3Q14 - 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 September 30, 2014

OR

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 October 17, 2014, 72,007,833 shares of common stock, par value $.01 per share, were outstanding.



TABLE OF CONTENTS

 
 
Page
 
 
 
 
FINANCIAL STATEMENTS (UNAUDITED)
 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2014, and December 31, 2013
 
 
 
 
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests for the Nine Months Ended September 30, 2014
 
 
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





GLOSSARY

Abbreviations or acronyms frequently used in this document:

ABR
Annualized Base Rent
ACKS
The Alexandria CenterTM at Kendall Square in the Greater Boston Area
AFFO
Adjusted Funds from Operations
ASU
Accounting Standards Update
bps
Basis Points
CIP
Construction in Progress
EBITDA
Earnings before Interest, Taxes, Depreciation, and Amortization
EPS
Earnings per Share
FASB
Financial Accounting Standards Board
FFO
Funds from Operations
GAAP
U.S. Generally Accepted Accounting Principles
HVAC
Heating, Ventilation, and Air Conditioning
JV
Joint Venture
LEED
Leadership in Energy and Environmental Design
LIBOR
London Interbank Offered Rate
NAREIT
National Association of Real Estate Investment Trusts
NOI
Net Operating Income
REIT
Real Estate Investment Trust
RSF
Rentable Square Feet
SEC
Securities and Exchange Commission
SoMa
South of Market submarket of the San Francisco Bay Area
TI
Tenant Improvement
U.S.
United States
VIE
Variable Interest Entity


3



PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS (UNAUDITED)

Alexandria Real Estate Equities, Inc.
Consolidated Balance Sheets
(In thousands)
(Unaudited)

 
September 30, 2014
 
December 31, 2013
Assets
 
 
 
Investments in real estate
$
7,197,630

 
$
6,776,914

Cash and cash equivalents
67,023

 
57,696

Restricted cash
24,245

 
27,709

Tenant receivables
10,830

 
9,918

Deferred rent
225,506

 
190,425

Deferred leasing and financing costs
199,835

 
192,658

Investments
177,577

 
140,288

Other assets
117,668

 
134,156

Total assets
$
8,020,314

 
$
7,529,764

 
 
 
 
Liabilities, Noncontrolling Interests, and Equity
 
 
 
Secured notes payable
$
636,825

 
$
708,831

Unsecured senior notes payable
1,747,290

 
1,048,230

Unsecured senior line of credit
142,000

 
204,000

Unsecured senior bank term loans
975,000

 
1,100,000

Accounts payable, accrued expenses, and tenant security deposits
504,535

 
435,342

Dividends payable
57,549

 
54,420

Total liabilities
4,063,199

 
3,550,823

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Redeemable noncontrolling interests
14,348

 
14,444

 
 
 
 
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
714

 
712

Additional paid-in capital
3,523,195

 
3,572,281

Accumulated other comprehensive loss
(28,711
)
 
(36,204
)
Alexandria’s stockholders’ equity
3,875,198

 
3,916,789

Noncontrolling interests
67,569

 
47,708

Total equity
3,942,767

 
3,964,497

Total liabilities, noncontrolling interests, and equity
$
8,020,314

 
$
7,529,764


The accompanying notes are an integral part of these consolidated financial statements.

4



Alexandria Real Estate Equities, Inc.
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Rental
$
137,718

 
$
116,052

 
$
403,280

 
$
342,071

Tenant recoveries
45,572

 
38,691

 
128,198

 
110,125

Other income
2,325

 
3,572

 
6,725

 
10,132

Total revenues
185,615

 
158,315

 
538,203

 
462,328

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental operations
57,423

 
47,684

 
162,283

 
139,147

General and administrative
12,609

 
11,666

 
39,669

 
35,769

Interest
20,555

 
16,171

 
57,111

 
50,169

Depreciation and amortization
58,388

 
48,866

 
166,123

 
141,039

Loss on early extinguishment of debt
525

 
1,432

 
525

 
1,992

Total expenses
149,500

 
125,819

 
425,711

 
368,116

 
 
 
 
 
 
 
 
Income from continuing operations
36,115

 
32,496

 
112,492

 
94,212

(Loss) income from discontinued operations
(180
)
 
(43
)
 
(489
)
 
1,043

Gain on sales of land parcels
8

 
—

 
805

 
772

Net income
35,943

 
32,453

 
112,808

 
96,027

 
 
 
 
 
 
 
 
Dividends on preferred stock
(6,471
)
 
(6,472
)
 
(19,414
)
 
(19,414
)
Net income attributable to noncontrolling interests
(1,340
)
 
(960
)
 
(3,842
)
 
(2,922
)
Net income attributable to unvested restricted stock awards
(506
)
 
(442
)
 
(1,285
)
 
(1,187
)
Net income attributable to Alexandria’s common stockholders
$
27,626

 
$
24,579

 
$
88,267

 
$
72,504

 
 
 
 
 
 
 
 
EPS attributable to Alexandria’s common stockholders – basic and diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.39

 
$
0.35

 
$
1.25

 
$
1.06

Discontinued operations
—

 
—

 
(0.01
)
 
0.02

EPS – basic and diluted
$
0.39

 
$
0.35

 
$
1.24

 
$
1.08

 
 
 
 
 
 
 
 
Dividends declared per share of common stock
$
0.72

 
$
0.68

 
$
2.14

 
$
1.93


The accompanying notes are an integral part of these consolidated financial statements.


5



Alexandria Real Estate Equities, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
35,943

 
$
32,453

 
$
112,808

 
$
96,027

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Unrealized (losses) gains on marketable securities:
 
 
 
 
 
 
 
Unrealized holding (losses) gains arising during the period
(2,454
)
 
(37
)
 
13,591

 
323

Reclassification adjustment for losses (gains) included in net income
111

 
(250
)
 
517

 
(480
)
Unrealized (losses) gains on marketable securities, net
(2,343
)
 
(287
)
 
14,108

 
(157
)
 
 
 
 
 
 
 
 
Unrealized gains on interest rate swap agreements:
 
 
 
 
 
 
 
Unrealized interest rate swap gains (losses) arising during the period
1,206

 
(676
)
 
(2,708
)
 
(704
)
Reclassification adjustment for amortization of interest expense included in net income
1,129

 
3,904

 
5,742

 
12,046

Unrealized gains on interest rate swap agreements, net
2,335

 
3,228

 
3,034

 
11,342

 
 
 
 
 
 
 
 
Unrealized losses on foreign currency translation:
 
 
 
 
 
 
 
Unrealized foreign currency translation losses during the period
(12,259
)
 
(3,404
)
 
(9,450
)
 
(26,461
)
Reclassification adjustment for gains included in net income
(199
)
 
—

 
(199
)
 
—

Unrealized losses on foreign currency translation, net
(12,458
)
 
(3,404
)
 
(9,649
)
 
(26,461
)
 
 
 
 
 
 
 
 
Total other comprehensive (loss) income
(12,466
)
 
(463
)
 
7,493

 
(15,276
)
Comprehensive income
23,477

 
31,990

 
120,301

 
80,751

Less: comprehensive income attributable to noncontrolling interests
(1,340
)
 
(933
)
 
(3,842
)
 
(2,839
)
Comprehensive income attributable to Alexandria's common stockholders
$
22,137

 
$
31,057

 
$
116,459

 
$
77,912


The accompanying notes are an integral part of these consolidated financial statements.


6



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, 2013
 
$
250,000

 
$
130,000

 
71,172,197

 
$
712

 
$
3,572,281

 
$
—

 
$
(36,204
)
 
$
47,708

 
$
3,964,497

 
$
14,444

Net income
 
—

 
—

 
—

 
—

 
—

 
108,966

 
—

 
3,045

 
112,011

 
797

Total other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
—

 
7,493

 
—

 
7,493

 
—

Contributions by noncontrolling interests
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
19,410

 
19,410

 
—

Distributions to noncontrolling interests
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,594
)
 
(2,594
)
 
(893
)
Issuances pursuant to stock plan
 
—

 
—

 
199,628

 
2

 
15,031

 
—

 
—

 
—

 
15,033

 
—

Dividends declared on common stock
 
—

 
—

 
—

 
—

 
—

 
(153,669
)
 
—

 
—

 
(153,669
)
 
—

Dividends declared on preferred stock
 
—

 
—

 
—

 
—

 
—

 
(19,414
)
 
—

 
—

 
(19,414
)
 
—

Distributions in excess of earnings
 
—

 
—

 
—

 
—

 
(64,117
)
 
64,117

 
—

 
—

 
—

 
—

Balance as of September 30, 2014
 
$
250,000

 
$
130,000

 
71,371,825

 
$
714

 
$
3,523,195

 
$
—

 
$
(28,711
)
 
$
67,569

 
$
3,942,767

 
$
14,348


The accompanying notes are an integral part of these consolidated financial statements.

7



Alexandria Real Estate Equities, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
Nine Months Ended September 30,
 
2014
 
2013
Operating Activities
 
 
 
Net income
$
112,808

 
$
96,027

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
166,123

 
142,677

Loss on early extinguishment of debt
525

 
1,992

Gain on sales of land parcels
(805
)
 
(772
)
Loss on sales of real estate
—

 
121

Amortization of loan fees and costs
8,090

 
7,300

Amortization of debt premiums/discounts
100

 
383

Amortization of acquired above and below market leases
(2,191
)
 
(2,490
)
Deferred rent
(35,511
)
 
(20,007
)
Stock compensation expense
9,372

 
11,541

Investment gains
(9,481
)
 
(4,716
)
Investment losses
8,725

 
529

Changes in operating assets and liabilities:
 
 
 
Restricted cash
—

 
1,243

Tenant receivables
(939
)
 
(271
)
Deferred leasing costs
(25,910
)
 
(37,190
)
Other assets
(12,228
)
 
(11,428
)
Accounts payable, accrued expenses, and tenant security deposits
36,446

 
51,437

Net cash provided by operating activities
255,124

 
236,376

 
 
 
 
Investing Activities
 
 
 
Proceeds from sales of properties
28,378

 
101,815

Additions to properties
(345,074
)
 
(450,140
)
Purchase of properties
(97,785
)
 
(24,537
)
Deposits for property acquisitions
(7,292
)
 
—

Change in restricted cash related to construction projects
6,694

 
5,711

Investment in unconsolidated real estate JVs
(67,525
)
 
(13,881
)
Additions to investments
(35,484
)
 
(22,835
)
Proceeds from sales of investments
13,883

 
12,750

Proceeds from repayment of notes receivable
29,866

 
—

Net cash used in investing activities
$
(474,339
)
 
$
(391,117
)

8



Alexandria Real Estate Equities, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
Nine Months Ended September 30,
 
2014
 
2013
Financing Activities
 
 
 
Borrowings from secured notes payable
$
108,626

 
$
26,319

Repayments of borrowings from secured notes payable
(228,909
)
 
(34,120
)
Proceeds from issuance of unsecured senior notes payable
698,908

 
498,561

Principal borrowings from unsecured senior line of credit
890,000

 
319,000

Repayments of borrowings from unsecured senior line of credit
(952,000
)
 
(871,000
)
Repayment of unsecured senior bank term loan
(125,000
)
 
(250,000
)
Repurchase of unsecured senior convertible notes
—

 
(384
)
Change in restricted cash related to financings
375

 
923

Deferred financing costs paid
(7,989
)
 
(16,247
)
Proceeds from common stock offering
—

 
535,686

Dividends paid on common stock
(150,540
)
 
(120,367
)
Dividends paid on preferred stock
(19,414
)
 
(19,414
)
Contributions by noncontrolling interests
19,410

 
—

Distributions to noncontrolling interests
(2,594
)
 
(2,100
)
Distributions to redeemable noncontrolling interests
(893
)
 
—

Net cash provided by financing activities
229,980

 
66,857

 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
(1,438
)
 
752

 
 
 
 
Net increase (decrease) in cash and cash equivalents
9,327

 
(87,132
)
Cash and cash equivalents at beginning of period
57,696

 
140,971

Cash and cash equivalents at end of period
$
67,023

 
$
53,839

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest, net of interest capitalized
$
33,783

 
$
34,281

 
 
 
 
Non-Cash Investing Activities
 
 
 
Note receivable issued in connection with sale of real estate
$
—

 
$
38,820

Assumption of secured notes payable in connection with purchase of properties
$
(48,329
)
 
$
—


The accompanying notes are an integral part of these consolidated financial statements.


9

Alexandria Real Estate Equities, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

1.
Background

As used in this quarterly report on Form 10-Q, references to the “Company,” “ARE,” “Alexandria,” “we,” “our,” and “us” refer to Alexandria Real Estate Equities, Inc. and its consolidated subsidiaries.

Alexandria Real Estate Equities, Inc. (NYSE:ARE), with a total market capitalization of $9.1 billion as of September 30, 2014, and an asset base of 31.6 million square feet, including 18.5 million RSF of operating and current value-creation projects, as well as an additional 13.1 million square feet in future ground-up development projects, is the largest and leading REIT uniquely focused on Class A assets in collaborative science and technology campuses located in urban innovation clusters. Alexandria pioneered this niche in 1994 and has since established a dominant market presence in AAA locations including Greater Boston, the San Francisco Bay Area, New York City, San Diego, Seattle, Maryland, and Research Triangle Park. Alexandria is known for its high-quality and diverse client tenant base. Alexandria is the Landlord of Choice to the Life Science Industry®, and approximately 53% of its total ABR results from investment-grade client tenants. Alexandria has a longstanding and proven track record of developing Class A assets clustered in urban collaborative science and technology campuses that provide its client tenants with a highly collaborative, 24/7 live/work/play ecosystems, as well as the critical ability to successfully recruit and retain best-in-class talent. We believe these advantages result in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value. For additional information on Alexandria, please visit www.are.com.

Our asset base consisted of the following, as of September 30, 2014:
 
 
Square Feet
Operating properties
 
16,373,416

Development properties
 
1,941,186

Redevelopment properties
 
143,777

Total operating and current value-creation projects
 
18,458,379

 
 
 
Near-term value-creation projects in North America (CIP)
 
1,926,331

Future value-creation projects
 
10,983,108

Land under sales contract
 
250,000

 
 
 
Total
 
31,617,818


Ÿ
Investment-grade client tenants represented approximately 53% of our total ABR;
Ÿ
Approximately 95% of our leases (on an RSF basis) contained effective annual rent escalations that were either fixed (generally ranging from 3% to 3.5%) or indexed based on a consumer price index or other index;
Ÿ
Approximately 95% of our leases (on an RSF basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area, and other operating expenses (including increases thereto) in addition to base rent, and;
Ÿ
Approximately 93% of our leases (on an RSF basis) provided for the recapture of certain capital expenditures (such as HVAC systems maintenance and/or replacement, roof replacement, and parking lot resurfacing) that we believe would typically be borne by the landlord in traditional office leases.

Any references to the number of buildings, square footage, number of leases, occupancy, and any amounts derived from these values in the notes to the consolidated financial statements are unaudited and outside the scope of our independent registered public accounting firm’s review of our interim consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.


10

2.
Basis of presentation

We have prepared the accompanying interim consolidated financial statements in accordance with GAAP and in conformity with the rules and regulations of the 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, 2014.  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, 2013.

Consolidation

The accompanying consolidated financial statements include the accounts of Alexandria Real Estate Equities, Inc. and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated. In certain circumstances, we may enter into joint venture arrangements with outside partners. On a quarterly basis, we evaluate each JV arrangement under the VIE model and if the entity is determined not to be a VIE, then we evaluate the entity under the voting model to determine if the entity should be consolidated.

Under the VIE model an entity is determined to be a VIE if it has any of the following characteristics:

•
the entity does not have enough equity to finance its activities without additional subordinated financial support;
•
the equity holders, as a group, lack the characteristics of a controlling financial interest, or
•
the legal entity is established with non-substantive voting rights.

If an entity is determined to be a VIE, we evaluate whether we are the primary beneficiary. We perform this evaluation on a quarterly basis. We use qualitative analyses when determining whether or not we are the primary beneficiary of a VIE. Factors considered include, but are not limited to, the purpose and design of the VIE, risks that the VIE was designed to create and pass through, the form of our ownership interest, our representation on the entity’s governing body, the size and seniority of our investment, our ability to participate in policy-making decisions, and the rights of the other investors to participate in the decision-making process and/or liquidate the venture, if applicable. We consolidate VIEs whenever we determine that we are the primary beneficiary.

If an entity is determined not to be a VIE, we then evaluate such entity under the voting model. Under the voting model, if we are the general partner, managing member, or a similar role that can direct the operations of the entity, we have a presumption that we control the entity and we should consolidate regardless of our ownership percentage. If we determine that the other equity holders have any one of the following rights, it is assumed that we do not control the entity and therefore should not consolidate the entity: (i) the substantive ability to dissolve the entity or remove us from the lead role of the entity, or (ii) substantive rights that allow them to participate in the activities that most significantly impact the entity’s economic performance.

As of September 30, 2014, we have two joint ventures that do not meet the requirements for consolidation and are accounted for under the equity method of accounting. See Note 3 – Investments in Real Estate, to our consolidated financial statements (unaudited) appearing elsewhere in this quarterly report on Form 10-Q for further information on our unconsolidated real estate entities.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation for discontinued operations.

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.


11


2.
Basis of presentation (continued)

Investments in real estate, net, and discontinued operations

We recognize real estate 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 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.  Costs related to the acquisition of businesses, including real estate acquired with in-place leases, are expensed as incurred.

The values allocated to buildings and building improvements, land improvements, tenant improvements, and equipment are depreciated on a straight-line basis using the shorter of the term of the respective ground lease and up to 40 years for buildings and building improvements, an estimated life of 20 years for land improvements, the respective lease term for TIs, and the estimated useful life for equipment. 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, predevelopment, or construction of a project.  Capitalization of development, redevelopment, predevelopment, and construction costs is required while activities are ongoing to prepare an asset for its intended use.  Fluctuations in our development, redevelopment, predevelopment, 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, predevelopment, or construction activities 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: (i) management, having the authority to approve the action, commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition, subject only to terms that are usual and customary; (iii) an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; (iv) the sale of the property is probable (including the removal of significant contingencies or the fulfillment of significant conditions precedent to the sale) and is expected to be completed within one year; (v) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) 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 if (i) the operations and cash flows of the property have been or will be eliminated from the ongoing operations, and (ii) 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.”


12


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 development, CIP, and intangibles, are individually evaluated for impairment when conditions exist that may indicate that the amount of a long-lived asset may not be recoverable.  The 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 development, and CIP, are assessed by project and include significant fluctuations in estimated NOI, 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 the “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 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 to be 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 investments in certain 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 realized gains or losses classified in other income in the accompanying consolidated statements of income.  Investments in privately held entities and limited partnerships 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 and limited partnerships 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 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 interest of each individual entity to less than 10%.  As of September 30, 2014, and December 31, 2013, our ownership percentage in the voting interest of each individual entity was less than 10%.

We monitor each of our investments throughout the year for new developments, including operating results, results of clinical trials, capital-raising events, and merger and acquisition activities. 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, but are not limited to, 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 charge to current earnings.


13


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 2009 through 2013.

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 may 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 expense for uncollectible accounts in future periods equal to the amount of uncollectible rent and tenant recoveries, and deferred rent receivables arising from the straight-lining of rent.  As of September 30, 2014, and December 31, 2013, we had no allowance for uncollectible receivables.

Monitoring client tenant credit quality

During the term of each lease, we monitor the credit quality of our client tenants by (i) reviewing the credit rating of tenants that are rated by a nationally recognized credit rating agency, (ii) reviewing financial statements of the client tenants that are publicly available or that are required to be delivered to us pursuant to the applicable lease, (iii) monitoring news reports regarding our tenants and their respective businesses, (iv) monitoring the timeliness of lease payments, and (v) periodically meeting with our client tenants’ senior management. We have a team of employees who, among them, have graduate and undergraduate degrees in biology, chemistry, and industrial biotechnology and experience in the life science industry, as well as in finance. This research team is responsible for assessing and monitoring their credit quality and any material changes in credit quality.

Interest and other income

Interest and other income was $2.0 million and $1.2 million during the three months ended September 30, 2014 and 2013, respectively. Interest and other income was $3.8 million and $3.5 million during the nine months ended September 30, 2014 and 2013, respectively.  Interest and other income is included in other income in the accompanying consolidated statements of income.


14


2.
Basis of presentation (continued)

Impact of recently issued accounting standards

In April 2014, the FASB issued an ASU on the reporting of discontinued operations which raises the threshold for disposals to qualify as discontinued operations. Under this ASU, a discontinued operation is (i) a component of an entity or group of components that has been disposed of by sale, that has been disposed of other than by sale, or that is classified as “held for sale” and represents a strategic shift that has had or will have a major effect on an entity’s operations and financial results or (ii) an acquired business or non-profit activity that is classified as “held for sale” on the date of the acquisition. A strategic shift that has or will have a major effect on an entity’s operations and financial results could include the disposal of (i) a major line of business, (ii) a major geographic area, (iii) a major equity method investment, or (iv) other major parts of an entity. Under current GAAP, an entity is prohibited from reporting a discontinued operation if it has certain continuing cash flows or involvement with the component after the disposal. This ASU eliminates these criteria and is effective for public companies during the interim and annual periods, beginning after December 15, 2014. We are required to adopt this ASU no later than January 1, 2015, and may early adopt this ASU during interim periods, as applicable. We expect the adoption of this ASU to result in fewer real estate sales qualifying for classification as discontinued operations in our consolidated financial statements.

In May 2014, the FASB issued an ASU that replaces substantially all industry-specific revenue recognition requirements and converges areas under this topic with International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The ASU also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. Other major provisions in this ASU include capitalizing and amortizing certain contract costs, ensuring the time value of money is considered in the applicable transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The ASU is effective for reporting periods beginning after December 15, 2016, and early adoption is prohibited. The ASU does not apply to lease contracts accounted for under current GAAP. We are currently evaluating the impact of the adoption of this ASU will have on our financial position and results of operations.

15



3.
Investments in real estate

Our investments in real estate consisted of the following as of September 30, 2014, and December 31, 2013 (in thousands):
 
September 30, 2014
 
December 31, 2013
Rental properties
$
6,849,966

 
$
6,442,208

 
 
 
 
CIP/current value-creation projects:
 
 
 
Current development in North America
532,053

 
511,838

Current redevelopment in North America
32,661

 
8,856

Current development in Asia
35,602

 
60,928

 
600,316

 
581,622

 
 
 
 
Near-term value-creation projects in North America (CIP):
 
 
 
50, 60, and 100 Binney Street
313,379

 
284,672

Other projects
90,843

 
97,617

 
404,222

 
382,289

 
 
 
 
Future value-creation projects:
 
 
 
North America
221,572

 
176,063

Asia
78,319

 
77,251

 
299,891

 
253,314

 
 
 
 
Land under sales contract
12,236

 
22,943

Near-term and future value-creation projects
716,349

 
658,546

 


 


Gross investments in real estate
8,166,631

 
7,682,376

Less: accumulated depreciation
(1,083,169
)
 
(952,106
)
Equity method of accounting – unconsolidated JV
114,168

 
46,644

Investments in real estate
$
7,197,630

 
$
6,776,914


Acquisitions

In January 2014, we acquired 3545 Cray Court, a 116,556 RSF laboratory/office property located in the Torrey Pines submarket of San Diego, for $64.0 million. The property was 100% occupied on the date of acquisition. In connection with the acquisition, we assumed a $40.7 million non-recourse secured note payable with a contractual interest rate of 4.66% and a maturity date in January 2023.

In March 2014, we acquired 225 Second Avenue, a vacant 112,500 RSF office property located in the Route 128 submarket of Greater Boston, for $16.3 million. In May 2014, we leased 100% of the project to accommodate the expansion requirements of an existing tenant. The property is undergoing conversion into laboratory/office space through redevelopment.

In March 2014, we acquired 4025/4031/4045 Sorrento Valley Boulevard, three adjacent buildings aggregating 42,566 RSF located in the Sorrento Valley submarket of San Diego, for a total purchase price of $12.4 million. These properties were 100% occupied on the date of acquisition. In connection with the acquisition, we assumed a $7.6 million non-recourse secured note payable with a contractual interest rate of 5.74% and a maturity date in April 2016.

In April 2014, we acquired 510 Townsend Street, a land parcel supporting approximately 300,000 gross square feet, in SoMa for a purchase price of $50.0 million. We are in the process of perfecting entitlements and marketing for lease, and, subject to market conditions, we plan to commence construction as soon as possible in 2015.

16


3.
Investments in real estate (continued)


See discussion of the acquisition of 1455/1515 Third Street below under “Investments in Unconsolidated Real Estate Entities.”

Current development and redevelopment projects

As of September 30, 2014, we had seven ground-up development projects in process in North America aggregating 1,636,424 RSF, including two unconsolidated JV development projects. We also had two projects undergoing redevelopment in North America aggregating 143,777 RSF.

Investments in unconsolidated real estate entities

We account for investments in JVs described below under the equity method of accounting. See our consolidation policy described in Note 2 – Basis of Presentation.

360 Longwood Avenue

We are currently developing a building aggregating 413,536 RSF in the Longwood Medical Area of the Greater Boston market through an unconsolidated JV. The cost at completion for this unconsolidated JV real estate project is approximately $350.0 million. The project is currently 37% occupied by Dana-Farber Cancer Institute, Inc. and this space was placed into operations in late September 2014. The JV has a construction loan with commitments aggregating $213.2 million, with $143.5 million outstanding as of September 30, 2014. The remaining cost to complete the development is expected to be funded primarily from the remaining commitments of $69.7 million under the construction loan. The construction loan bears interest at LIBOR+3.75%, with a floor of 5.25%, and has a maturity date of April 1, 2019, inclusive of two separate options to extend the stated maturity date of April 1, 2017 by one year.

We have a 27.5% interest in this unconsolidated JV that we account for under the equity method of accounting. Our investment under the equity method of accounting was $48.5 million as of September 30, 2014.

1455/1515 Third Street

In September 2014, Alexandria and Uber Technologies, Inc. (“Uber”) entered into a JV agreement and acquired two land parcels supporting 422,980 RSF at 1455/1515 Third Street in the Mission Bay submarket of the San Francisco Bay Area for a total purchase price of $125.0 million. We have a 51.0% interest and Uber has a 49% interest in this unconsolidated JV. We account for our investment in this JV under the equity method of accounting. Our investment under the equity method of accounting was $65.6 million as of September 30, 2014.

This JV is currently developing two buildings aggregating 422,980 RSF. We are in the process of finalizing the design and construction budget with our partner and we expect to provide the total estimated cost at completion once we complete our planning in the near term. The project is 100% pre-leased to Uber on a 15-year lease.

Land undergoing predevelopment activities (CIP)
    
Land undergoing predevelopment activities is classified as CIP and is undergoing activities prior to commencement of construction of aboveground building improvements.  We generally will not commence ground-up development of any parcels undergoing predevelopment activities without first securing pre-leasing for such space, except when there is significant market demand.  If aboveground construction is not initiated at completion of predevelopment activities, the land parcel will be classified as land held for development.  Our objective with predevelopment is to reduce the time it takes to deliver projects to prospective client tenants.  Additionally, during predevelopment, we focus on the design of cost-effective buildings with generic and reusable infrastructure to accommodate single and multi-tenancy. As of September 30, 2014, we held land undergoing predevelopment activities in North America aggregating 1.9 million RSF. The largest project included in land undergoing predevelopment activities consists of substantially all of our 1.1 million square feet at ACKS located in East Cambridge, Massachusetts.


17


3.
Investments in real estate (continued)

Predevelopment costs generally include the following activities prior to commencement of vertical construction:

Ÿ
Traditional predevelopment costs, including entitlement, design, construction drawings, BIM (3-D virtual modeling), budgeting, sustainability and energy optimization reviews, permitting, and planning for all aspects of the project; and

Ÿ
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 construction of aboveground building improvements. For example, site and infrastructure costs for the 1.1 million RSF primarily related to 50, 60, and 100 Binney Street at ACKS are classified as predevelopment prior to commencement of vertical construction.

Land held for development

Land held for development represents real estate we plan to develop in the future, but for which, as of each period presented, no construction or predevelopment activities were ongoing. As a result, interest, property taxes, insurance, and other costs are expensed as incurred. As of September 30, 2014, we had land held for development in North America supporting an aggregate of 3.4 million RSF of ground-up development.

Dispositions

During the nine months ended September 30, 2014, we sold four land parcels for aggregate consideration of $29.4 million and recognized gains aggregating $805 thousand, which included a gain of $797 thousand on the sale of one parcel in the Seattle market, and a gain of $8 thousand on the sale of three parcels in non-cluster markets. These gains are classified in gain on sales of land parcels in the accompanying consolidated statements of income.


18



4.
Investments

We hold investments in certain publicly traded companies and privately held entities, including limited partnerships, involved primarily in life science and related industries.  Our investments in publicly traded companies are accounted for as “available for sale” securities and are carried at their fair values.  Investments in “available for sale” securities with gross unrealized losses as of September 30, 2014, 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 have not recognized other-than-temporary impairments related to “available for sale” securities as of September 30, 2014. As of September 30, 2014, and December 31, 2013, there were no unrealized losses in our investments in privately held entities, including limited partnerships.

The following table summarizes our investments as of September 30, 2014, and December 31, 2013 (in thousands):
 
September 30, 2014
 
December 31, 2013
“Available-for-sale” marketable equity securities, cost basis
$
15,119

 
$
2,879

Unrealized gains
17,150

(1) 
2,177

Unrealized losses
(1,452
)
 
(587
)
“Available-for-sale” marketable equity securities, at fair value
30,817

 
4,469

Investments accounted for under cost method
146,760

 
135,819

Total investments
$
177,577

 
$
140,288


(1)
The increase in our investments during the nine months ended September 30, 2014, includes an increase in unrealized gains of approximately $13.6 million related to our investments in publicly traded life science companies. These unrealized gains are a component of our comprehensive income, within our stockholders’ equity, and have not been recognized in the accompanying consolidated statement of income for the nine months ended September 30, 2014.
    
The following table outlines our investment (loss) income, which is classified in other income in the accompanying consolidated statements of income (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Investment gains
$
3,256

 
$
2,050

 
$
9,481

 
$
4,716

Investment losses
(3,485
)
 
—

 
(8,725
)
 
(529
)
Investment (loss) income
$
(229
)
 
$
2,050

 
$
756

 
$
4,187


5.
Secured and unsecured senior debt

The following table summarizes our secured and unsecured senior debt as of September 30, 2014 (dollars in thousands):
 
Fixed Rate/Hedged
Variable Rate
 
Unhedged
Variable Rate
 
Total
Consolidated
 
Percentage of Total Debt
 
Weighted Average
Interest Rate at
End of Period (1)
 
Weighted Average
Remaining Term
(in years)
Secured notes payable
$
406,125

 
$
230,700

 
$
636,825

 
18.2
%
 
4.67
%
 
2.9
Unsecured senior notes payable
1,747,290

 
—

 
1,747,290

 
49.9

 
3.98

 
8.6
$1.5 billion unsecured senior line of credit
—

 
142,000

 
142,000

 
4.1

 
1.25

 
4.3
2016 Unsecured Senior Bank Term Loan
350,000

 
25,000

 
375,000

 
10.7

 
1.42

 
1.8
2019 Unsecured Senior Bank Term Loan
600,000

 
—

 
600,000

 
17.1

 
2.05

 
4.3
Total/weighted average
$
3,103,415

 
$
397,700

 
$
3,501,115

 
100.0
%
 
3.39
%
 
5.9
Percentage of total debt
89
%
 
11
%
 
100
%
 
 
 
 
 
 

(1)
Represents the weighted average 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.

19


5.
Secured and unsecured senior debt (continued)

The following table summarizes our outstanding indebtedness and respective principal maturities as of
September 30, 2014 (dollars in thousands):
 
 
Stated 
Rate
 
Weighted Average
Interest Rate(1)
 
Maturity Date(2)
  
Principal Payments Remaining for the Period Ending December 31,
 
 
 
 
Debt
 
 
 
  
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
Secured notes payable
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 

Seattle
 
6.00
%
 
6.00
%
 
11/18/14
  
$
60

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
60

Maryland
 
5.64
 
 
4.50
 
 
6/1/15
  
34

 
5,777

 
—

 
—

 
—

 
—

 
5,811

San Francisco Bay Area
 
L+1.50
 
 
1.66
 
 
7/1/15
 
—

 
46,596

 
—

 
—

 
—

 
—

 
46,596

Greater Boston, San Francisco Bay Area, and San Diego
 
5.73
 
 
5.73
 
 
1/1/16
  
440

 
1,816

 
75,501

 
—

 
—

 
—

 
77,757

Greater Boston, San Diego, and New York City
 
5.82
 
 
5.82
 
 
4/1/16
  
234

 
988

 
29,389

 
—

 
—

 
—

 
30,611

San Diego
 
5.74
 
 
3.00
 
 
4/15/16
 
42

 
175

 
6,916

 
—

 
—

 
—

 
7,133

San Francisco Bay Area
 
L+1.40
 
 
1.56
 
 
6/1/16
 
—

 
—

 
17,952

 
—

 
—

 
—

 
17,952

San Francisco Bay Area
 
6.35
 
 
6.35
 
 
8/1/16
 
619

 
2,652

 
126,715

 
—

 
—

 
—

 
129,986

Maryland
 
2.14
 
 
2.14
 
 
1/20/17
 
—

 
—

 
—

 
76,000

 
—

 
—

 
76,000

Greater Boston
 
L+1.35
 
 
1.50
 
 
8/23/17
 
—

 
—

 
—

 
90,092

 
—

 
—

 
90,092

San Diego, Maryland, and Seattle
 
7.75
 
 
7.75
 
 
4/1/20
 
374

 
1,570

 
1,696

 
1,832

 
1,979

 
106,490

 
113,941

San Diego
 
4.66
 
 
4.66
 
 
1/1/23
 
337

 
1,402

 
1,464

 
1,540

 
1,614

 
33,367

 
39,724

San Francisco Bay Area
 
6.50
 
 
6.50
 
 
6/1/37
  
—

 
18

 
19

 
20

 
22

 
751

 
830

Unamortized premiums
 
 
 
 
 
 
 
 
 
54

 
218

 
60

 
—

 
—

 
—

 
332

Secured notes payable average/subtotal
 
4.71
%
 
4.67
 
 
 
  
2,194

 
61,212

 
259,712

 
169,484

 
3,615

 
140,608

 
636,825

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 Unsecured Senior Bank Term Loan
 
L+1.20
%
 
1.42
 
 
7/31/16
 
—

 
—

 
375,000

 
—

 
—

 
—

 
375,000

2019 Unsecured Senior Bank Term Loan
 
L+1.20
%
 
2.05
 
 
1/3/19
 
—

 
—

 
—

 
—

 
—

 
600,000

 
600,000

$1.5 billion unsecured senior line of credit
 
L+1.10
%
(3) 
1.25
 
 
1/3/19
  
—

 
—

 
—

 
—

 
—

 
142,000

 
142,000

Unsecured senior notes payable
 
2.75
%
 
2.79
 
 
1/15/20
  
—

 
—

 
—

 
—

 
—

 
400,000

 
400,000

Unsecured senior notes payable
 
4.60
%
 
4.61
 
 
4/1/22
  
—

 
—

 
—

 
—

 
—

 
550,000

 
550,000

Unsecured senior notes payable
 
3.90
%
 
3.94
 
 
6/15/23
 
—

 
—

 
—

 
—

 
—

 
500,000

 
500,000

Unsecured senior notes payable
 
4.50
%
 
4.51
 
 
7/30/29
 
—

 
—

 
—

 
—

 
—

 
300,000

 
300,000

Unamortized discounts
 
 
 
 
 
 
 
 
 
(79
)
 
(326
)
 
(337
)
 
(350
)
 
(362
)
 
(1,256
)
 
(2,710
)
Unsecured debt average/subtotal
 
 
 
 
3.11
 
 
 
  
(79
)
 
(326
)
 
374,663

 
(350
)
 
(362
)
 
2,490,744

 
2,864,290

Average/total
 
 
 
 
3.39
%
 
 
  
$
2,115

 
$
60,886

 
$
634,375

 
$
169,134

 
$
3,253

 
$
2,631,352

 
$
3,501,115

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balloon payments
 
 
 
 
 
 
 
 
  
$
—

 
$
52,336

 
$
629,851

 
$
166,092

 
$
—

 
$
2,622,238

 
$
3,470,517

Principal amortization
 
 
 
 
 
 
 
 
  
2,115

 
8,550

 
4,524

 
3,042

 
3,253

 
9,114

 
30,598

Total consolidated debt
 
 
 
 
 
 
 
 
  
$
2,115

 
$
60,886

 
$
634,375

 
$
169,134

 
$
3,253

 
$
2,631,352

 
$
3,501,115

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate/hedged variable-rate debt
 
 
 
 
 
 
 
 
  
$
2,055

 
$
14,290

 
$
591,423

 
$
3,042

 
$
3,253

 
$
2,489,352

 
$
3,103,415

Unhedged variable-rate debt
 
 
 
 
 
 
 
 
  
60

 
46,596

 
42,952

 
166,092

 
—

 
142,000

 
397,700

Total consolidated debt
 
 
 
 
 
 
 
 
  
$
2,115

 
$
60,886

 
$
634,375

 
$
169,134

 
$
3,253

 
$
2,631,352

 
$
3,501,115


(1)
Represents the weighted average 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)
In addition to the stated rate, the unsecured senior line of credit is subject to an annual facility fee of 0.20%.


20


5.
Secured and unsecured senior debt (continued)

2.75% and 4.50% Unsecured senior notes payable

In July 2014, we completed an offering of $700 million unsecured senior notes payable at a weighted average interest rate of 3.50%. The offering consisted of $400 million of 2.75% unsecured senior notes (“2.75% Unsecured Senior Notes”) and $300 million of 4.50% unsecured senior notes (“4.50% Unsecured Senior Notes”).  The 2.75% Unsecured Senior Notes were priced at 99.793% of the principal amount with a yield to maturity of 2.791% and are due on January 15, 2020. The 4.50% Unsecured Senior Notes were priced at 99.912% of the principal amount with a yield to maturity of 4.508% and are due on July 30, 2029.  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 subordinate 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 reduce variable-rate debt, including the partial repayment of $125 million of our unsecured senior bank term loan due in 2016 (“2016 Unsecured Senior Bank Term Loan”) and to reduce the outstanding borrowings on our unsecured senior line by $569 million. In connection with the partial repayment of $125 million of our 2016 Unsecured Senior Bank Term Loan, we recognized a loss on early extinguishment of debt related to the write-off of unamortized loan fees totaling $525 thousand in July 2014.

Interest expense

The following table summarizes interest expense for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Gross interest
$
32,680

 
$
32,959

 
$
92,551

 
$
96,668

Capitalized interest
(12,125
)
 
(16,788
)
 
(35,440
)
 
(46,499
)
Interest expense
$
20,555

 
$
16,171

 
$
57,111

 
$
50,169


Repayment of secured note payable

In January 2014, we repaid a $208.7 million secured note payable related to Alexandria Technology Square® which bore interest at a rate of 5.59%. Our JV partner funded $20.9 million of the proceeds required to repay the secured note payable.

In April 2014, we repaid a $6.4 million secured note payable related to a San Diego property which bore interest at a rate of 4.88%.

In August 2014, we repaid a $7.4 million secured note payable related to a San Diego property which bore interest at a rate of 4.00%.

Secured construction loans

The following table summarizes our secured construction loans as of September 30, 2014 (dollars in thousands):
Market
 
Stated Rate
 
Maturity Date
 
Outstanding Balance
 
Remaining Commitments
 
Total Aggregate Commitments
San Francisco Bay Area
 
 
L+1.50
%
 
7/1/15
(1) 
 
$
46,596

 
$
8,404

 
$
55,000

San Francisco Bay Area
 
 
L+1.40
%
 
6/1/16
(2) 
 
17,952

 
18,048

 
36,000

Greater Boston
 
 
L+1.35
%
 
8/23/17
(3) 
 
90,092

 
160,308

 
250,400

 
 
 
 
 
 
 
 
 
 
$
154,640

 
$
186,760

 
$
341,400


(1)
We have two, one-year options to extend the stated maturity date to July 1, 2017, subject to certain conditions.
(2)
We have two, one-year options to extend the stated maturity date to June 1, 2018, subject to certain conditions.
(3)
We have a one-year option to extend the stated maturity date to August 23, 2018, subject to certain conditions.


21

6.
Interest rate swap agreements

We use interest rate swap agreements 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 nine months ended September 30, 2014 and 2013, our interest rate swap agreements were 100% effective; because of this, no hedge ineffectiveness was recognized in earnings.  Changes in fair value, including accrued interest and adjustments for non-performance risk, on the effective portion of our interest rate swap agreements that are designated and that qualify as cash flow hedges are classified in accumulated other comprehensive loss. Amounts classified in accumulated other comprehensive loss 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 $2.1 million in accumulated other comprehensive loss to interest expense as an increase to interest expense. As of September 30, 2014, and December 31, 2013, the fair values of our interest rate swap agreements aggregating an asset balance were classified in other assets, and those aggregating a liability balance were classified in accounts payable, accrued expenses, and tenant security deposits, based upon their respective fair values. Under our interest rate swap agreements, we have no collateral posting requirements.

As of September 30, 2014, the fair value of derivatives in a net liability position was $287 thousand. The Company has agreements with certain of its derivative counterparties that contain a provision wherein (i) the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness; or (ii) if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. If the Company had breached any of these provisions as of September 30, 2014, it could have been required to settle its obligations under the agreements at their termination value of $803 thousand.

We had the following outstanding interest rate swap agreements that were designated as cash flow hedges of interest rate risk as of September 30, 2014 (dollars in thousands):
Effective Date
 
Maturity Date
 
Number of Contracts
 
Weighted Average Interest Pay
Rate (1)
 
Fair Value as of 9/30/14
 
Notional Amount in Effect as of
 
 
 
 
 
9/30/14
 
12/31/14
 
12/31/15
 
12/31/16
December 31, 2013
 
December 31, 2014
 
2
 
0.98%
 
$
(1,051
)
 
$
500,000

 
$
—

 
$
—

 
$
—

December 31, 2013
 
March 31, 2015
 
2
 
0.23%
 
(110
)
 
250,000

 
250,000

 
—

 
—

March 31, 2014
 
March 31, 2015
 
4
 
0.21%
 
(61
)
 
200,000

 
200,000

 
—

 
—

December 31, 2014
 
March 31, 2016
 
3
 
0.53%
 
(23
)
 
—

 
500,000

 
500,000

 
—

March 31, 2016
 
March 31, 2017
 
3
 
1.40%
 
958

 
—

 
—

 
—

 
500,000

Total
 
 
 
 
 
 
 
$
(287
)
 
$
950,000

 
$
950,000

 
$
500,000

 
$
500,000


(1)
In addition to the interest pay rate, borrowings outstanding as of September 30, 2014, under our unsecured senior bank term loans include an applicable margin of 1.20% and borrowings outstanding under our unsecured senior line of credit include an applicable margin of 1.10%.

22



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 nine months ended September 30, 2014 and 2013.

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 September 30, 2014, and December 31, 2013 (in thousands):
 
 
 
 
September 30, 2014
Description
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Assets:
 
 
 
 
 
 
 
 
“Available-for-sale” securities
 
$
30,817

 
$
30,817

 
$
—

 
$
—

Interest rate swap agreements
 
$
958

 
$
—

 
$
958

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
1,245

 
$
—

 
$
1,245

 
$
—

 
 
 
 
December 31, 2013
Description
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Assets:
 
 
 
 
 
 
 
 
“Available-for-sale” securities
 
$
4,469

 
$
4,469

 
$
—

 
$
—

Interest rate swap agreements
 
$
2,870

 
$
—

 
$
2,870

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
6,191

 
$
—

 
$
6,191

 
$
—


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.  See Note 6 – Interest Rate Swap Agreements, for further details on our interest rate swap agreements. 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.


23


7.
Fair value measurements (continued)

As of September 30, 2014, and December 31, 2013, the book and fair values of our “available-for-sale” marketable equity 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):
 
September 30, 2014
 
December 31, 2013
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
“Available-for-sale” marketable equity securities
$
30,817

 
$
30,817

 
$
4,469

 
$
4,469

Interest rate swap agreements
$
958

 
$
958

 
$
2,870

 
$
2,870

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate swap agreements
$
1,245

 
$
1,245

 
$
6,191

 
$
6,191

Secured notes payable
$
636,825

 
$
686,388

 
$
708,831

 
$
736,772

Unsecured senior notes payable
$
1,747,290

 
$
1,775,990

 
$
1,048,230

 
$
1,043,125

Unsecured senior line of credit
$
142,000

 
$
141,881

 
$
204,000

 
$
193,714

Unsecured senior bank term loans
$
975,000

 
$
974,424

 
$
1,100,000

 
$
1,099,897


8.
Earnings per share (EPS)