UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
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 |
|
(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
(Registrants 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 x 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 x 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 x
As of August 7, 2012, 62,775,477 shares of common stock, par value $.01 per share, were outstanding.
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
Alexandria Real Estate Equities, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
|
|
June 30, |
|
December 31, |
| ||
|
|
2012 |
|
2011 |
| ||
Assets |
|
|
|
|
| ||
Investments in real estate, net |
|
$ |
6,208,354 |
|
$ |
6,008,440 |
|
Cash and cash equivalents |
|
80,937 |
|
78,539 |
| ||
Restricted cash |
|
41,897 |
|
23,332 |
| ||
Tenant receivables |
|
6,143 |
|
7,480 |
| ||
Deferred rent |
|
155,295 |
|
142,097 |
| ||
Deferred leasing and financing costs, net |
|
151,355 |
|
135,550 |
| ||
Investments |
|
104,454 |
|
95,777 |
| ||
Other assets |
|
93,304 |
|
82,914 |
| ||
Total assets |
|
$ |
6,841,739 |
|
$ |
6,574,129 |
|
|
|
|
|
|
| ||
Liabilities, Noncontrolling Interests, and Equity |
|
|
|
|
| ||
Secured notes payable |
|
$ |
719,977 |
|
$ |
724,305 |
|
Unsecured senior notes payable |
|
549,783 |
|
84,959 |
| ||
Unsecured senior line of credit |
|
379,000 |
|
370,000 |
| ||
Unsecured senior bank term loans |
|
1,350,000 |
|
1,600,000 |
| ||
Accounts payable, accrued expenses, and tenant security deposits |
|
348,037 |
|
325,393 |
| ||
Dividends payable |
|
38,357 |
|
36,579 |
| ||
Total liabilities |
|
3,385,154 |
|
3,141,236 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Redeemable noncontrolling interests |
|
15,817 |
|
16,034 |
| ||
|
|
|
|
|
| ||
Alexandria Real Estate Equities, Inc.s stockholders equity: |
|
|
|
|
| ||
Series C Preferred Stock |
|
|
|
129,638 |
| ||
Series D Convertible Preferred Stock |
|
250,000 |
|
250,000 |
| ||
Series E Preferred Stock |
|
130,000 |
|
|
| ||
Common stock |
|
622 |
|
616 |
| ||
Additional paid-in capital |
|
3,053,269 |
|
3,028,558 |
| ||
Accumulated other comprehensive loss |
|
(37,370 |
) |
(34,511 |
) | ||
Alexandria Real Estate Equities, Inc.s stockholders equity |
|
3,396,521 |
|
3,374,301 |
| ||
Noncontrolling interests |
|
44,247 |
|
42,558 |
| ||
Total equity |
|
3,440,768 |
|
3,416,859 |
| ||
Total liabilities, noncontrolling interests, and equity |
|
$ |
6,841,739 |
|
$ |
6,574,129 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Rental |
|
$ |
110,683 |
|
$ |
109,248 |
|
$ |
218,267 |
|
$ |
215,300 |
|
Tenant recoveries |
|
34,041 |
|
33,147 |
|
68,563 |
|
66,008 |
| ||||
Other income |
|
9,381 |
|
926 |
|
12,010 |
|
1,703 |
| ||||
Total revenues |
|
154,105 |
|
143,321 |
|
298,840 |
|
283,011 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Expenses: |
|
|
|
|
|
|
|
|
| ||||
Rental operations |
|
44,506 |
|
40,595 |
|
87,888 |
|
81,630 |
| ||||
General and administrative |
|
12,324 |
|
10,764 |
|
22,685 |
|
20,258 |
| ||||
Interest |
|
17,922 |
|
16,567 |
|
34,149 |
|
34,377 |
| ||||
Depreciation and amortization |
|
52,316 |
|
40,173 |
|
95,682 |
|
76,716 |
| ||||
Total expenses |
|
127,068 |
|
108,099 |
|
240,404 |
|
212,981 |
| ||||
Income from continuing operations before loss on early extinguishment of debt |
|
27,037 |
|
35,222 |
|
58,436 |
|
70,030 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Loss on early extinguishment of debt |
|
(1,602 |
) |
(1,248 |
) |
(2,225 |
) |
(3,743 |
) | ||||
Income from continuing operations |
|
25,435 |
|
33,974 |
|
56,211 |
|
66,287 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income from discontinued operations, net |
|
206 |
|
337 |
|
341 |
|
649 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gain on sale of land parcel |
|
|
|
|
|
1,864 |
|
|
| ||||
Net income |
|
25,641 |
|
34,311 |
|
58,416 |
|
66,936 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income attributable to noncontrolling interests |
|
851 |
|
938 |
|
1,562 |
|
1,867 |
| ||||
Dividends on preferred stock |
|
6,903 |
|
7,089 |
|
14,386 |
|
14,178 |
| ||||
Preferred stock redemption charge |
|
|
|
|
|
5,978 |
|
|
| ||||
Net income attributable to unvested restricted stock awards |
|
271 |
|
298 |
|
506 |
|
540 |
| ||||
Net income attributable to Alexandria Real Estate Equities, Inc.s common stockholders |
|
$ |
17,616 |
|
$ |
25,986 |
|
$ |
35,984 |
|
$ |
50,351 |
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings per share attributable to Alexandria Real Estate Equities, Inc.s common stockholders basic and diluted: |
|
|
|
|
|
|
|
|
| ||||
Continuing operations |
|
$ |
0.29 |
|
$ |
0.43 |
|
$ |
0.57 |
|
$ |
0.88 |
|
Discontinued operations, net |
|
|
|
0.01 |
|
0.01 |
|
0.01 |
| ||||
Earnings per share basic and diluted |
|
$ |
0.29 |
|
$ |
0.44 |
|
$ |
0.58 |
|
$ |
0.89 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Net income |
|
$ |
25,641 |
|
$ |
34,311 |
|
$ |
58,416 |
|
$ |
66,936 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
| ||||
Unrealized gains (losses) on marketable securities: |
|
|
|
|
|
|
|
|
| ||||
Unrealized holding (losses) gains arising during the period |
|
(107 |
) |
(501 |
) |
567 |
|
12 |
| ||||
Reclassification adjustment for losses (gains) included in net income |
|
238 |
|
|
|
(686 |
) |
|
| ||||
Unrealized gains (losses) on marketable securities, net |
|
131 |
|
(501 |
) |
(119 |
) |
12 |
| ||||
Unrealized gains (losses) on interest rate swaps: |
|
|
|
|
|
|
|
|
| ||||
Unrealized interest rate swap losses arising during the period |
|
(3,091 |
) |
(5,555 |
) |
(7,164 |
) |
(5,255 |
) | ||||
Reclassification adjustment for amortization of interest expense included in net income |
|
5,895 |
|
5,302 |
|
11,670 |
|
10,741 |
| ||||
Unrealized gains (losses) on interest rate swap agreements, net |
|
2,804 |
|
(253 |
) |
4,506 |
|
5,486 |
| ||||
Foreign currency translation (losses) gains |
|
(17,192 |
) |
1,676 |
|
(7,233 |
) |
6,559 |
| ||||
Total other comprehensive (loss) income |
|
(14,257 |
) |
922 |
|
(2,846 |
) |
12,057 |
| ||||
Comprehensive income |
|
11,384 |
|
35,233 |
|
55,570 |
|
78,993 |
| ||||
Less: comprehensive income attributable to noncontrolling interests |
|
(875 |
) |
(939 |
) |
(1,574 |
) |
(1,861 |
) | ||||
Comprehensive income attributable to Alexandria Real Estate Equities, Inc.s common stockholders |
|
$ |
10,509 |
|
$ |
34,294 |
|
$ |
53,996 |
|
$ |
77,132 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Condensed Consolidated Statement of Changes in Stockholders Equity and Noncontrolling Interests
(Dollars in thousands)
(Unaudited)
|
|
Alexandria Real Estate Equities, Inc.s Stockholders Equity |
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
Series C |
|
Series D |
|
Series E |
|
Number of |
|
Common |
|
Additional |
|
Retained |
|
Accumulated |
|
Noncontrolling |
|
Total |
|
Redeemable |
| |||||||||||
Balance at December 31, 2011 |
|
$ |
129,638 |
|
$ |
250,000 |
|
$ |
|
|
|
61,560,472 |
|
$ |
616 |
|
$ |
3,028,558 |
|
$ |
|
|
$ |
(34,511 |
) |
$ |
42,558 |
|
$ |
3,416,859 |
|
$ |
16,034 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
56,854 |
|
|
|
1,151 |
|
58,005 |
|
411 |
| |||||||||||
Unrealized loss on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119 |
) |
|
|
(119 |
) |
|
| |||||||||||
Unrealized gain on interest rate swap agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,506 |
|
|
|
4,506 |
|
|
| |||||||||||
Foreign currency translation (loss) gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,246 |
) |
11 |
|
(7,235 |
) |
2 |
| |||||||||||
Contributions by noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,125 |
|
1,125 |
|
|
| |||||||||||
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(598 |
) |
(598 |
) |
(630 |
) | |||||||||||
Issuance of common stock, net of offering costs |
|
|
|
|
|
|
|
538,086 |
|
5 |
|
39,856 |
|
|
|
|
|
|
|
39,861 |
|
|
| |||||||||||
Issuance of Series E Preferred Stock, net of offering costs |
|
|
|
|
|
130,000 |
|
|
|
|
|
(5,132 |
) |
|
|
|
|
|
|
124,868 |
|
|
| |||||||||||
Issuances pursuant to stock plan |
|
|
|
|
|
|
|
151,415 |
|
1 |
|
10,196 |
|
|
|
|
|
|
|
10,197 |
|
|
| |||||||||||
Redemption of Series C Preferred Stock |
|
(129,638 |
) |
|
|
|
|
|
|
|
|
5,978 |
|
(5,978 |
) |
|
|
|
|
(129,638 |
) |
|
| |||||||||||
Dividends declared on common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,348 |
) |
|
|
|
|
(62,348 |
) |
|
| |||||||||||
Dividends declared on preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,715 |
) |
|
|
|
|
(14,715 |
) |
|
| |||||||||||
Distributions in excess of earnings |
|
|
|
|
|
|
|
|
|
|
|
(26,187 |
) |
26,187 |
|
|
|
|
|
|
|
|
| |||||||||||
Balance at June 30, 2012 |
|
$ |
|
|
$ |
250,000 |
|
$ |
130,000 |
|
62,249,973 |
|
$ |
622 |
|
$ |
3,053,269 |
|
$ |
|
|
$ |
(37,370 |
) |
$ |
44,247 |
|
$ |
3,440,768 |
|
$ |
15,817 |
| |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
Six Months Ended |
| ||||
|
|
June 30, |
| ||||
|
|
2012 |
|
2011 |
| ||
Operating Activities |
|
|
|
|
| ||
Net income |
|
$ |
58,416 |
|
$ |
66,936 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
95,760 |
|
77,070 |
| ||
Loss on early extinguishment of debt |
|
2,225 |
|
3,743 |
| ||
Gain on sale of land parcel |
|
(1,864 |
) |
|
| ||
Gain on sale of real estate |
|
(2 |
) |
|
| ||
Amortization of loan fees and costs |
|
4,857 |
|
4,605 |
| ||
Amortization of debt premiums/discounts |
|
289 |
|
2,504 |
| ||
Amortization of acquired above and below market leases |
|
(1,578 |
) |
(7,580 |
) | ||
Deferred rent |
|
(13,991 |
) |
(9,592 |
) | ||
Stock compensation expense |
|
6,567 |
|
5,105 |
| ||
Equity in loss related to investments |
|
26 |
|
|
| ||
Gain on sales of investments |
|
(11,126 |
) |
(2,579 |
) | ||
Loss on sales of investments |
|
1,089 |
|
1,768 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Restricted cash |
|
(610 |
) |
110 |
| ||
Tenant receivables |
|
1,366 |
|
1,005 |
| ||
Deferred leasing costs |
|
(13,791 |
) |
(40,424 |
) | ||
Other assets |
|
(9,331 |
) |
8,539 |
| ||
Accounts payable, accrued expenses, and tenant security deposits |
|
24,318 |
|
(982 |
) | ||
Net cash provided by operating activities |
|
142,620 |
|
110,228 |
| ||
|
|
|
|
|
| ||
Investing Activities |
|
|
|
|
| ||
Proceeds from sale of property |
|
1,905 |
|
|
| ||
Additions to properties |
|
(258,573 |
) |
(161,762 |
) | ||
Purchase of properties |
|
(42,171 |
) |
(307,839 |
) | ||
Change in restricted cash related to construction projects |
|
(11,532 |
) |
(4 |
) | ||
Distributions from unconsolidated real estate entity |
|
22,250 |
|
|
| ||
Contributions to unconsolidated real estate entity |
|
(4,918 |
) |
(2,038 |
) | ||
Additions to investments |
|
(16,344 |
) |
(12,721 |
) | ||
Proceeds from investments |
|
17,559 |
|
8,581 |
| ||
Net cash used in investing activities |
|
(291,824 |
) |
(475,783 |
) | ||
|
|
|
|
|
| ||
Financing Activities |
|
|
|
|
| ||
Principal reductions of secured notes payable |
|
(4,525 |
) |
(16,297 |
) | ||
Proceeds from issuance of unsecured senior notes payable |
|
544,649 |
|
|
| ||
Repurchase of unsecured senior convertible notes |
|
(84,801 |
) |
(98,590 |
) | ||
Principal borrowings from unsecured senior line of credit and unsecured senior bank term loan |
|
529,147 |
|
1,708,317 |
| ||
Repayments of borrowings from unsecured senior line of credit |
|
(520,147 |
) |
(1,631,317 |
) | ||
Repayment of unsecured senior bank term loan |
|
(250,000 |
) |
|
| ||
Redemption of Series C Preferred Stock |
|
(129,638 |
) |
|
| ||
Proceeds from issuance of Series E Preferred Stock |
|
124,868 |
|
|
| ||
Proceeds from issuance of common stock |
|
37,385 |
|
451,538 |
| ||
Change in restricted cash related to financings |
|
(7,714 |
) |
4,824 |
| ||
Deferred financing costs paid |
|
(15,739 |
) |
(18,126 |
) | ||
Proceeds from exercise of stock options |
|
155 |
|
1,165 |
| ||
Dividends paid on common stock |
|
(60,791 |
) |
(49,896 |
) | ||
Dividends paid on preferred stock |
|
(14,178 |
) |
(14,178 |
) | ||
Distributions to redeemable noncontrolling interests |
|
(630 |
) |
(622 |
) | ||
Contributions by noncontrolling interests |
|
1,125 |
|
|
| ||
Distributions to noncontrolling interests |
|
(598 |
) |
(1,468 |
) | ||
Net cash provided by financing activities |
|
148,568 |
|
335,350 |
| ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and cash equivalents |
|
3,034 |
|
(102 |
) | ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
|
2,398 |
|
(30,307 |
) | ||
Cash and cash equivalents at beginning of period |
|
78,539 |
|
91,232 |
| ||
Cash and cash equivalents at end of period |
|
$ |
80,937 |
|
$ |
60,925 |
|
|
|
|
|
|
| ||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
| ||
Cash paid during the period for interest, net of interest capitalized |
|
$ |
23,154 |
|
$ |
25,992 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Background
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 real estate investment trust (REIT), is the largest and leading investment-grade REIT focused principally on owning, operating, redeveloping, developing, and acquiring high-quality, sustainable real estate for the broad and diverse life science industry. Founded in 1994, Alexandria was the first REIT to identify and pursue the laboratory niche and has since had the first-mover advantage in every core life science cluster location including Greater Boston, San Francisco Bay, San Diego, New York City, Seattle, Suburban Washington, D.C., and Research Triangle Park. Alexandrias high-credit client tenants span the life science industry, including renowned academic and medical institutions, multinational pharmaceutical companies, public and private biotechnology entities, United States government research agencies, medical device companies, clean technology companies, venture capital firms, and life science product and service companies. As the recognized real estate partner of the life science industry, Alexandria has a superior track record in driving client tenant productivity and innovation through its best-in-class laboratory and office space, collaborative locations adjacent to leading academic and medical institutions, unparalleled life science real estate expertise and services, and longstanding and expansive network in the life science community, which we believe result in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value. For additional information on Alexandria Real Estate Equities, Inc., please visit www.are.com.
2. Basis of presentation
We have prepared the accompanying interim condensed consolidated financial statements in accordance with United States 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 condensed consolidated financial statements presented herein reflect all adjustments that are necessary to fairly present the interim condensed 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, 2012. These condensed 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, 2011.
The accompanying condensed 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 of these entities, such as investing activity and changes in financing.
Use of estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, the disclosure of contingent assets and liabilities as of the date of the condensed 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, 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. 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 to execute 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 recorded 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 included in other assets in the accompanying condensed consolidated balance sheets, and amortized over the remaining terms of the related leases.
We are required to capitalize direct construction and development 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; its operations, including any interest expense directly attributable to it, are classified as discontinued operations in our condensed 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.
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 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, but are not limited to, significant fluctuations in estimated net operating income, occupancy changes, 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, historical operating results, known trends, 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 recorded to reduce the carrying amount to its estimated fair value. If an impairment loss is not required to be recorded, 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.
2. Basis of presentation (continued)
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.
Investments
We hold equity investments in certain publicly traded companies and privately held entities primarily involved in the life science industry. All of our investments in publicly traded companies are considered available for sale and are recorded 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 included in other 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 entitys operating and financial policies. Additionally, we limit our ownership percentage in the voting stock of each individual entity to less than 10%. As of June 30, 2012, and December 31, 2011, 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, 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 investments 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. For a description of the methodology we use to determine the fair value of privately held entities, refer to Note 7, Fair Value of Financial Instruments.
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 at least 90% 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 is subject to certain state and local taxes. We generally distribute 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 United States, Canada, China, India, and other international locations. Our tax returns are subject to examination in various jurisdictions for the calendar years 2007 through 2011.
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, 2012, 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 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 tax-related interest expense or penalties for the three and six months ended June 30, 2012 and 2011.
Interest income
Interest income was approximately $0.8 million, and less than $10,000, during the three months ended June 30, 2012 and 2011, respectively. Interest income was approximately $1.4 million and $0.1 million during the six months ended June 30, 2012 and 2011, respectively. Interest income is classified in other income in the accompanying condensed consolidated statements of income.
2. Basis of presentation (continued)
Recognition of rental income and tenant recoveries
Rental income from leases with scheduled rent increases, free rent, incentives, and other rent adjustments is recognized on a straight-line basis over the respective lease terms. We include amounts currently recognized as income, and expected to be received in later years, in deferred rent receivable in the accompanying condensed consolidated balance sheets. Amounts received currently, but recognized as income in future years, are included in accounts payable, accrued expenses, and tenant security deposits in the accompanying condensed consolidated balance sheets. We commence recognition of rental income at the date the property is ready for its intended use and the 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 the applicable expenses are incurred.
We maintain an allowance for estimated losses that may result from the inability of our tenants to make payments required under the terms of the lease and for tenant recoveries due. If a tenant fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the amount of unpaid rent and unrealized deferred rent. As of June 30, 2012, and December 31, 2011, we had no allowance for estimated losses.
As of June 30, 2012, approximately 94% of our leases (on a rentable square footage basis) were triple net leases, requiring 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 96% 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.
Impact of recently issued accounting standards
In May 2011, the FASB issued an Accounting Standards Update (ASU) to substantially converge the guidance in GAAP and International Financial Reporting Standards (IFRS) on fair value measurements and disclosures. The ASU changes several aspects of the fair value measurement guidance in FASB Accounting Standards Codification 820, Fair Value Measurement, including (1) the application of the concepts of highest and best use and valuation premise; (2) the introduction of an option to measure groups of offsetting assets and liabilities on a net basis; (3) the incorporation of certain premiums and discounts in fair value measurements; and (4) the measurement of the fair value of certain instruments classified in stockholders equity. In addition, the ASU includes several new fair value disclosure requirements, such as information about valuation techniques and significant unobservable inputs used in fair value measurements and a narrative description of the fair value measurements sensitivity to changes in significant unobservable inputs. The ASU is effective for public companies during the interim and annual periods, beginning after December 15, 2011. We adopted the ASU as of January 1, 2012. The adoption of the ASU did not impact our condensed consolidated financial statements or related disclosures.
In June 2011, the FASB issued an ASU to make presentation of items within other comprehensive income (OCI) more prominent. Entities are required to present items of net income, items of OCI, and total comprehensive income either in a single continuous statement or in two separate but consecutive statements. There no longer exists the option to present OCI in the statement of changes in stockholders equity. In December 2011, the FASB decided to defer the requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (AOCI) in both net income and OCI on the face of the financial statements. Reclassifications out of AOCI will be either presented on the face of the financial statement in which OCI is presented or disclosed in the notes to the financial statements. This deferral does not change the requirement to present items of net income, items of OCI, and total comprehensive income in either one continuous statement or two separate consecutive statements. The ASU is effective for public companies during the interim and annual periods, beginning after December 15, 2011. We adopted this guidance as of January 1, 2012, and have presented the condensed consolidated statements of comprehensive income separately from the condensed consolidated statements of income.
3. Investments in real estate
Our investments in real estate, net, consisted of the following as of June 30, 2012, and December 31, 2011 (in thousands):
|
|
June 30, 2012 |
|
December 31, 2011 |
| ||
Land (related to rental properties) |
|
$ |
520,593 |
|
$ |
510,630 |
|
Buildings and building improvements |
|
4,600,499 |
|
4,417,093 |
| ||
Other improvements |
|
184,209 |
|
185,036 |
| ||
Rental properties |
|
5,305,301 |
|
5,112,759 |
| ||
Less: accumulated depreciation |
|
(822,369 |
) |
(742,535 |
) | ||
Rental properties, net |
|
4,482,932 |
|
4,370,224 |
| ||
|
|
|
|
|
| ||
Construction in progress (CIP)/current value-added projects: |
|
|
|
|
| ||
Active development in North America |
|
290,289 |
|
198,644 |
| ||
Active redevelopment in North America |
|
275,086 |
|
281,555 |
| ||
Generic infrastructure/building improvement projects in North America |
|
80,877 |
|
92,338 |
| ||
Active development and redevelopment in Asia |
|
97,744 |
|
106,775 |
| ||
|
|
743,996 |
|
679,312 |
| ||
|
|
|
|
|
| ||
Subtotal |
|
5,226,928 |
|
5,049,536 |
| ||
|
|
|
|
|
| ||
Land/future value-added projects: |
|
|
|
|
| ||
Land held for future development in North America |
|
324,586 |
|
305,981 |
| ||
Land undergoing preconstruction activities (additional CIP) in North America |
|
569,805 |
|
574,884 |
| ||
Land held for future development/land undergoing preconstruction activities (additional CIP) in Asia |
|
60,161 |
|
35,697 |
| ||
|
|
954,552 |
|
916,562 |
| ||
Investment in unconsolidated real estate entity |
|
26,874 |
|
42,342 |
| ||
Investments in real estate, net |
|
$ |
6,208,354 |
|
$ |
6,008,440 |
|
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 preconstruction activities were ongoing. As a result, interest, property taxes, insurance, and other costs are expensed as incurred. Additionally, as of June 30, 2012, and December 31, 2011, we held land in North America supporting an aggregate of 2.4 million and 2.7 million rentable square feet of future ground-up development, respectively, undergoing preconstruction activities (consisting of Building Information Modeling [BIM or 3-D virtual modeling], design development and construction drawings, sustainability and energy optimization review, budgeting, planning for future site and infrastructure work, and other activities prior to commencement of vertical construction of aboveground shell and core improvements) that are also classified as construction in progress. Our objective with preconstruction is to reduce the time it takes to deliver projects to prospective tenants. Project costs are capitalized as a cost of the project during periods when activities necessary to prepare an asset for its intended use are in progress. We generally will not commence ground-up development of any parcels undergoing preconstruction activities without first securing pre-leasing for such space. If vertical aboveground construction is not initiated at completion of preconstruction activities, the land parcel will be classified as land held for future development. The two largest projects included in preconstruction consisted of our 1.6 million developable square foot site at Alexandria Center at Kendall Square in Cambridge, Massachusetts, and our 407,000 developable square foot site for the second tower at Alexandria Center for Life Science New York City.
3. Investments in real estate (continued)
Real estate asset sales
The following table summarizes our real estate asset disposition activities for the six months ended June 30, 2012 (dollars in thousands):
|
|
Date |
|
|
|
Rentable |
|
Gain |
|
Disposition |
| ||
Real Estate Asset Sales |
|
of Sale |
|
Location |
|
Square Feet |
|
on Sale |
|
Amount |
| ||
5110 Campus Drive |
|
May 2012 |
|
Pennsylvania |
|
21,000 |
|
$ |
2 |
|
$ |
1,800 |
(1) |
Land parcel |
|
March 2012 |
|
Greater Boston |
|
(2) |
|
$ |
1,864 |
|
$ |
31,360 |
|
(1) |
Represents a sale in May 2012 to a tenant that occupied 28% of the property on the date of sale. |
(2) |
In March 2012, we sold one-half of our 55% interest in a land parcel supporting a 414,000 rentable square feet project for $31 million (including closing costs), or approximately $275 per rentable square foot. See discussion at Note 3, Investments in Real Estate. |
Sale of land parcel
In March 2012, we contributed our 55% ownership interest in a land parcel supporting a future 414,000 rentable square feet building in the Longwood Medical Area of the Greater Boston market to a newly formed joint venture (the Restated JV) with National Development and Charles River Realty Investors, and admitted as a 50% member, Clarion Partners, LLC, resulting in a reduction of our ownership interest from 55% to 27.5%. The transfer of one-half of our 55% ownership interest in this real estate venture to Clarion Partners, LLC, was accounted for as an in-substance partial sale of an interest in the underlying real estate. In connection with the sale of one-half of our 55% ownership interest in the land parcel, we received a special distribution of approximately $22.3 million, which included the recognition of a $1.9 million gain on sale of land and approximately $5.4 million from our share of loan refinancing proceeds. The land parcel we sold in March 2012 did not meet the criteria for discontinued operations since the parcel did not have any significant operations prior to disposition. Pursuant to the presentation and disclosure literature on gains/losses on sales or disposals by REITs required by the SEC, 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 income statement. Accordingly, we classified the $1.9 million gain on sale of land below income from discontinued operations, net, in the condensed consolidated statements of income. Our 27.5% share of the land was sold at approximately $31 million (including closing costs), or approximately $275 per rentable square foot. Upon formation of the Restated JV, the existing $38.4 million secured loan was refinanced with a seven-year (including two one-year extension options) non-recourse $213 million secured construction loan with initial loan proceeds of $50 million. As of June 30, 2012, the outstanding balance on the construction loan was $51.1 million. We do not expect our share of capital contributions through the completion of the project to exceed the approximate $22.3 million in net proceeds received in this transaction. Construction of this $350 million project commenced in April 2012, with an initial occupancy date in the fourth quarter of 2014, and the project is 37% pre-leased to Dana-Farber Cancer Institute, Inc. In addition, Dana-Farber Cancer Institute, Inc. has an option to an additional two floors approximating 99,000 rentable square feet, or 24% of the total rentable square feet of the project. We expect to earn development and other fees of approximately $3.5 million through 2015, and recurring annual property management fees thereafter. For the three and six months ended June 30, 2012, we recognized approximately $0.2 million of development fees. These fees are classified in other income in the condensed consolidated statements of income.
We do not qualify as the primary beneficiary of the Restated JV since we do not have the power to direct the activities of the entity that most significantly impacts its economic performance. The decisions that most significantly impact the entitys economic performance require both our consent and that of our partners, for all major operating, investing, and financing decisions, as well as decisions involving major expenditures. As of June 30, 2012, and December 31, 2011, our investment in the unconsolidated real estate entity of approximately $26.9 million and $42.3 million, respectively, was classified as an investment in real estate in the accompanying condensed consolidated balance sheets.
Our investment in the unconsolidated real estate entity is adjusted for additional contributions and distributions, the proportionate share of the net earnings or losses, and other comprehensive income or loss. Distributions, profits, and losses related to this entity are allocated in accordance with the operating agreement. When circumstances indicate that there may have been a reduction in value of an equity investment, we evaluate the equity investment and any advances made for impairment by estimating our ability to recover our investment from future expected cash flows. If we determine the loss in value is other than temporary, we recognize an impairment charge to reflect the equity investment and any advances made at fair value.
4. Investments
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, 2012, 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 an other-than-temporary impairment related to available for sale securities as of June 30, 2012. As of June 30, 2012, and December 31, 2011, there were no unrealized losses in our investments in privately held entities.
The following table summarizes our investments in securities (in thousands):
|
|
June 30, |
|
December 31, |
| ||
|
|
2012 |
|
2011 |
| ||
Available-for-sale securities, cost basis |
|
$ |
3,605 |
|
$ |
2,401 |
|
Gross unrealized gains |
|
3,807 |
|
4,206 |
| ||
Gross unrealized losses |
|
(92 |
) |
(372 |
) | ||
Available-for-sale securities, at fair value |
|
7,320 |
|
6,235 |
| ||
Investments accounted for under cost method |
|
97,128 |
|
89,510 |
| ||
Investments accounted for under equity method |
|
6 |
|
32 |
| ||
Total investments |
|
$ |
104,454 |
|
$ |
95,777 |
|
5. Secured and unsecured senior debt
The following table summarizes our secured and unsecured senior debt and their respective principal maturities, as of June 30, 2012 (in thousands):
|
|
Fixed Rate/Hedged |
|
Unhedged |
|
Total |
|
Percentage of |
|
Weighted Average |
|
Weighted Average |
| |||||
Secured notes payable (2) |
|
$ |
643,377 |
|
$ |
76,600 |
|
$ |
719,977 |
|
24.0 |
% |
|
5.76 |
% |
|
3.5 |
|
Unsecured senior notes payable (2) |
|
549,783 |
|
|
|
549,783 |
|
18.3 |
|
|
4.61 |
|
|
9.7 |
| |||
Unsecured senior line of credit (3) |
|
100,000 |
|
279,000 |
|
379,000 |
|
12.7 |
|
|
1.51 |
|
|
4.8 |
| |||
2016 Unsecured Senior Bank Term Loan (4) |
|
750,000 |
|
|
|
750,000 |
|
25.0 |
|
|
3.29 |
|
|
4.0 |
| |||
2017 Unsecured Senior Bank Term Loan (5) |
|
600,000 |
|
|
|
600,000 |
|
20.0 |
|
|
3.84 |
|
|
4.6 |
| |||
Total debt |
|
$ |
2,643,160 |
|
$ |
355,600 |
|
$ |
2,998,760 |
|
100.0 |
% |
|
4.01 |
% |
|
5.1 |
|
Percentage of total debt |
|
88% |
|
12% |
|
100% |
|
|
|
|
|
|
|
(1) |
Represents the contractual interest rate as of the end of the period plus the impact of debt premiums/discounts and our interest rate hedge agreements. The weighted average interest rate excludes bank fees and amortization of loan fees. |
(2) |
Represents amounts net of unamortized premiums/discounts. |
(3) |
Total commitments available for borrowing aggregate $1.5 billion under our unsecured senior line of credit. As of June 30, 2012, we had approximately $1.1 billion available for borrowings under our unsecured senior line of credit. Weighted average remaining term assumes we exercise our sole option to extend the stated maturity date of April 30, 2016, by six months, twice, to April 30, 2017. |
(4) |
Assumes we exercise our sole option to extend the stated maturity date of June 30, 2015, by one year, to June 30, 2016. |
(5) |
Assumes we exercise our sole option to extend the stated maturity date of January 31, 2016, by one year, to January 31, 2017. |
5. Secured and unsecured senior debt (continued)
The following table summarizes fixed rate/hedged variable and unhedged variable rate debt and their respective principal maturities, as of June 30, 2012 (in thousands):
Debt |
|
Stated Rate |
|
Effective |
|
Maturity |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
Thereafter |
|
Total |
| |||||||||
Secured notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
San Diego |
|
6.21 |
% |
|
6.21 |
% |
|
3/1/13 |
|
$ |
156 |
|
$ |
7,934 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
8,090 |
|
Suburban Washington, D.C. |
|
6.36 |
|
|
6.36 |
|
|
9/1/13 |
|
268 |
|
26,093 |
|
|
|
|
|
|
|
|
|
26,361 |
| |||||||
San Francisco Bay |
|
6.14 |
|
|
6.14 |
|
|
11/16/13 |
|
|
|
7,527 |
|
|
|
|
|
|
|
|
|
7,527 |
| |||||||
Greater Boston |
|
5.26 |
|
|
5.59 |
|
|
4/1/14 |
|
1,846 |
|
3,839 |
|
208,683 |
|
|
|
|
|
|
|
214,368 |
| |||||||
Suburban Washington, D.C. |
|
2.24 |
|
|
2.24 |
|
|
4/20/14 |
|
|
|
|
|
76,000 |
|
|
|
|
|
|
|
76,000 |
| |||||||
San Diego |
|
6.05 |
|
|
4.88 |
|
|
7/1/14 |
|
55 |
|
142 |
|
6,458 |
|
|
|
|
|
|
|
6,655 |
| |||||||
San Diego |
|
5.39 |
|
|
4.00 |
|
|
11/1/14 |
|
70 |
|
177 |
|
7,495 |
|
|
|
|
|
|
|
7,742 |
| |||||||
Seattle |
|
6.00 |
|
|
6.00 |
|
|
11/18/14 |
|
120 |
|
240 |
|
240 |
|
|
|
|
|
|
|
600 |
| |||||||
Suburban Washington, D.C. |
|
5.64 |
|
|
4.50 |
|
|
6/1/15 |
|
51 |
|
130 |
|
138 |
|
5,788 |
|
|
|
|
|
6,107 |
| |||||||
Greater Boston, San Francisco Bay, and San Diego |
|
5.73 |
|
|
5.73 |
|
|
1/1/16 |
|
767 |
|
1,616 |
|
1,713 |
|
1,816 |
|
75,501 |
|
|
|
81,413 |
| |||||||
Greater Boston, San Diego, and Greater NYC |
|
5.82 |
|
|
5.82 |
|
|
4/1/16 |
|
412 |
|
878 |
|
931 |
|
988 |
|
29,389 |
|
|
|
32,598 |
| |||||||
San Francisco Bay |
|
6.35 |
|
|
6.35 |
|
|
8/1/16 |
|
1,075 |
|
2,332 |
|
2,487 |
|
2,652 |
|
126,715 |
|
|
|
135,261 |
| |||||||
San Diego, Suburban Washington, D.C., and Seattle |
|
7.75 |
|
|
7.75 |
|
|
4/1/20 |
|
635 |
|
1,345 |
|
1,453 |
|
1,570 |
|
1,696 |
|
110,301 |
|
117,000 |
| |||||||
San Francisco Bay |
|
6.50 |
|
|
6.50 |
|
|
6/1/37 |
|
8 |
|
16 |
|
17 |
|
17 |
|
19 |
|
801 |
|
878 |
| |||||||
Average/Total |
|
5.70 |
|
|
5.77 |
|
|
|
|
5,463 |
|
52,269 |
|
305,615 |
|
12,831 |
|
233,320 |
|
111,102 |
|
720,600 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
$1.5 Billion unsecured senior line of credit |
|
LIBOR+1.20 |
|
1.51 |
|
|
4/30/17 (2) |
|
|
|
|
|
|
|
|
|
|
|
379,000 |
|
379,000 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
2016 Unsecured Senior Bank Term Loan |
|
LIBOR+1.65 |
|
3.29 |
|
|
6/30/16 (3) |
|
|
|
|
|
|
|
|
|
750,000 |
|
|
|
750,000 |
| ||||||||
2017 Unsecured Senior Bank Term Loan |
|
LIBOR+1.50 |
|
3.84 |
|
|
1/31/17 (4) |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
600,000 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Unsecured senior notes payable (5) |
|
4.60 |
|
4.61 |
|
|
4/1/22 |
|
|
|
|
|
250 |
|
|
|
|
|
550,000 |
|
550,250 |
| ||||||||
Average/Subtotal |
|
|
|
4.01 |
|
|
|
|
5,463 |
|
52,269 |
|
305,865 |
|
12,831 |
|
983,320 |
|
1,640,102 |
|
2,999,850 |
| ||||||||
Unamortized discounts |
|
|
|
|
|
|
|
|
(223 |
) |
(464 |
) |
(78 |
) |
(12 |
) |
(44 |
) |
(269 |
) |
(1,090 |
) | ||||||||
Average/Total |
|
|
|
4.01 |
% |
|
|
|
$ |
5,240 |
|
$ |
51,805 |
|
$ |
305,787 |
|
$ |
12,819 |
|
$ |
983,276 |
|
$ |
1,639,833 |
|
$ |
2,998,760 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balloon payments |
|
|
|
|
|
|
|
$ |
|
|
$ |
41,165 |
|
$ |
297,080 |
|
$ |
5,728 |
|
$ |
980,029 |
|
$ |
1,632,791 |
|
$ |
2,956,793 |
| ||
Principal amortization |
|
|
|
|
|
|
|
5,240 |
|
10,640 |
|
8,707 |
|
7,091 |
|
3,247 |
|
7,042 |
|
41,967 |
| |||||||||
Total consolidated debt |
|
|
|
|
|
|
|
$ |
5,240 |
|
$ |
51,805 |
|
$ |
305,787 |
|
$ |
12,819 |
|
$ |
983,276 |
|
$ |
1,639,833 |
|
$ |
2,998,760 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Fixed rate/hedged variable rate debt |
|
|
|
|
|
|
|
$ |
5,120 |
|
$ |
51,565 |
|
$ |
229,547 |
|
$ |
12,819 |
|
$ |
983,276 |
|
$ |
1,360,833 |
|
$ |
2,643,160 |
| ||
Unhedged variable rate debt |
|
|
|
|
|
|
|
120 |
|
240 |
|
76,240 |
|
|
|
|
|
279,000 |
|
355,600 |
| |||||||||
Total consolidated debt |
|
|
|
|
|
|
|
$ |
5,240 |
|
$ |
51,805 |
|
$ |
305,787 |
|
$ |
12,819 |
|
$ |
983,276 |
|
$ |
1,639,833 |
|
$ |
2,998,760 |
|
(1) |
Represents the contractual interest rate as of the end of the period plus the impact of debt premiums/discounts and our interest rate hedge agreements. The weighted average interest rate excludes bank fees and amortization of loan fees. |
(2) |
Assumes we exercise our sole option to extend the stated maturity date of April 30, 2016, by six months, twice, to April 30, 2017. |
(3) |
Assumes we exercise our sole option to extend the stated maturity date of June 30, 2015, by one year, to June 30, 2016. |
(4) |
Assumes we exercise our sole option to extend the stated maturity date of January 31, 2016, by one year, to January 31, 2017. |
(5) |
Includes $550 million of our 4.60% unsecured senior notes payable due in April 2022, and $250,000 of our 8.00% unsecured senior convertible notes payable with a maturity date of April 15, 2014. |
In June 2012, we closed a secured construction loan with aggregate commitments of $55 million. The construction loan matures in June 2017, assuming we exercise our sole option to extend the stated maturity date of June 2015 by one year, twice. The construction loan will be used to fund the majority of the cost to complete the development of a 100% pre-leased 170,618 rentable square feet life science laboratory building at 259 East Grand Avenue in the San Francisco Bay market. The construction loan will bear interest at the London Interbank Offered Rate (LIBOR) or the base rate specified in the construction loan agreement, defined as the higher of either the prime rate being offered by our lender or the federal funds rate in effect on the day of borrowing (Base Rate), plus in either case a specified margin of 1.50% for LIBOR borrowings or 0.25% for Base Rate borrowings. As of June 30, 2012, $55 million of commitments were available.
5. Secured and unsecured senior debt (continued)
4.60% Unsecured senior notes payable
In February 2012, we completed a public $550 million offering of our unsecured senior notes payable at a stated interest rate of 4.60%. The unsecured senior notes payable were priced at 99.915% of the principal amount with a yield to maturity of 4.61% and are due April 1, 2022. 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 wholly 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 Companys subsidiaries, other than Alexandria Real Estate Equities, L.P. We used the net proceeds of this offering to prepay the outstanding principal balance of $250 million on our unsecured senior bank term loan (2012 Unsecured Senior Bank Term Loan) and to reduce the outstanding borrowings on our unsecured senior line of credit.
The requirements of the key financial covenants under our unsecured senior notes payable as of June 30, 2012, are as follows:
Covenant Ratios (1) |
|
Requirement |
|
Total Debt to Total Assets |
|
Less than or equal to 60% |
|
Consolidated EBITDA to Interest Expense |
|
Greater than or equal to 1.5x |
|
Unencumbered Total Asset Value to Unsecured Debt |
|
Greater than or equal to 150% |
|
Secured Debt to Total Assets |
|
Less than or equal to 40% |
|
(1) |
For a definition of the ratios used in the table above, refer to the Indenture dated February 29, 2012, which governs the unsecured senior notes payable, which was filed as an exhibit to our Current Report on Form 8-K filed with the SEC on February 29, 2012. |
In addition, the terms of the Indenture, among other things, limit the ability of the Company, Alexandria Real Estate Equities, L.P., and the Companys other subsidiaries to (1) consummate a merger, or consolidate or sell all or substantially all of the Companys assets, and (2) incur certain secured or unsecured indebtedness.
5. Secured and unsecured senior debt (continued)
Unsecured senior line of credit and unsecured senior bank term loans
In April 2012, we amended our $1.5 billion unsecured senior line of credit, with Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., and Citigroup Global Markets Inc. as joint lead arrangers, and certain lenders, to extend the maturity date of our unsecured senior line of credit, provide an accordion option for up to an additional $500 million, and reduce the interest rate for outstanding borrowings. The maturity date of the unsecured senior line of credit was extended to 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 bear interest at LIBOR or the base rate specified in the amended unsecured senior line of credit and unsecured senior bank term loan agreements, plus in either case a specified margin (the Applicable Margin). The Applicable Margin for LIBOR borrowings under the unsecured senior line of credit was set at 1.20%, down from 2.40% in effect immediately prior to the modification. In addition to the Applicable Margin, our unsecured senior line of credit is subject to an annual facility fee of 0.25%. In connection with the modification of our unsecured senior line of credit in April 2012, we recognized a loss on early extinguishment of debt of approximately $1.6 million related to the write-off of a portion of unamortized loan fees.
In April 2012, we amended our 2016 unsecured senior bank term loan (2016 Unsecured Senior Bank Term Loan) and 2017 unsecured senior bank term loan (2017 Unsecured Senior Bank Term Loan), conforming the financial covenants contained in our unsecured senior bank term loan agreements to those contained in our amended $1.5 billion unsecured senior line of credit.
In February 2012, we recognized a loss on early extinguishment of debt of approximately $0.6 million related to the write-off of unamortized loan fees as a result of the early repayment of $250 million of our 2012 Unsecured Senior Bank Term Loan. In June 2011, we recognized a loss on early extinguishment of debt of approximately $1.2 million related to the write-off of unamortized loan fees as a result of the early repayment of $500 million of our 2012 Unsecured Senior Bank Term Loan.
The requirements of the key financial covenants under our unsecured senior line of credit and unsecured senior bank term loans as of June 30, 2012, are as follows:
Covenant Ratios (1) |
|
Requirement |
|
Leverage Ratio |
|
Less than or equal to 60.0% |
|
Fixed Charge Coverage Ratio |
|
Greater than or equal to 1.50x |
|
Secured Debt Ratio |
|
Less than or equal to 40.0% |
|
Unsecured Leverage Ratio |
|
Less than or equal to 60.0% |
|
Unsecured Interest Coverage Ratio |
|
Greater than or equal to 1.75x |
|
(1) |
For a definition of the ratios used in the table above, refer to the amended unsecured senior line of credit and unsecured senior bank term loan agreements, dated as of April 30, 2012, which are filed as Exhibits 10.2, 10.3, and 10.4 to this Quarterly Report on Form 10-Q. |
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 Companys subsidiaries to (1) consummate a merger, or consolidate or sell all or substantially all of the Companys assets, and (2) incur certain secured or unsecured indebtedness.
5. Secured and unsecured senior debt (continued)
Unsecured senior convertible notes
The following tables summarize the balances, significant terms, and components of interest cost recognized (excluding amortization of loan fees and before the impact of capitalized interest) on our unsecured senior convertible notes (dollars in thousands):
|
|
8.00% Unsecured Senior |
|
3.70% Unsecured Senior |
| ||||||||
|
|
June 30, |
|
December 31, |
|
June 30, |
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Principal amount |
|
$ |
250 |
|
$ |
250 |
|
$ |
|
|
$ |
84,801 |
|
Unamortized discount |
|
(12 |
) |
(15 |
) |
|
|
(77 |
) | ||||
Net carrying amount of liability component |
|
$ |
238 |
|
$ |
235 |
|
$ |
|
|
$ |
84,724 |
|
|
|
|
|
|
|
|
|
|
| ||||
Carrying amount of equity component |
|
$ |
27 |
|
$ |
27 |
|
$ |
|
|
$ |
8,080 |
|
Number of shares on which the aggregate consideration to be delivered on conversion is determined |
|
6,087 |
|
6,087 |
|
|
|
N/A |
(1) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Issuance date |
|
April 2009 |
|
N/A |
| ||||||||
Stated interest rate |
|
8.00% |
|
N/A |
| ||||||||
Effective interest rate at June 30, 2012 |
|
11.00% |
|
N/A |
| ||||||||
Conversion rate per $1,000 principal value of unsecured senior convertible notes, as adjusted |
|
24.3480 |
|
N/A |
|
|
|
8.00% Unsecured Senior |
|
3.70% Unsecured Senior |
| ||||||||
|
|
Three Months Ended |
|
Three Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Contractual interest |
|
$ |
5 |
|
$ |
4 |
|
$ |
3 |
|
$ |
1,905 |
|
Amortization of discount on liability component |
|
2 |
|
2 |
|
1 |
|
1,115 |
| ||||
Total interest cost |
|
$ |
7 |
|
$ |
6 |
|
$ |
4 |
|
$ |
3,020 |
|
|
|
Six Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Contractual interest |
|
$ |
10 |
|
$ |
9 |
|
$ |
142 |
|
$ |
3,947 |
|
Amortization of discount on liability component |
|
3 |
|
3 |
|
78 |
|
2,532 |
| ||||
Total interest cost |
|
$ |
13 |
|
$ |
12 |
|
$ |
220 |
|
$ |
6,479 |
|
(1) Our 3.70% unsecured senior convertible notes (3.70% Unsecured Senior Convertible Notes) require that upon conversion, the entire principal amount is to be settled in cash, and any excess value above the principal amount, if applicable, is to be settled in shares of our common stock. Based on the December 31, 2011, closing price of our common stock of $68.97, and the conversion price of our 3.70% Unsecured Senior Convertible Notes of $117.36 as of December 31, 2011, the if-converted value of the notes did not exceed the principal amount as of December 31, 2011, and accordingly, no shares of our common stock would have been issued if the notes had been settled on December 31, 2011.
5. Secured and unsecured senior debt (continued)
3.70% unsecured senior convertible notes
During the six months ended June 30, 2011, we recognized an aggregate loss on early extinguishment of debt of approximately $2.5 million related to the repurchase, in privately negotiated transactions, of approximately $96.1 million of certain of our 3.70% Unsecured Senior Convertible Notes.
During January 2012, we repurchased approximately $83.8 million in principal amount of our 3.70% Unsecured Senior Convertible Notes at par, pursuant to options exercised by holders thereof under the indenture governing the notes. During April 2012, we repurchased the remaining outstanding $1.0 million in principal amount of the notes. We did not recognize a gain or loss as a result of either repurchase during the six months ended June 30, 2012.
The following table outlines our interest expense for the three and six months ended June 30, 2012 and 2011 (in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Gross interest |
|
$ |
33,747 |
|
$ |
31,617 |
|
$ |
65,240 |
|
$ |
62,652 |
|
Capitalized interest |
|
(15,825 |
) |
(15,046 |
) |
(31,091 |
) |
(28,239 |
) | ||||
Interest expense (1) |
|
$ |
17,922 |
|
$ |
16,571 |
|
$ |
34,149 |
|
$ |
34,413 |
|
(1) Includes interest expense related to and classified in income from discontinued operations in the accompanying condensed consolidated statements of income.
6. Interest rate swap agreements
During the three and six months ended June 30, 2012 and 2011, 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, 2012 and 2011, 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 value of our interest rate swap agreements that are designated and that qualify as cash flow hedges is classified in accumulated other comprehensive loss.
The following table reflects the effective portion of the unrealized loss recognized in other comprehensive loss for our interest rate swaps related to the change in fair value for the three and six months ended June 30, 2012 and 2011 (in thousands):
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Unrealized loss recognized in other comprehensive loss related to the effective portion of changes in the fair value of our interest rate swap agreements |
|
$ |
3,091 |
|
$ |
5,555 |
|
$ |
7,164 |
|
$ |
5,255 |
|
Losses are subsequently reclassified into earnings in the period during which the hedged forecasted transactions affect earnings. During the next 12 months, we expect to reclassify approximately $17.7 million from accumulated other comprehensive loss to interest expense as an increase to interest expense. The following table indicates the classification in the condensed consolidated statements of income and the effective portion of the loss reclassified from accumulated other comprehensive income into earnings for our cash flow hedge contracts for the three and six months ended June 30, 2012 and 2011 (in thousands):
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Loss reclassified from accumulated other comprehensive income to earnings as an increase to interest expense (effective portion) |
|
$ |
5,895 |
|
$ |
5,302 |
|
$ |
11,670 |
|
$ |
10,741 |
|
6. Interest rate swap agreements (continued)
As of June 30, 2012, and December 31, 2011, 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 $28.5 million and $33.0 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, 2012 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Notional Amount in Effect as of |
| |||||||||
Transaction Date |
|
Effective Date |
|
Termination Date |
|
Interest Pay Rate (1) |
|
Fair Value as of |
|
June 30, |
|
December 31, |
|
December 31, |
| |||||
December 2006 |
|
December 29, 2006 |
|
March 31, 2014 |
|
4.990 |
% |
|
$ |
(4,098 |
) |
$ |
50,000 |
|
$ |
50,000 |
|
$ |
|
|
October 2007 |
|
October 31, 2007 |
|
September 30, 2012 |
|
4.546 |
|
|
(543 |
) |
50,000 |
|
|
|
|
| ||||
October 2007 |
|
October 31, 2007 |
|
September 30, 2013 |
|
4.642 |
|
|
(2,738 |
) |
50,000 |
|
|
|
|
| ||||
October 2007 |
|
July 1, 2008 |
|
March 31, 2013 |
|
4.622 |
|
|
(817 |
) |
25,000 |
|
|
|
|
| ||||
October 2007 |
|
July 1, 2008 |
|
March 31, 2013 |
|
4.625 |
|
|
(818 |
) |
25,000 |
|
|
|
|
| ||||
December 2006 |
|
November 30, 2009 |
|
March 31, 2014 |
|
5.015 |
|
|
(6,180 |
) |
75,000 |
|
75,000 |
|
|
| ||||
December 2006 |
|
November 30, 2009 |
|
March 31, 2014 |
|
5.023 |
|
|
(6,191 |
) |
75,000 |
|
75,000 |
|
|
| ||||
December 2006 |
|
December 31, 2010 |
|
October 31, 2012 |
|
5.015 |
|
|
(1,639 |
) |
100,000 |
|
|
|
|
| ||||
December 2011 |
|
December 30, 2011 |
|
December 31, 2012 |
|
0.480 |
|
|
(275 |
) |
250,000 |
|
|
|
|
| ||||
December 2011 |
|
December 30, 2011 |
|
December 31, 2012 |
|
0.480 |
|
|
(275 |
) |
250,000 |
|
|
|
|
| ||||
December 2011 |
|
December 30, 2011 |
|
December 31, 2012 |
|
0.480 |
|
|
(137 |
) |
125,000 |
|
|
|
|
| ||||
December 2011 |
|
December 30, 2011 |
|
December 31, 2012 |
|
0.480 |
|
|
(137 |
) |
125,000 |
|
|
|
|
| ||||
December 2011 |
|
December 30, 2011 |
|
December 31, 2012 |
|
0.495 |
|
|
(147 |
) |
125,000 |
|
|
|
|
| ||||
December 2011 |
|
December 30, 2011 |
|
December 31, 2012 |
|
0.508 |
|
|
(155 |
) |
125,000 |
|
|
|
|
| ||||
December 2011 |
|
December 31, 2012 |
|
December 31, 2013 |
|
0.640 |
|
|
(672 |
) |
|
|
250,000 |
|
|
| ||||
December 2011 |
|
December 31, 2012 |
|
December 31, 2013 |
|
0.640 |
|
|
(672 |
) |
|
|
250,000 |
|
|
| ||||
December 2011 |
|
December 31, 2012 |
|
December 31, 2013 |
|
0.644 |
|
|
(341 |
) |
|
|
125,000 |
|
|
| ||||
December 2011 |
|
December 31, 2012 |
|
December 31, 2013 |
|
0.644 |
|
|
(341 |
) |
|
|
125,000 |
|
|
| ||||
December 2011 |
|
December 31, 2013 |
|
December 31, 2014 |
|
0.977 |
|
|
(1,150 |
) |
|
|
|
|
250,000 |
| ||||
December 2011 |
|
December 31, 2013 |
|
December 31, 2014 |
|
0.976 |
|
|
(1,148 |
) |
|