |
|
Active redevelopment in North America | 104,994 |
| | 199,744 |
|
Active development and redevelopment in Asia | 98,949 |
| | 101,602 |
|
Generic infrastructure/building improvement projects in North America | 53,333 |
| (1) | 80,599 |
|
| 964,575 |
| | 842,179 |
|
Subtotal | 5,773,172 |
| | 5,612,915 |
|
| | | |
Land/future value-added projects: |
|
| |
|
|
Land undergoing predevelopment activities (CIP) in North America (2) | 313,498 |
| | 433,310 |
|
Land held for future development in North America | 211,292 |
| | 296,039 |
|
Land held for future development/undergoing predevelopment activities (CIP) in Asia | 79,105 |
| | 82,314 |
|
Land subject to sale negotiations | 76,312 |
| | — |
|
| 680,207 |
| | 811,663 |
|
Investments in real estate, net | $ | 6,453,379 |
| | $ | 6,424,578 |
|
| |
(1) | Represents the book value associated with approximately 96,372 square feet at four projects undergoing construction of generic laboratory improvements, of which approximately 81% was leased, but not delivered, as of June 30, 2013. |
| |
(2) | In addition to assets included in our gross investment in real estate, we hold options/rights for parcels supporting the future ground-up development of approximately 420,000 RSF in Alexandria CenterTM for Life Science - New York City related to an option under our ground lease. Also, our asset base contains additional embedded development opportunities aggregating approximately 715,000 RSF which represents additional development and expansion rights related to existing rental properties. |
Land undergoing predevelopment activities
Land undergoing predevelopment activities includes activities prior to commencement of vertical construction of aboveground building improvements and is classified as construction in progress. We generally will not commence ground-up development of any parcels undergoing predevelopment activities without first securing pre-leasing for such space. If vertical aboveground construction is not initiated at completion of predevelopment activities, the land parcel will be classified as land held for future development. Our objective with predevelopment is to reduce the time it takes to deliver projects to prospective client tenants. The largest project included in land undergoing predevelopment consists of substantially all of our 1.2 million RSF at the Alexandria Center™ at Kendall Square in East Cambridge, Massachusetts.
| |
3. | Investments in real estate (continued) |
We are required to capitalize project costs, including interest, property taxes, insurance, and other costs directly related and essential to the development or construction of a project during periods when activities necessary to prepare an asset for its intended use are in progress. Predevelopment costs generally include the following activities prior to commencement of vertical construction:
| |
• | Traditional preconstruction costs including entitlement, design, construction drawings, Building Information Modeling (3-D virtual modeling), budgeting, sustainability and energy optimization reviews, permitting, and planning for all aspects of the project prior to vertical construction of aboveground building improvements including infrastructure, belowground site work, utility connections, land grading, and egress and regress access points. |
| |
• | Site and infrastructure construction costs including belowground site work, utility connections, land grading, drainage, egress and regress access points, foundation, and other costs to prepare the site for vertical construction of aboveground building improvements. For example, site and infrastructure costs for the 1.2 million rentable square feet (“RSF”) related to 50 Binney Street, 100 Binney Street, and 228,000 RSF of residential at the Alexandria Center™ at Kendall Square are classified as preconstruction prior to commencement of vertical construction. Site and infrastructure costs related to 75/125 Binney Street and 225 Binney Street are included in our estimate of cost of completion and initial stabilized yields for each project. |
Land held for future development
Land held for future development represents real estate we plan to develop in the future, but on which, as of each period presented, no construction or predevelopment activities were ongoing. All predevelopment efforts have been advanced to appropriate stages and no further predevelopment activities are ongoing. As a result, interest, property taxes, insurance, and other costs are expensed as incurred. As of June 30, 2013, and December 31, 2012, we held land in North America supporting an aggregate of 3.5 million and 4.7 million RSF of future ground-up development, respectively. Additionally, as of June 30, 2013, and December 31, 2012, we held land undergoing predevelopment activities in North America totaling 1.9 million and 2.9 million RSF, respectively.
Real estate asset sales
During the six months ended June 30, 2013, we sold seven properties for aggregate consideration of $128.6 million, at a net loss of $121 thousand, which included an aggregate gain of $52 thousand on the sale of two properties in the Suburban Washington, D.C. market, an aggregate loss of $392 thousand on the sale of three properties in the Greater Boston market, no gain or loss on the sale of a property in the Seattle market, and a gain of $219 thousand on one property sold outside of our core markets. The net loss is a component of income from discontinued operations, net.
During the six months ended June 30, 2013, we sold three parcels of land for aggregate consideration of $18.1 million and recognized a gain of $772 thousand, which included a gain of $381 thousand on the sale of two parcels in the San Francisco Bay Area market, and a gain of $391 thousand on the sale of one parcel in the Greater NYC market.
We hold equity investments in certain publicly traded companies and privately held entities primarily involved in the life science industry. Investments in “available for sale” securities with gross unrealized losses as of June 30, 2013, had been in a continuous unrealized loss position for less than 12 months. We have the ability and intent to hold these investments for a reasonable period of time sufficient for the recovery of our investment. We believe that these unrealized losses are temporary, and accordingly we have not recognized other-than-temporary impairment related to “available for sale” securities as of June 30, 2013. As of June 30, 2013, and December 31, 2012, there were no unrealized losses in our investments in privately held entities.
The following table summarizes our investments as of June 30, 2013, and December 31, 2012 (in thousands):
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
“Available-for-sale” securities, cost basis | $ | 1,832 |
| | $ | 1,236 |
|
Gross unrealized gains | 2,112 |
| | 1,561 |
|
Gross unrealized losses | (509 | ) | | (88 | ) |
“Available-for-sale” securities, at fair value | 3,435 |
| | 2,709 |
|
Investments accounted for under cost method | 119,164 |
| | 112,333 |
|
Investments accounted for under equity method | 6 |
| | 6 |
|
Total investments | $ | 122,605 |
| | $ | 115,048 |
|
The following table outlines our net investment income, which is classified in other income in the accompanying consolidated statements of income for the three and six months ended June 30, 2013 and 2012 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Equity in loss related to equity method investments | $ | — |
| | $ | — |
| | $ | — |
| | $ | (26 | ) |
Gross realized gains | 2,220 |
| | 9,127 |
| | 2,666 |
| | 11,126 |
|
Gross realized losses | (143 | ) | | (1,088 | ) | | (529 | ) | | (1,089 | ) |
Net investment income | $ | 2,077 |
| | $ | 8,039 |
| | $ | 2,137 |
| | $ | 10,011 |
|
| | | | | | | |
Amount of gains (losses) reclassified from accumulated other comprehensive income to realized gains, net | $ | (42 | ) | | $ | (238 | ) | | $ | 230 |
| | $ | 686 |
|
| |
5. | Secured and unsecured senior debt |
The following table summarizes our secured and unsecured senior debts and their respective principal maturities, as of June 30, 2013 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Fixed Rate/Hedged Variable Rate | | Unhedged Variable Rate | | Total Consolidated | | Percentage of Total | | Weighted Average Interest Rate at End of Period (1) | | Weighted Average Remaining Term (including extension options, in years) |
Secured notes payable | $ | 591,623 |
| | $ | 119,406 |
| | $ | 711,029 |
| | 24.0 | % | | 5.48 | % | | 2.7 |
Unsecured senior notes payable | 1,048,395 |
| | — |
| | 1,048,395 |
| | 35.4 |
| | 4.29 |
| | 9.3 |
$1.5 billion unsecured senior line of credit | — |
| | — |
| | — |
| | — |
| | 1.39 |
| | 3.8 |
2016 Unsecured Senior Bank Term Loan | 400,000 |
| | 200,000 |
| | 600,000 |
| | 20.3 |
| | 2.24 |
| | 3.0 |
2017 Unsecured Senior Bank Term Loan | 600,000 |
| | — |
| | 600,000 |
| | 20.3 |
| | 3.93 |
| | 3.6 |
Total / weighted average | $ | 2,640,018 |
| | $ | 319,406 |
| | $ | 2,959,424 |
| | 100.0 | % | | 4.09 | % | | 5.3 |
Percentage of total debt | 89 | % | | 11 | % | | 100 | % | | | | | | |
| |
(1) | Represents the weighted average contractual interest rate as of the end of the period plus the impact of debt premiums/discounts and our interest rate swap agreements. The weighted average interest rate excludes bank fees and amortization of loan fees. |
| |
5. | Secured and unsecured senior debt (continued) |
The following table summarizes our outstanding consolidated indebtedness, as of June 30, 2013 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stated Interest Rate | | Weighted Average Interest Rate (1) | | Maturity Date (2) | | Remaining for the Period Ending December 31, | | | | |
Debt | | | | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | Thereafter | | Total |
Secured notes payable | | | | | | | | | | | | | | | | | | | | | |
Greater Boston | | 5.26 | % | | | 5.59 | % | | 4/1/14 | | | $ | 1,945 |
| | $ | 208,683 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 210,628 |
|
Suburban Washington, D.C. | | 2.18 |
| | | 2.18 |
| | 4/20/14 | (3) | | — |
| | 76,000 |
| | — |
| | — |
| | — |
| | — |
| | 76,000 |
|
San Diego | | 6.05 |
| | | 4.88 |
| | 7/1/14 | | | 59 |
| | 6,458 |
| | — |
| | — |
| | — |
| | — |
| | 6,517 |
|
San Diego | | 5.39 |
| | | 4.00 |
| | 11/1/14 | | | 74 |
| | 7,495 |
| | — |
| | — |
| | — |
| | — |
| | 7,569 |
|
Seattle | | 6.00 |
| | | 6.00 |
| | 11/18/14 | | | 120 |
| | 240 |
| | — |
| | — |
| | — |
| | — |
| | 360 |
|
Suburban Washington, D.C. | | 5.64 |
| | | 4.50 |
| | 6/1/15 | | | 54 |
| | 138 |
| | 5,788 |
| | — |
| | — |
| | — |
| | 5,980 |
|
Greater Boston, San Francisco Bay Area, and San Diego | | 5.73 |
| | | 5.73 |
| | 1/1/16 | | | 814 |
| | 1,713 |
| | 1,816 |
| | 75,501 |
| | — |
| | — |
| | 79,844 |
|
Greater Boston, San Diego, and Greater NYC | | 5.82 |
| | | 5.82 |
| | 4/1/16 | | | 438 |
| | 931 |
| | 988 |
| | 29,389 |
| | — |
| | — |
| | 31,746 |
|
San Francisco Bay Area | | 6.35 |
| | | 6.35 |
| | 8/1/16 | | | 1,149 |
| | 2,487 |
| | 2,652 |
| | 126,715 |
| | — |
| | — |
| | 133,003 |
|
San Francisco Bay Area | | LIBOR+1.50 | | | 1.70 |
| | 7/1/17 | (4) | | — |
| | — |
| | 43,046 |
| | — |
| | — |
| | — |
| | 43,046 |
|
San Diego, Suburban Washington, D.C., and Seattle | | 7.75 |
| | | 7.75 |
| | 4/1/20 | | | 685 |
| | 1,453 |
| | 1,570 |
| | 1,696 |
| | 1,832 |
| | 108,469 |
| | 115,705 |
|
San Francisco Bay Area | | 6.50 |
| | | 6.50 |
| | 6/1/37 | | | — |
| | 17 |
| | 18 |
| | 19 |
| | 20 |
| | 773 |
| | 847 |
|
Average/Total | | 5.42 | % |
| | 5.48 |
| | | | | 5,338 |
| | 305,615 |
| | 55,878 |
| | 233,320 |
| | 1,852 |
| | 109,242 |
| | 711,245 |
|
Unsecured debt | | | | | | | | | | | | | | | | | | | | | | |
$1.5 billion unsecured senior line of credit (5) | | LIBOR+ 1.20% |
| (6) | | 1.39 |
| | 4/30/17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
2016 Unsecured Senior Bank Term Loan (5) | | LIBOR+ 1.75% |
| | | 2.24 |
| | 6/30/16 | (3) | | — |
| | — |
| | — |
| | 600,000 |
| | — |
| | — |
| | 600,000 |
|
2017 Unsecured Senior Bank Term Loan (5) | | LIBOR+ 1.50% |
| | | 3.93 |
| | 1/31/17 | (3) | | — |
| | — |
| | — |
| | — |
| | 600,000 |
| | — |
| | 600,000 |
|
Unsecured senior notes payable | | 4.60 | % | | | 4.61 |
| | 4/1/22 | | | — |
| | 250 |
| | — |
| | — |
| | — |
| | 550,000 |
| | 550,250 |
|
Unsecured senior notes payable | | 3.90 | % | | | 3.94 |
| | 6/15/23 | | | — |
| | — |
| | — |
| | — |
| | — |
| | 500,000 |
| | 500,000 |
|
Average/Subtotal | | | | | 4.09 |
| | | | | 5,338 |
| | 305,865 |
| | 55,878 |
| | 833,320 |
| | 601,852 |
| | 1,159,242 |
| | 2,961,495 |
|
Unamortized discounts | | | | | — |
| | | | | (294 | ) | | (200 | ) | | (139 | ) | | (177 | ) | | (184 | ) | | (1,077 | ) | | (2,071 | ) |
Average/Total | | | | | 4.09 | % | | | | | $ | 5,044 |
| | $ | 305,665 |
| | $ | 55,739 |
| | $ | 833,143 |
| | $ | 601,668 |
| | $ | 1,158,165 |
| | $ | 2,959,424 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Balloon payments | | | | | | | | | | $ | — |
| | $ | 297,330 |
| | $ | 48,774 |
| | $ | 830,029 |
| | $ | 600,000 |
| | $ | 654,352 |
| | $ | 2,430,485 |
|
Principal amortization | | | | | | | | | | 5,044 |
| | 8,335 |
| | 6,965 |
| | 3,114 |
| | 1,668 |
| | 503,813 |
| | 528,939 |
|
Total consolidated debt | | | | | | | | | | $ | 5,044 |
| | $ | 305,665 |
| | $ | 55,739 |
| | $ | 833,143 |
| | $ | 601,668 |
| | $ | 1,158,165 |
| | $ | 2,959,424 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Fixed rate/hedged variable rate debt | | | $ | 4,924 |
| | $ | 229,425 |
| | $ | 12,693 |
| | $ | 633,143 |
| | $ | 601,668 |
| | $ | 1,158,165 |
| | $ | 2,640,018 |
|
Unhedged variable rate debt | | | 120 |
| | 76,240 |
| | 43,046 |
| | 200,000 |
| | — |
| | — |
| | 319,406 |
|
Total consolidated debt | | | | | | | | | | $ | 5,044 |
| | $ | 305,665 |
| | $ | 55,739 |
| | $ | 833,143 |
| | $ | 601,668 |
| | $ | 1,158,165 |
| | $ | 2,959,424 |
|
| |
(1) | Represents the weighted average contractual interest rate as of the end of the period plus the impact of debt premiums/discounts and our interest rate swap agreements. The weighted average interest rate excludes bank fees and amortization of loan fees. |
| |
(2) | Includes any extension options that we control. |
| |
(3) | This loan may be prepaid without any prepayment penalty. |
| |
(4) | We have two, one year options to extend the stated maturity date of July 1, 2015. |
| |
(5) | Does not reflect amendments completed or in progress subsequent to June 30, 2013, that will reduce our borrowing costs and/or extend our maturity as noted in our Subsequent Events note to the consolidated financial statements. See Note 13 for amended terms. |
| |
(6) | In addition to the stated rate, we were subject to an annual facility fee of 0.25% as of June 30, 2013. |
| |
5. | Secured and unsecured senior debt (continued) |
3.90% Unsecured senior notes payable
In June 2013, we completed a $500 million public offering of our unsecured senior notes payable at a stated interest rate of 3.90% (“3.90% Unsecured Senior Notes”). The unsecured senior notes payable were priced at 99.712% of the principal amount with a yield to maturity of 3.94% and are due June 15, 2023. The unsecured senior notes payable are unsecured obligations of the Company and are fully and unconditionally guaranteed by Alexandria Real Estate Equities, L.P., a 100% owned subsidiary of the Company. The unsecured senior notes payable rank equally in right of payment with all other senior unsecured indebtedness. However, the unsecured senior notes payable are effectively subordinated to existing and future mortgages and other secured indebtedness (to the extent of the value of the collateral securing such indebtedness) and to all existing and future preferred equity and liabilities, whether secured or unsecured, of the Company’s subsidiaries, other than Alexandria Real Estate Equities, L.P. We used the net proceeds of this offering to prepay $150 million of the outstanding principal balance of $750 million on our unsecured senior bank term loan due in 2016 (“2016 Unsecured Senior Bank Term Loan”), to reduce the outstanding borrowings on our unsecured senior line of credit to zero, and to hold the remaining proceeds in cash and cash equivalents to fund near-term opportunities related to development/redevelopment projects, to fund near-term property acquisitions, and for general corporate purposes. As a result of the $150 million prepayment, we recognized a loss on early extinguishment of debt related to the write-off of a portion of unamortized loan fees in June 2013, totaling $560 thousand.
Unsecured senior line of credit and unsecured senior bank term loans
The maturity date of the unsecured senior line of credit is April 2017, assuming we exercise our sole right to extend the maturity date twice by an additional six months after each exercise. Borrowings under the unsecured senior line of credit will bear interest at LIBOR or the base rate specified in the amended unsecured senior line of credit agreement, plus in either case a specified margin (the “Applicable Margin”). The Applicable Margin for LIBOR borrowings under the unsecured senior line of credit as of June 30, 2013, was 1.20%, which is based on our existing credit rating as set by certain rating agencies. As of June 30, 2013, we did not have any borrowings outstanding. Our unsecured senior line of credit is subject to an annual facility fee of 0.25% based on the aggregate commitments outstanding.
In addition, the terms of the unsecured senior line of credit and unsecured senior bank term loan agreements, among other things, limit the ability of the Company, Alexandria Real Estate Equities, L.P., and the Company’s subsidiaries to i) consummate a merger, or consolidate or sell all or substantially all of the Company’s assets, and ii) incur certain secured or unsecured indebtedness. Additionally, the terms of the unsecured senior line of credit and unsecured senior bank term loan agreements include a restriction that may limit our ability to pay dividends, including distributions with respect to common stock or other equity interests, during any time a default is continuing, except to enable us to continue to qualify as a REIT for federal income tax purposes. As of June 30, 2013, we were in compliance with all such covenants.
The following table outlines our interest expense for the three and six months ended June 30, 2013 and 2012 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Gross interest | $ | 31,668 |
| | $ | 33,747 |
| | $ | 63,709 |
| | $ | 65,239 |
|
Capitalized interest | (15,690 | ) | | (15,825 | ) | | (29,711 | ) | | (31,091 | ) |
Interest expense | $ | 15,978 |
| | $ | 17,922 |
| | $ | 33,998 |
| | $ | 34,148 |
|
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6. | Interest rate swap agreements |
During the three and six months ended June 30, 2013 and 2012, our interest rate swap agreements were used primarily to hedge the variable cash flows associated with certain of our existing LIBOR-based variable rate debt, including our unsecured senior line of credit and unsecured senior bank term loans. The ineffective portion of the change in fair value of our interest rate swap agreements is required to be recognized directly in earnings. During the three and six months ended June 30, 2013 and 2012, our interest rate swap agreements were 100% effective; because of this, no hedge ineffectiveness was recognized in earnings. The effective portion of changes in the fair values of our interest rate swap agreements that are designated and that qualify as cash flow hedges is classified in accumulated other comprehensive loss. Losses are subsequently reclassified into earnings in the period during which the hedged transactions affect earnings. During the next 12 months, we expect to reclassify approximately $11.2 million in accumulated other comprehensive loss to interest expense as an increase to interest expense.
As of June 30, 2013, and December 31, 2012, the fair values of our interest rate swap agreements were classified in accounts payable, accrued expenses, and tenant security deposits based upon their respective fair values, aggregating a liability balance of approximately $12.5 million and $20.7 million, respectively, which included accrued interest and adjustments for non-performance risk, with the offsetting adjustment reflected as unrealized loss in accumulated other comprehensive loss in total equity. Under our interest rate swap agreements, we have no collateral posting requirements.
We had the following outstanding interest rate swap agreements that were designated as cash flow hedges of interest rate risk as of June 30, 2013 (dollars in thousands):
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| | | | | | | | | | | | | | | | | | | |
| |
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| | Interest Pay | | Fair Value as of | | Notional Amount in Effect as of |
Transaction Date | | Effective Date | | Termination Date | | Rate (1) | | June 30, 2013 | | June 30, 2013 | | December 31, 2013 |
December 2006 | | December 29, 2006 | | March 31, 2014 | | 4.990 | % | | $ | (1,804 | ) | | $ | 50,000 |
| | $ | 50,000 |
|
October 2007 | | October 31, 2007 | | September 30, 2013 | | 4.642 | % | | (563 | ) | | 50,000 |
| | — |
|
December 2006 | | November 30, 2009 | | March 31, 2014 | | 5.015 | % | | (2,721 | ) | | 75,000 |
| | 75,000 |
|
December 2006 | | November 30, 2009 | | March 31, 2014 | | 5.023 | % | | (2,725 | ) | | 75,000 |
| | 75,000 |
|
December 2011 | | December 31, 2012 | | December 31, 2013 | | 0.640 | % | | (553 | ) | | 250,000 |
| | — |
|
December 2011 | | December 31, 2012 | | December 31, 2013 | | 0.640 | % | | (553 | ) | | 250,000 |
| | — |
|
December 2011 | | December 31, 2012 | | December 31, 2013 | | 0.644 | % | | (279 | ) | | 125,000 |
| | — |
|
December 2011 | | December 31, 2012 | | December 31, 2013 | | 0.644 | % | | (279 | ) | | 125,000 |
| | — |
|
December 2011 | | December 31, 2013 | | December 31, 2014 | | 0.977 | % | | (1,536 | ) | | — |
| | 250,000 |
|
December 2011 | | December 31, 2013 | | December 31, 2014 | | 0.976 | % | | (1,534 | ) | | — |
| | 250,000 |
|
Total | |
| |
| |
|
| | $ | (12,547 | ) | | $ | 1,000,000 |
| | $ | 700,000 |
|
| |
(1) | In addition to the interest pay rate, borrowings outstanding under our unsecured senior bank term loans include an applicable margin currently ranging from 1.50% to 1.75% as of June 30, 2013. |
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7. | Fair value measurements |
We are required to disclose fair value information about all financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. We measure and disclose the estimated fair value of financial assets and liabilities utilizing a fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. This hierarchy consists of three broad levels, as follows: i) quoted prices in active markets for identical assets or liabilities, ii) “significant other observable inputs,” and iii) “significant unobservable inputs.” “Significant other observable inputs” can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. “Significant unobservable inputs” are typically based on an entity’s own assumptions, since there is little, if any, related market activity. In instances in which the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level of input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers between the levels in the fair value hierarchy during the three and six months ended June 30, 2013 and 2012.
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7. | Fair value measurements (continued) |
The following tables set forth the assets and liabilities that we measure at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2013, and December 31, 2012 (in thousands):
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| | | | | | | | | | | | | | | | |
| | | | June 30, 2013 |
Description | | Total | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
Assets: | | | | | | | | |
Marketable securities | | $ | 3,435 |
| | $ | 3,435 |
| | $ | — |
| | $ | — |
|
Liabilities: | | | | | | | | |
Interest rate swap agreements | | $ | 12,547 |
| | $ | — |
| | $ | 12,547 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | | | December 31, 2012 |
Description | | Total | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
Assets: | | | | | | | | |
Marketable securities | | $ | 2,709 |
| | $ | 2,709 |
| | $ | — |
| | $ | — |
|
Liabilities: | | | | | | | | |
Interest rate swap agreements | | $ | 20,661 |
| | $ | — |
| | $ | 20,661 |
| | $ | — |
|
The carrying amounts of cash and cash equivalents, restricted cash, tenant receivables, other assets, accounts payable, accrued expenses, and tenant security deposits approximate fair value. Our “available-for-sale” securities and our interest rate swap agreements, respectively, have been recognized at fair value. The fair values of our secured notes payable, unsecured senior notes payable, unsecured senior line of credit, and unsecured senior bank term loans were estimated using widely accepted valuation techniques, including discounted cash flow analyses of “significant other observable inputs” such as available market information on discount and borrowing rates with similar terms, maturities, and credit ratings. Because the valuations of our financial instruments are based on these types of estimates, the actual fair value of our financial instruments may differ materially if our estimates do not prove to be accurate. Additionally, the use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.
As of June 30, 2013, and December 31, 2012, the book and fair values of our marketable securities, interest rate swap agreements, secured notes payable, unsecured senior notes payable, unsecured senior line of credit, and unsecured senior bank term loans were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 |
| Book Value | | Fair Value | | Book Value | | Fair Value |
Marketable securities | $ | 3,435 |
| | $ | 3,435 |
| | $ | 2,709 |
| | $ | 2,709 |
|
Interest rate swap agreements | (12,547 | ) | | (12,547 | ) | | (20,661 | ) | | (20,661 | ) |
Secured notes payable | (711,029 | ) | | (766,262 | ) | | (716,144 | ) | | (788,455 | ) |
Unsecured senior notes payable | (1,048,395 | ) | | (1,039,170 | ) | | (549,805 | ) | | (593,350 | ) |
Unsecured senior line of credit | — |
| | — |
| | (566,000 | ) | | (567,196 | ) |
Unsecured senior bank term loans | (1,200,000 | ) | | (1,357,376 | ) | | (1,350,000 | ) | | (1,405,124 | ) |
We use income from continuing operations attributable to Alexandria’s common stockholders as the “control number” in determining whether potential common shares, including potential common shares issuable upon conversion of our 8.00% unsecured senior convertible notes (“8.00% Unsecured Senior Convertible Notes”), are dilutive or antidilutive to earnings per share. Pursuant to the presentation and disclosure literature on gains or losses on sales or disposals by REITs and earnings per share required by the SEC and the Financial Accounting Standards Board, gains or losses on sales or disposals by a REIT that do not qualify as discontinued operations are classified below income from discontinued operations in the consolidated statements of income and included in the numerator for the computation of earnings per share for income from continuing operations.
The land parcels we sold during the three and six months ended June 30, 2013, and the six months ended June 30, 2012, did not meet the criteria for classification as discontinued operations because the land parcels did not have significant operations prior to disposition. Accordingly, for the three and six months ended June 30, 2013, and the six months ended June 30, 2012, we classified approximately $0.8 million and $1.9 million, respectively, as gain on sales of land parcels below income from discontinued operations, net, in the accompanying consolidated statements of income, and included the gain in income from continuing operations attributable to Alexandria’s common stockholders in the “control number,” or numerator for computation of earnings per share.
We account for unvested restricted stock awards that contain nonforfeitable rights to dividends as participating securities and include these securities in the computation of earnings per share using the two-class method. Our Series D convertible preferred stock (“Series D Convertible Preferred Stock”) and our 8.00% Unsecured Senior Convertible Notes are not participating securities, and are not included in the computation of earnings per share using the two-class method. Under the two-class method, we allocate net income after preferred stock dividends, preferred stock redemption charge, and amounts attributable to noncontrolling interests to common stockholders and unvested restricted stock awards based on their respective participation rights to dividends declared (or accumulated) and undistributed earnings. Diluted earnings per share is computed using the weighted average shares of common stock outstanding determined for the basic earnings per share computation plus the effect of any dilutive securities, including the dilutive effect of stock options using the treasury stock method.
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8. | Earnings per share (continued) |
The table below is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three and six months ended June 30, 2013 and 2012 (in thousands, except per share amounts):
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Income from continuing operations | $ | 32,322 |
| | $ | 20,928 |
| | $ | 61,745 |
| | $ | 47,194 |
|
Gain on sale of land parcel | 772 |
| | — |
| | 772 |
| | 1,864 |
|
Net income attributable to noncontrolling interests | (980 | ) | | (851 | ) | | (1,962 | ) | | (1,562 | ) |
Dividends on preferred stock | (6,471 | ) | | (6,903 | ) | | (12,942 | ) | | (14,386 | ) |
Preferred stock redemption charge | — |
| | — |
| | — |
| | (5,978 | ) |
Net income attributable to unvested restricted stock awards | (403 | ) | | (271 | ) | | (745 | ) | | (506 | ) |
Income from continuing operations attributable to Alexandria’s common stockholders – basic and diluted | 25,240 |
| | 12,903 |
| | 46,868 |
| | 26,626 |
|
Income from discontinued operations, net | 243 |
| | 4,713 |
| | 1,057 |
| | 9,358 |
|
Net income attributable to Alexandria’s common stockholders – basic and diluted | $ | 25,483 |
| | $ | 17,616 |
| | $ | 47,925 |
| | $ | 35,984 |
|
| | | | | | | |
Weighted average shares of common stock outstanding – basic | 66,973 |
| | 61,663 |
| | 65,078 |
| | 61,586 |
|
Dilutive effect of stock options | — |
| | 1 |
| | — |
| | — |
|
Weighted average shares of common stock outstanding – diluted | 66,973 |
| | 61,664 |
| | 65,078 |
| | 61,586 |
|
| | | | | | | |
Earnings per share attributable to Alexandria’s common stockholders – basic and diluted: |
|
| |
|
| |
|
| | |
Continuing operations | $ | 0.38 |
| | $ | 0.21 |
| | $ | 0.72 |
| | $ | 0.43 |
|
Discontinued operations, net | — |
| | 0.08 |
| | 0.02 |
| | 0.15 |
|
Earnings per share – basic and diluted | $ | 0.38 |
| | $ | 0.29 |
| | $ | 0.74 |
| | $ | 0.58 |
|
For purposes of calculating diluted earnings per share, we did not assume conversion of our 8.00% Unsecured Senior Convertible Notes for the three and six months ended June 30, 2013 and 2012, since the impact was antidilutive to earnings per share attributable to Alexandria’s common stockholders from continuing operations during those periods.
For purposes of calculating diluted earnings per share, we did not assume conversion of our Series D Convertible Preferred Stock for the three and six months ended June 30, 2013 and 2012, since the impact was antidilutive to earnings per share attributable to Alexandria’s common stockholders from continuing operations during those periods.
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9. | Net income attributable to Alexandria Real Estate Equities, Inc. |
The following table shows income from continuing and discontinued operations attributable to Alexandria Real Estate Equities, Inc. for the three and six months ended June 30, 2013 and 2012 (in thousands):
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
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