Table of Contents

 

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
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 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.

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2012, and December 31, 2011

 

3

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011

 

4

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011

 

5

 

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests for the Six Months Ended June 30, 2012

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

 

7

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

39

 

 

 

 

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

82

 

 

 

 

Item 4.

CONTROLS AND PROCEDURES

 

84

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1A.

RISK FACTORS

 

84

 

 

 

 

Item 6.

EXHIBITS

 

84

 

 

 

 

SIGNATURES

 

86

 


 


Table of Contents

 

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.

 

3



Table of Contents

 

Alexandria Real Estate Equities, Inc.

Condensed Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

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.

 

4



Table of Contents

 

Alexandria Real Estate Equities, Inc.

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

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.

 

5



Table of Contents

 

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
Preferred
Stock

 

Series D
Convertible
Preferred
Stock

 

Series E
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 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.

 

6



Table of Contents

 

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.

 

7



Table of Contents

 

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. Alexandria’s 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.

 

8



Table of Contents

 

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.

 

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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 entity’s 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 investment’s fair value.  For all of our investments, if a decline in the fair value of an investment below the carrying value is determined to be other than temporary, such investment is written down to its estimated fair value with a non-cash charge to current earnings.  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.

 

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Table of Contents

 

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.

 

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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.

 

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Table of Contents

 

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 entity’s 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.

 

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Table of Contents

 

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
Variable Rate

 

Unhedged
Variable Rate

 

Total
Consolidated

 

Percentage of
Total

 

Weighted Average
Interest Rate at
End of Period (1)

 

Weighted Average
Remaining Term
(Years)

 

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.

 

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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
Interest
Rate (1)

 

Maturity
Date

 

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.

 

15



Table of Contents

 

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 Company’s 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 Company’s other subsidiaries to (1) consummate a merger, or consolidate or sell all or substantially all of the Company’s assets, and (2) incur certain secured or unsecured indebtedness.

 

16



Table of Contents

 

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 Company’s subsidiaries to (1) consummate a merger, or consolidate or sell all or substantially all of the Company’s assets, and (2) incur certain secured or unsecured indebtedness.

 

17



Table of Contents

 

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
 Convertible Notes

 

3.70% Unsecured Senior
Convertible Notes

 

 

 

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
Convertible Notes

 

3.70% Unsecured Senior
Convertible Notes

 

 

 

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.

 

18



Table of Contents

 

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

 

 

19



Table of Contents

 

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, 2012

 

June 30,
2012

 

December 31,
2013

 

December 31,
2014

 

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

)