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 March 31, 2013

 

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 May 2, 2013, 63,837,404 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 March 31, 2013, and December 31, 2012

3

 

 

 

 

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2013 and 2012

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012

5

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests for the Three Months Ended March 31, 2013

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

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

35

 

 

 

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

79

 

 

 

Item 4.

CONTROLS AND PROCEDURES

80

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1A.

RISK FACTORS

80

 

 

 

Item 6.

EXHIBITS

81

 

 

 

SIGNATURES

82

 



Table of Contents

 

PART I FINANCIAL INFORMATION

 

Item 1.                           FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

Assets

 

 

 

 

 

Investments in real estate, net

 

$

6,375,182

 

$

6,424,578

 

Cash and cash equivalents

 

87,001

 

140,971

 

Restricted cash

 

30,008

 

39,947

 

Tenant receivables

 

9,261

 

8,449

 

Deferred rent

 

170,100

 

170,396

 

Deferred leasing and financing costs, net

 

159,872

 

160,048

 

Investments

 

123,543

 

115,048

 

Other assets

 

135,952

 

90,679

 

Total assets

 

$

7,090,919

 

$

7,150,116

 

 

 

 

 

 

 

Liabilities, Noncontrolling Interests, and Equity

 

 

 

 

 

Secured notes payable

 

$

730,714

 

$

716,144

 

Unsecured senior notes payable

 

549,816

 

549,805

 

Unsecured senior line of credit

 

554,000

 

566,000

 

Unsecured senior bank term loans

 

1,350,000

 

1,350,000

 

Accounts payable, accrued expenses, and tenant security deposits

 

367,153

 

423,708

 

Dividends payable

 

43,955

 

41,401

 

Total liabilities

 

3,595,638

 

3,647,058

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

14,534

 

14,564

 

 

 

 

 

 

 

Alexandria Real Estate Equities, Inc.’s stockholders’ equity:

 

 

 

 

 

Series D Convertible Preferred Stock

 

250,000

 

250,000

 

Series E Preferred Stock

 

130,000

 

130,000

 

Common stock

 

633

 

632

 

Additional paid-in capital

 

3,075,860

 

3,086,052

 

Accumulated other comprehensive loss

 

(22,890

)

(24,833

)

Alexandria Real Estate Equities, Inc.’s stockholders’ equity

 

3,433,603

 

3,441,851

 

Noncontrolling interests

 

47,144

 

46,643

 

Total equity

 

3,480,747

 

3,488,494

 

Total liabilities, noncontrolling interests, and equity

 

$

7,090,919

 

$

7,150,116

 

 

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
March 31,

 

 

 

2013

 

2012

 

Revenues:

 

 

 

 

 

Rental

 

$

111,776

 

$

101,201

 

Tenant recoveries

 

35,611

 

31,882

 

Other income

 

2,993

 

2,628

 

Total revenues

 

150,380

 

135,711

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Rental operations

 

45,224

 

40,453

 

General and administrative

 

11,648

 

10,357

 

Interest

 

18,020

 

16,226

 

Depreciation and amortization

 

46,065

 

41,786

 

Loss on early extinguishment of debt

 

 

623

 

Total expenses

 

120,957

 

109,445

 

 

 

 

 

 

 

Income from continuing operations

 

29,423

 

26,266

 

 

 

 

 

 

 

Income from discontinued operations, net

 

814

 

4,645

 

 

 

 

 

 

 

Gain on sale of land parcel

 

 

1,864

 

Net income

 

30,237

 

32,775

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

982

 

711

 

Dividends on preferred stock

 

6,471

 

7,483

 

Preferred stock redemption charge

 

 

5,978

 

Net income attributable to unvested restricted stock awards

 

342

 

235

 

Net income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders

 

$

22,442

 

$

18,368

 

 

 

 

 

 

 

Earnings per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – basic and diluted:

 

 

 

 

 

Continuing operations

 

$

0.35

 

$

0.22

 

Discontinued operations, net

 

0.01

 

0.08

 

Earnings per share – basic and diluted

 

$

0.36

 

$

0.30

 

 

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
March 31,

 

 

 

2013

 

2012

 

Net income

 

$

30,237

 

$

32,775

 

Other comprehensive income:

 

 

 

 

 

Unrealized gains (losses) on marketable securities:

 

 

 

 

 

Unrealized holding gains arising during the period

 

316

 

674

 

Reclassification adjustment for gains included in net income

 

(272

)

(924

)

Unrealized gains (losses) on marketable securities, net

 

44

 

(250

)

Unrealized gains on interest rate swaps:

 

 

 

 

 

Unrealized interest rate swap losses arising during the period

 

(133

)

(4,073

)

Reclassification adjustment for amortization of interest expense included in net income

 

4,308

 

5,775

 

Unrealized gains on interest rate swap agreements, net

 

4,175

 

1,702

 

Foreign currency translation (losses) gains

 

(2,360

)

9,959

 

Total other comprehensive income

 

1,859

 

11,411

 

Comprehensive income

 

32,096

 

44,186

 

Less: comprehensive income attributable to noncontrolling interests

 

(898

)

(699

)

Comprehensive income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders

 

$

31,198

 

$

43,487

 

 

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 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 as of December 31, 2012

 

$

250,000

 

$

130,000

 

63,244,645

 

$

632

 

$

3,086,052

 

$

 

$

(24,833

)

$

46,643

 

$

3,488,494

 

$

14,564

 

Net income

 

 

 

 

 

 

29,255

 

 

714

 

29,969

 

268

 

Unrealized loss on marketable securities

 

 

 

 

 

 

 

44

 

 

44

 

 

Unrealized gain on interest rate swap agreements

 

 

 

 

 

 

 

4,175

 

 

4,175

 

 

Foreign currency translation loss

 

 

 

 

 

 

 

(2,276

)

(84

)

(2,360

)

 

Contributions by noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

(129

)

(129

)

(298

)

Issuances pursuant to stock plan

 

 

 

72,651

 

1

 

5,269

 

 

 

 

5,270

 

 

Dividends declared on common stock

 

 

 

 

 

 

(38,245

)

 

 

(38,245

)

 

Dividends declared on preferred stock

 

 

 

 

 

 

(6,471

)

 

 

(6,471

)

 

Distributions in excess of earnings

 

 

 

 

 

(15,461

)

15,461

 

 

 

 

 

Balance as of March 31, 2013

 

$

250,000

 

$

130,000

 

63,317,296

 

$

633

 

$

3,075,860

 

$

 

$

(22,890

)

$

47,144

 

$

3,480,747

 

$

14,534

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Operating Activities

 

 

 

 

 

Net income

 

$

30,237

 

$

32,775

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

46,995

 

43,405

 

Loss on early extinguishment of debt

 

 

623

 

Gain on sale of land parcel

 

 

(1,864

)

Loss on sale of real estate

 

340

 

 

Amortization of loan fees and costs

 

2,386

 

2,643

 

Amortization of debt premiums/discounts

 

115

 

179

 

Amortization of acquired above and below market leases

 

(830

)

(800

)

Deferred rent

 

(6,198

)

(8,796

)

Stock compensation expense

 

3,349

 

3,293

 

Equity in loss related to investments

 

 

26

 

Gain on sales of investments

 

(446

)

(1,999

)

Loss on sales of investments

 

386

 

1

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

1,506

 

862

 

Tenant receivables

 

(818

)

(1,237

)

Deferred leasing costs

 

(11,757

)

(7,011

)

Other assets

 

(7,302

)

(2,411

)

Accounts payable, accrued expenses, and tenant security deposits

 

(10,722

)

(10,004

)

Net cash provided by operating activities

 

47,241

 

49,685

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Proceeds from sale of properties

 

80,203

 

 

Additions to properties

 

(139,245

)

(120,585

)

Purchase of properties

 

 

(19,946

)

Change in restricted cash related to construction projects

 

(17

)

(1,400

)

Distribution from unconsolidated real estate entity

 

 

22,250

 

Contributions to unconsolidated real estate entity

 

(2,074

)

(3,914

)

Additions to investments

 

(10,363

)

(5,438

)

Proceeds from investments

 

1,972

 

4,785

 

Net cash used in investing activities

 

 

(69,524

)

 

(124,248

)

 

7



Table of Contents

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Financing Activities

 

 

 

 

 

Borrowings from secured notes payable

 

$

17,215

 

$

 

Repayments of borrowings from secured notes payable

 

(2,749

)

(2,688

)

Proceeds from issuance of unsecured senior notes payable

 

 

544,649

 

Principal borrowings from unsecured senior line of credit

 

179,000

 

248,000

 

Repayments of borrowings from unsecured senior line of credit

 

(191,000

)

(451,000

)

Repayment of unsecured senior bank term loan

 

 

(250,000

)

Repurchase of unsecured senior convertible notes

 

 

(83,801

)

Proceeds from issuance of Series E Preferred Stock

 

 

124,868

 

Change in restricted cash related to financings

 

8,656

 

(15,955

)

Deferred financing costs paid

 

(46

)

(5,300

)

Proceeds from exercise of stock options

 

 

112

 

Dividends paid on common stock

 

(35,687

)

(30,386

)

Dividends paid on preferred stock

 

(6,471

)

(7,089

)

Distributions to redeemable noncontrolling interests

 

 

(315

)

Contributions by noncontrolling interests

 

 

625

 

Distributions to noncontrolling interests

 

(427

)

(369

)

Net cash (used in) provided by financing activities

 

(31,509

)

71,351

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

(178

)

2,034

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(53,970

)

(1,178

)

Cash and cash equivalents at beginning of period

 

140,971

 

78,539

 

Cash and cash equivalents at end of period

 

$

87,001

 

$

77,361

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for interest, net of interest capitalized

 

$

9,964

 

$

11,976

 

 

 

 

 

 

 

Non-Cash Investing Activities

 

 

 

 

 

Note receivable from sale of real estate

 

$

38,820

 

$

 

Change in accrued capital expenditures

 

$

(37,045

)

$

9,396

 

 

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

 

8



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 investment-grade real estate investment trust (“REIT”), is the largest and leading REIT focused principally on owning, operating, developing, redeveloping, and acquiring high-quality, sustainable real estate for the broad and diverse life science industry.  Alexandria’s client tenants span the life science industry, including renowned academic and medical institutions, multinational pharmaceutical companies, public and private biotechnology entities, United States (“U.S.”) government research agencies, medical device companies, industrial biotech companies, venture capital firms, and life science product and service companies.  For additional information on Alexandria Real Estate Equities, Inc., please visit www.are.com.

 

2.                 Basis of presentation

 

We have prepared the accompanying interim condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”).  In our opinion, the interim 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, 2013.  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, 2012.

 

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 by these entities, such as investment 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, and 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.

 

9



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, client tenant relationships, and other intangible assets or liabilities), liabilities assumed, and any noncontrolling interest in an acquired entity at their fair value as of the acquisition date.  If there is a bargain fixed rate renewal option for the period beyond the non-cancelable lease term, we evaluate factors such as the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, in order to determine the likelihood that the lessee will renew.  When we determine there is reasonable assurance that such bargain purchase option will be exercised, we consider its impact in determining the intangible value of such lease and its related amortization period.  The value of tangible assets acquired is based upon our estimation of value on an “as if vacant” basis.  The value of acquired in-place leases includes the estimated carrying costs during the hypothetical lease-up period and other costs that would have been incurred 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 recognized as either an increase (for below market leases) or a decrease (for above market leases) to rental income.  The values of acquired in-place leases are classified in other assets in the accompanying condensed consolidated balance sheets, and amortized over the remaining terms of the related leases.

 

We are required to capitalize project costs, including predevelopment costs, interest, property taxes, insurance, and other costs directly related and essential to the acquisition, development, redevelopment, or construction of a project.  Capitalization of development, redevelopment, and construction costs is required while activities are ongoing to prepare an asset for its intended use.  Fluctuations in our development, redevelopment, and construction activities could result in significant changes to total expenses and net income.  Costs incurred after a project is substantially complete and ready for its intended use are expensed as incurred.  Should development, redevelopment, or construction activity cease, interest, property taxes, insurance, and certain other costs would no longer be eligible for capitalization and would be expensed as incurred.  Expenditures for repairs and maintenance are expensed as incurred.

 

A property is classified as “held for sale” when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve the action, commits to a plan to sell the property; (2) the property is available for immediate sale in its present condition, subject only to terms that are usual and customary; (3) an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; (4) the sale of the property is probable and is expected to be completed within one year; (5) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.  When all of these criteria have been met, the property is classified as “held for sale”; if (1) the operations and cash flows of the property have been or will be eliminated from the ongoing operations, and (2) we will not have any significant continuing involvement in the operations of the property after the sale, then its operations, including any interest expense directly attributable to it, are classified as discontinued operations in our 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.”

 

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Table of Contents

 

2.                 Basis of presentation (continued)

 

Impairment of long-lived assets

 

Long-lived assets to be held and used, including our rental properties, land held for future development, construction in progress, and intangibles, are individually evaluated for impairment when conditions exist that may indicate that the carrying amount of a long-lived asset may not be recoverable.  The carrying amount of a long-lived asset to be held and used is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  Impairment indicators or triggering events for long-lived assets to be held and used, including our rental properties, land held for future development, and construction in progress, are assessed by project and include significant fluctuations in estimated net operating income, occupancy changes, significant near-term lease expirations, current and historical operating and/or cash flow losses, construction costs, estimated completion dates, rental rates, and other market factors.  We assess the expected undiscounted cash flows based upon numerous factors, including, but not limited to, construction costs, available market information, current and historical operating results, known trends, current market/economic conditions that may affect the property, and our assumptions about the use of the asset, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration.  Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value.  If an impairment loss is not required to be recognized, the recognition of depreciation is adjusted prospectively, as necessary, to reduce the carrying amount of the real estate to its estimated disposition value over the remaining period that the real estate is expected to be held and used.  We may adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives.

 

We use a “held for sale” impairment model for our properties classified as “held for sale.”  The “held for sale” impairment model is different from the held and used impairment model.  Under the “held for sale” impairment model, an impairment loss is recognized if the carrying amount of the long-lived asset classified as “held for sale” exceeds its fair value less cost to sell.  Because of these two different models, it is possible for a long-lived asset previously classified as held and used to require the recognition of an impairment charge upon classification as “held for sale.”

 

Investments

 

We hold equity investments in certain publicly traded companies and privately held entities primarily involved in the life science industry.  All of our investments in actively traded public companies are considered “available for sale” and are reflected in the accompanying condensed consolidated balance sheets at fair value.  Fair value has been determined based upon the closing price as of each balance sheet date, with unrealized gains and losses shown as a separate component of comprehensive income.  The classification of each investment is determined at the time each investment is made, and such determination is reevaluated at each balance sheet date.  The cost of each investment sold is determined by the specific identification method, with net realized gains or losses classified in other income in the accompanying condensed consolidated statements of income.  Investments in privately held entities are generally accounted for under the cost method when our interest in the entity is so minor that we have virtually no influence over the entity’s operating and financial policies.  Certain investments in privately held entities are accounted for under the equity method when our interest in the entity is not deemed so minor that we have virtually no influence over the entity’s operating and financial policies.  Under the equity method of accounting, we recognize our investment initially at cost and adjust the carrying amount of the investment to recognize our share of the earnings or losses of the investee subsequent to the date of our investment.  Additionally, we limit our ownership percentage in the voting stock of each individual entity to less than 10%.  As of March 31, 2013, and December 31, 2012, our ownership percentage in the voting stock of each individual entity was less than 10%.

 

Individual investments are evaluated for impairment when changes in conditions may indicate an impairment exists.  The factors that we consider in making these assessments include market prices, market conditions, available financing, prospects for favorable or unfavorable clinical trial results, new product initiatives, and new collaborative agreements.  If there are no identified events or changes in circumstances that would have an adverse effect on our cost method investments, we do not estimate the investment’s fair value.  For all of our investments, if a decline in the fair value of an investment below the carrying value is determined to be other than temporary, such investment is written down to its estimated fair value with a non-cash charge to current earnings.

 

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2.      Basis of presentation (continued)

 

Income taxes

 

We are organized and qualify as a REIT pursuant to the Internal Revenue Code of 1986, as amended (the “Code”).  Under the Code, a REIT that distributes 100% of its REIT taxable income as a dividend to its shareholders each year and that meets certain other conditions is not subject to federal income taxes, but could be subject to certain state and local taxes.  We have distributed 100% or more of our taxable income.  Therefore, no provision for federal income taxes is required.  We file tax returns, including returns for our subsidiaries, with federal, state, and local jurisdictions, including jurisdictions located in the U.S., Canada, India, China, and other international locations.  Our tax returns are subject to examination in various jurisdictions for the calendar years 2008 through 2012.

 

We recognize tax benefits of uncertain tax positions only if it is more likely than not that the tax position will be sustained, based solely on its technical merits, with the taxing authority having full knowledge of all relevant information.  The measurement of a tax benefit for an uncertain tax position that meets the “more likely than not” threshold is based on a cumulative probability model under which the largest amount of tax benefit recognized is the amount with a greater than 50% likelihood of being realized upon ultimate settlement with the taxing authority having full knowledge of all the relevant information.  As of March 31, 2013, there were no unrecognized tax benefits.  We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

 

Interest expense and penalties, if any, would be recognized in the first period during which the interest or penalty would begin accruing, according to the provisions of the relevant tax law at the applicable statutory rate of interest.  We did not incur any material tax-related interest expense or penalties for the three months ended March 31, 2013 and 2012.

 

Interest income

 

Interest income was approximately $1.3 million and $0.6 million during the three months ended March 31, 2013 and 2012, respectively.  Interest income is classified in other income in the accompanying condensed consolidated statements of income.

 

Recognition of rental income and tenant recoveries

 

Rental income from leases is recognized on a straight-line basis over the respective lease terms.  We classify amounts currently recognized as income, and expected to be received in later years, as an asset in deferred rent in the accompanying condensed consolidated balance sheets.  Amounts received currently, but recognized as income in future years, are classified in accounts payable, accrued expenses, and tenant security deposits in the accompanying condensed consolidated balance sheets.  We commence recognition of rental income at the date the property is ready for its intended use and the client tenant takes possession of or controls the physical use of the property.

 

Tenant recoveries related to reimbursement of real estate taxes, insurance, utilities, repairs and maintenance, and other operating expenses are recognized as revenue in the period during which the applicable expenses are incurred.

 

Tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes, and other expenses recoverable from client tenants.  Tenant receivables are expected to be collected within one year.  We maintain an allowance for estimated losses that may result from the inability of our client tenants to make payments required under the terms of the lease and for tenant recoveries due.  If a client tenant fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the amount of uncollectible rent and deferred rent receivables arising from the straight-lining of rent.  As of March 31, 2013, and December 31, 2012, we had no allowance for estimated losses.

 

As of March 31, 2013, approximately 94% of our leases (on a rentable square footage basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses, and other operating expenses (including increases thereto) in addition to base rent.  Approximately 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.

 

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3.      Investments in real estate

 

Our investments in real estate, net, consisted of the following as of March 31, 2013, and December 31, 2012 (in thousands):

 

 

 

March 31, 2013

 

December 31, 2012

 

Land (related to rental properties)

 

$

516,957

 

$

522,664

 

Buildings and building improvements

 

4,955,207

 

4,933,314

 

Other improvements

 

163,864

 

189,793

 

Rental properties

 

5,636,028

 

5,645,771

 

Less: accumulated depreciation

 

(849,891

)

(875,035

)

Rental properties, net

 

4,786,137

 

4,770,736

 

 

 

 

 

 

 

Construction in progress (“CIP”)/current value-added projects:

 

 

 

 

 

Active development in North America

 

579,273

 

431,578

 

Investment in unconsolidated real estate entity

 

30,730

 

28,656

 

Active redevelopment in North America

 

141,470

 

199,744

 

Generic infrastructure/building improvement projects in North America

 

62,869

 

80,599

 

Active development and redevelopment in Asia

 

101,357

 

101,602

 

 

 

915,699

 

842,179

 

 

 

 

 

 

 

Subtotal

 

5,701,836

 

5,612,915

 

 

 

 

 

 

 

Land/future value-added projects:

 

 

 

 

 

Land subject to sale negotiations

 

45,378

 

 

Land undergoing preconstruction activities (additional CIP) in North America

 

305,300

 

433,310

 

Land held for future development in North America

 

231,130

 

296,039

 

Land held for future development/land undergoing preconstruction activities (additional CIP) in Asia

 

83,735

 

82,314

 

 

 

673,346

 

811,663

 

 

 

 

 

 

 

Investments in real estate, net

 

$

6,375,182

 

$

6,424,578

 

 

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.  As of March 31, 2013, and December 31, 2012, we held land in North America supporting an aggregate of 3.8 million and 4.7 million rentable square feet of future ground-up development, respectively.  Additionally, as of March 31, 2013, and December 31, 2012, we held land undergoing preconstruction activities in North America totaling 1.9 million and 2.9 million rentable square feet, respectively.  Land 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) is also classified as construction in progress.  Our objective with preconstruction is to reduce the time it takes to deliver projects to prospective client 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 largest project primarily included in land undergoing preconstruction consists of our 1.2 million developable square feet at Alexandria Center™ at Kendall Square in East Cambridge, Massachusetts.

 

Real estate asset sales

 

During the three months ended March 31, 2013, we sold six properties in three separate transactions for aggregate consideration of approximately $124.3 million, at a net loss of approximately $0.3 million, which included an aggregate gain of approximately $0.1 million on the sale of two properties in the Suburban Washington, D.C. market, an aggregate loss of approximately $0.4 million on sale of three properties in the Greater Boston market, and no gain or loss on the sale of a property in the Seattle market.

 

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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 March 31, 2013, had been in a continuous unrealized loss position for less than 12 months.  We have the ability and intent to hold these investments for a reasonable period of time sufficient for the recovery of our investment.  We believe that these unrealized losses are temporary, and accordingly we have not recognized other-than-temporary impairment related to “available for sale” securities as of March 31, 2013.  As of March 31, 2013, and December 31, 2012, there were no unrealized losses in our investments in privately held entities.

 

The following table summarizes our investments as of March 31, 2013, and December 31, 2012 (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

“Available-for-sale” securities, cost basis

 

$

1,607

 

$

1,236

 

Gross unrealized gains

 

1,547

 

1,561

 

Gross unrealized losses

 

(29

)

(88

)

“Available-for-sale” securities, at fair value

 

3,125

 

2,709

 

Investments accounted for under cost method

 

120,412

 

112,333

 

Investments accounted for under equity method

 

6

 

6

 

Total investments

 

$

123,543

 

$

115,048

 

 

The following table outlines our net investment income, which is classified in other income in the accompanying condensed consolidated statements of income for the three months ended March 31, 2013 and 2012 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

Equity in loss related to equity method investments

 

$

 

$

(26

)

Gross realized gains

 

446

 

1,999

 

Gross realized losses

 

(386

)

(1

)

Net investment income

 

$

60

 

$

1,972

 

 

 

 

 

 

 

Amount reclassified from accumulated other comprehensive income to realized gains, net

 

$

272

 

$

924

 

 

5.      Secured and unsecured senior debt

 

The following table summarizes our secured and unsecured senior debt and their respective principal maturities, as of March 31, 2013 (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)

 

$

620,076

 

$

110,638

 

$

730,714

 

22.9

%

 

5.56

%

 

2.8

 

Unsecured senior notes payable (2)

 

549,816

 

 

549,816

 

17.3

 

 

4.61

 

 

9.0

 

Unsecured senior line of credit (3)

 

 

554,000

 

554,000

 

17.4

 

 

1.40

 

 

4.1

 

2016 Unsecured Senior Bank Term Loan (4)

 

750,000

 

 

750,000

 

23.6

 

 

2.39

 

 

3.3

 

2017 Unsecured Senior Bank Term Loan (5)

 

250,000

 

350,000

 

600,000

 

18.8

 

 

3.68

 

 

3.8

 

Total debt

 

$

2,169,892

 

$

1,014,638

 

$

3,184,530

 

100.0

%

 

3.57

%

 

4.4

 

Percentage of total debt

 

68%

 

32%

 

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 swap 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 March 31, 2013, we had approximately $0.9 billion available for borrowing 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 March 31, 2013 (dollars in thousands):

 

Debt

 

Stated Rate

 

Effective
Interest
Rate (1)

 

Maturity
Date

 

2013

 

2014

 

2015

 

2016

 

2017

 

Thereafter

 

Total

 

Secured notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Suburban Washington, D.C.

 

6.36

%

 

6.36

%

 

9/1/13

 

$

25,946

 

$

 

$

 

$

 

$

 

$

 

$

25,946

 

Greater Boston

 

5.26

 

 

5.59

 

 

4/1/14

 

2,898

 

208,683

 

 

 

 

 

211,581

 

Suburban Washington, D.C.

 

2.19

 

 

2.19

 

 

4/20/14

 

 

76,000

 

 

 

 

 

76,000

 

San Diego

 

6.05

 

 

4.88

 

 

7/1/14

 

95

 

6,458

 

 

 

 

 

6,553

 

San Diego

 

5.39

 

 

4.00

 

 

11/1/14

 

119

 

7,495

 

 

 

 

 

7,614

 

Seattle

 

6.00

 (2)

 

6.00

 

 

11/18/14

 

180

 

240

 

 

 

 

 

420

 

Suburban Washington, D.C.

 

5.64

 

 

4.50

 

 

6/1/15

 

87

 

138

 

5,788

 

 

 

 

6,013

 

San Francisco Bay Area

 

LIBOR+1.50

 

1.74

 

 

7/1/15

(3)

 

 

34,218

 

 

 

 

34,218

 

Greater Boston, San Francisco Bay Area, and San Diego

 

5.73

 

 

5.73

 

 

1/1/16

 

1,205

 

1,713

 

1,816

 

75,501

 

 

 

80,235

 

Greater Boston, San Diego, and Greater NYC

 

5.82

 

 

5.82

 

 

4/1/16

 

657

 

931

 

988

 

29,389

 

 

 

31,965

 

San Francisco Bay Area

 

6.35

 

 

6.35

 

 

8/1/16

 

1,734

 

2,487

 

2,652

 

126,715

 

 

 

133,588

 

San Diego, Suburban Washington, D.C., and Seattle

 

7.75

 

 

7.75

 

 

4/1/20

 

1,018

 

1,453

 

1,570

 

1,696

 

1,832

 

108,469

 

116,038

 

San Francisco Bay Area

 

6.50

 

 

6.50

 

 

6/1/37

 

16

 

17

 

18

 

19

 

20

 

773

 

863

 

Average/Total

 

5.50

%

 

5.56

 

 

 

 

33,955

 

305,615

 

47,050

 

233,320

 

1,852

 

109,242

 

731,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$1.5 billion unsecured senior line of credit

 

LIBOR+1.20% (4)

 

1.40

 

 

4/30/17

(5)

 

 

 

 

554,000

 

 

554,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 Unsecured Senior Bank Term Loan

 

LIBOR+1.75%

 

2.39

 

 

6/30/16

(6)

 

 

 

750,000

 

 

 

750,000

 

2017 Unsecured Senior Bank Term Loan

 

LIBOR+1.50%

 

3.68

 

 

1/31/17

(7)

 

 

 

 

600,000

 

 

600,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured senior notes payable (8)

 

4.60

%

 

4.61

 

 

4/1/22

 

 

250

 

 

 

 

550,000

 

550,250

 

Average/Subtotal

 

 

 

 

3.57

 

 

 

 

33,955

 

305,865

 

47,050

 

983,320

 

1,155,852

 

659,242

 

3,185,284

 

Unamortized discounts

 

 

 

 

 

 

 

 

(350

)

(78

)

(12

)

(44

)

(47

)

(223

)

(754

)

Average/Total

 

 

 

 

3.57

%

 

 

 

$

33,605

 

$

305,787

 

$

47,038

 

$

983,276

 

$

1,155,805

 

$

659,019

 

$

3,184,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balloon payments

 

 

 

 

 

 

 

 

$

25,757

 

$

297,330

 

$

39,946

 

$

980,029

 

$

1,154,000

 

$

653,791

 

$

3,150,853

 

Principal amortization

 

 

 

 

 

 

 

 

7,848

 

8,457

 

7,092

 

3,247

 

1,805

 

5,228

 

33,677

 

Total consolidated debt

 

 

 

 

 

 

 

 

$

33,605

 

$

305,787

 

$

47,038

 

$

983,276

 

$

1,155,805

 

$

659,019

 

$

3,184,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate/hedged variable rate debt

 

 

 

 

 

 

 

 

$

33,425

 

$

229,547

 

$

12,820

 

$

983,276

 

$

251,805

 

$

659,019

 

$

2,169,892

 

Unhedged variable rate debt

 

 

 

 

 

 

 

 

180

 

76,240

 

34,218

 

 

904,000

 

 

1,014,638

 

Total consolidated debt

 

 

 

 

 

 

 

 

$

33,605

 

$

305,787

 

$

47,038

 

$

983,276

 

$

1,155,805

 

$

659,019

 

$

3,184,530

 

 

(1)

Represents the contractual interest rate as of the end of the period plus the impact of debt premiums/discounts and our interest rate swap agreements. The weighted average interest rate excludes bank fees and amortization of loan fees.

(2)

Represents a loan assumed with the acquisition of a property. The interest rate is based upon 10-year U.S. treasury bills plus 3%, with a floor of 6% and a ceiling of 8.5%.

(3)

We have two, one-year options to extend the stated maturity date of July 1, 2015 to July 1, 2017.

(4)

In addition to the stated rate, we are subject to an annual facility fee of 0.25%.

(5)

Assumes we exercise our sole option to extend the stated maturity date of April 30, 2016, by six months, twice, to April 30, 2017.

(6)

Assumes we exercise our sole option to extend the stated maturity date of June 30, 2015, by one year, to June 30, 2016.

(7)

Assumes we exercise our sole option to extend the stated maturity date of January 31, 2016, by one year, to January 31, 2017.

(8)

Includes $550.0 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.

 

4.60% Unsecured senior notes payable

 

In February 2012, we completed a $550.0 million public 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 100% owned subsidiary of the Company.  The unsecured senior notes payable rank equally in right of payment with all other senior unsecured indebtedness.  However, the unsecured senior notes payable are effectively subordinated to existing and future mortgages and other secured indebtedness (to the extent of the value of the collateral securing such indebtedness) and to all existing and future preferred equity and liabilities, whether secured or unsecured, of the Company’s subsidiaries, other than Alexandria Real Estate Equities, L.P.  We used the net proceeds of this offering to prepay the outstanding principal balance of $250.0 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.

 

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Table of Contents

 

5.     Secured and unsecured senior debt (continued)

 

The requirements of the key financial covenants under our unsecured senior notes payable as of March 31, 2013, 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 (“Indenture”), 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.

 

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 $500.0 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 the 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% based on the aggregate commitments outstanding.  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 also 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 $250.0 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 March 31, 2013, 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 April 30, 2012, which were filed as exhibits to our Quarterly Report on Form 10-Q filed with the SEC on August 8, 2012.

 

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5.      Secured and unsecured senior debt (continued)

 

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.  Additionally, the terms of the unsecured senior line of credit and unsecured senior bank term loan agreements include a restriction that may limit our ability to pay dividends, including distributions with respect to common stock or other equity interests, during any time a default is continuing, except to enable us to continue to qualify as a REIT for federal income tax purposes.  As of March 31, 2013, we were in compliance with all such covenants.

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

Principal amount

 

$

250

 

$

250

 

Unamortized discount

 

(8

)

(9

)

Net carrying amount of liability component

 

$

242

 

$

241

 

 

 

 

 

 

 

Carrying amount of equity component

 

$

27

 

$

27

 

Number of shares on which the aggregate consideration to be delivered on conversion is determined

 

6,146

 

6,146

 

 

 

 

 

 

 

Issuance date

 

April 2009

 

Stated interest rate

 

8.00%

 

Effective interest rate at March 31, 2013

 

11.00%

 

Conversion rate per $1,000 principal value of unsecured senior convertible notes, as adjusted, as of March 31, 2013

 

24.5836

 

 

 

 

8.00% Unsecured Senior
Convertible Notes

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Contractual interest

 

$

5

 

$

5

 

Amortization of discount on liability component

 

1

 

1

 

Total interest cost

 

$

6

 

$

6

 

 

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Table of Contents

 

5.      Secured and unsecured senior debt (continued)

 

The following table outlines our interest expense for the three months ended March 31, 2013 and 2012 (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Gross interest

 

$

32,041

 

$

31,493

 

Capitalized interest

 

(14,021

)

(15,266

)

Interest expense (1)

 

$

18,020

 

$

16,227

 

 

(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 months ended March 31, 2013 and 2012, our interest rate swap agreements were used primarily to hedge the variable cash flows associated with certain of our existing LIBOR-based variable rate debt, including our unsecured senior line of credit and unsecured senior bank term loans.  The ineffective portion of the change in fair value of our interest rate swap agreements is required to be recognized directly in earnings.  During the three months ended March 31, 2013 and 2012, our interest rate swap agreements were 100% effective; because of this, no hedge ineffectiveness was recognized in earnings.  The effective portion of changes in the fair values of our interest rate swap agreements that are designated and that qualify as cash flow hedges is classified in accumulated other comprehensive loss.

 

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 months ended March 31, 2013 and 2012 (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2013

 

2012

 

Unrealized loss recognized in other comprehensive loss related to the effective portion of changes in the fair values of our interest rate swap agreements

 

$

(133

)

$

(4,073

)

 

Losses are subsequently reclassified into earnings in the period during which the hedged transactions affect earnings.  During the next 12 months, we expect to reclassify approximately $14.0 million 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 months ended March 31, 2013 and 2012 (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2013

 

2012

 

Loss reclassified from accumulated other comprehensive income to earnings as an increase to interest expense (effective portion)

 

$

4,308

 

$

5,775

 

 

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Table of Contents

 

6.      Interest rate swap agreements (continued)

 

As of March 31, 2013, and December 31, 2012, the fair values of our interest rate swap agreements were classified in accounts payable, accrued expenses, and tenant security deposits based upon their respective fair values, aggregating a liability balance of approximately $16.5 million and $20.7 million, respectively, which included accrued interest and adjustments for non-performance risk, with the offsetting adjustment reflected as unrealized loss in accumulated other comprehensive loss in total equity.  Under our interest rate swap agreements, we have no collateral posting requirements.  We had the following outstanding interest rate swap agreements that were designated as cash flow hedges of interest rate risk as of March 31, 2013 (in thousands):

 

 

 

 

 

 

 

Interest Pay

 

Fair Value as of

 

Notional Amount in Effect as of

 

Transaction Date

 

Effective Date

 

Termination Date

 

Rate (1)

 

March 31, 2013 (2)

 

March 31, 2013

 

December 31, 2013

 

December 2006

 

December 29, 2006

 

March 31, 2014

 

4.990

%

 

$

(2,398

)

$

50,000

 

$

50,000

 

October 2007

 

October 31, 2007

 

September 30, 2013

 

4.642

%

 

(1,120

)

50,000

 

 

December 2006

 

November 30, 2009

 

March 31, 2014

 

5.015

%

 

(3,616

)

75,000

 

75,000

 

December 2006

 

November 30, 2009

 

March 31, 2014

 

5.023

%

 

(3,622

)

75,000

 

75,000

 

December 2011

 

December 31, 2012

 

December 31, 2013

 

0.640

%

 

(791

)

250,000

 

 

December 2011

 

December 31, 2012

 

December 31, 2013

 

0.640

%

 

(791

)

250,000

 

 

December 2011

 

December 31, 2012

 

December 31, 2013

 

0.644

%

 

(399

)

125,000

 

 

December 2011

 

December 31, 2012

 

December 31, 2013

 

0.644

%

 

(399

)

125,000

 

 

December 2011

 

December 31, 2013

 

December 31, 2014

 

0.977

%

 

(1,676

)

 

250,000

 

December 2011

 

December 31, 2013

 

December 31, 2014

 

0.976

%

 

(1,674

)

 

250,000

 

Total

 

 

 

 

 

 

 

 

$

(16,486

)

$

1,000,000

 

$

700,000

 

 

(1)

In addition to the interest pay rate, borrowings outstanding under our unsecured senior line of credit and unsecured senior bank term loans include an applicable margin currently ranging from 1.20% to 1.75%.

(2)

Includes accrued interest and credit valuation adjustment.

 

7.      Fair value measurements

 

Recurring fair value measurements

 

We are required to disclose fair value information about all financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value.  We measure and disclose the estimated fair value of financial assets and liabilities utilizing a fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions.  This hierarchy consists of three broad levels as follows: (1) quoted prices in active markets for identical assets or liabilities, (2) “significant other observable inputs,” and (3) “significant unobservable inputs.”  “Significant other observable inputs” can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.  “Significant unobservable inputs” are typically based on an entity’s own assumptions, since there is little, if any, related market activity.  In instances in which the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level of input that is significant to the fair value measurement in its entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.  There were no transfers between the levels in the fair value hierarchy during the three months ended March 31, 2013 and 2012.

 

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7.      Fair value measurements (continued)

 

The following tables set forth the assets and liabilities that we measure at fair value on a recurring basis by level within the fair value hierarchy as of March 31, 2013, and December 31, 2012 (in thousands):

 

 

 

 

 

March 31, 2013

 

Description

 

Total

 

Quoted Prices in
Active Markets
for Identical
Assets

 

“Significant
Other
Observable
Inputs”

 

“Significant
Unobservable
Inputs”

 

Assets:

 

 

 

 

 

 

 

 

 

Marketable securities

 

$

3,125

 

$

3,125

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

16,486

 

$

 

$

16,486

 

$

 

 

 

 

 

 

December 31, 2012

 

Description

 

Total

 

Quoted Prices in
Active Markets
for Identical
Assets

 

“Significant
Other
Observable
Inputs”

 

“Significant
Unobservable
Inputs”

 

Assets:

 

 

 

 

 

 

 

 

 

Marketable securities

 

$

2,709

 

$

2,709

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

20,661

 

$

 

$

20,661

 

$

 

 

The carrying amounts of cash and cash equivalents, restricted cash, tenant receivables, other assets, accounts payable, accrued expenses, and tenant security deposits approximate fair value.  Our “available-for-sale” securities and our interest rate swap agreements, respectively, have been recognized at fair value.  The fair values of our secured notes payable, unsecured senior notes payable, unsecured senior line of credit, unsecured senior bank term loans, and unsecured senior convertible notes were estimated using widely accepted valuation techniques, including discounted cash flow analyses of “significant other observable inputs” such as available market information on discount and borrowing rates with similar terms, maturities, and credit ratings.  Because the valuations of our financial instruments are based on these types of estimates, the actual fair value of our financial instruments may differ materially if our estimates do not prove to be accurate.  Additionally, the use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

 

As of March 31, 2013, and December 31, 2012, the book and fair values of our marketable securities, interest rate swap agreements, secured notes payable, unsecured senior notes payable, unsecured senior line of credit, and unsecured senior bank term loans were as follows (in thousands):

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Book Value

 

Fair Value

 

Book Value

 

Fair Value

 

Marketable securities

 

$

3,125

 

$

3,125

 

$

2,709

 

$

2,709

 

Interest rate swap agreements

 

$

(16,486

)

$

(16,486

)

$

(20,661

)

$

(20,661

)

Secured notes payable

 

$

(730,714

)

$

(799,242

)

$

(716,144

)

$

(788,455

)

Unsecured senior notes payable

 

$

(549,816

)

$

(588,743

)

$

(549,805

)

$

(593,350

)

Unsecured senior line of credit

 

$

(554,000

)

$

(554,000

)

$

(566,000

)

$

(567,196

)

Unsecured senior bank term loans

 

$

(1,350,000

)

$

(1,358,228

)

$

(1,350,000

)

$

(1,405,124

)

 

Fair value measurements for other than on a recurring basis

 

See discussion under Note 3, Investments in Real Estate, Net – Impairment of Real Estate Assets.

 

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Table of Contents

 

8.                     Earnings per share

 

We use income from continuing operations attributable to Alexandria Real Estate Equities, Inc.’s common stockholders as the “control number” in determining whether potential common shares, including potential common shares issuable upon conversion of our 8.00% unsecured senior convertible notes (“8.00% Unsecured Senior Convertible Notes”), are dilutive or antidilutive to earnings per share.  Pursuant to the presentation and disclosure literature on gains or losses on sales or disposals by REITs and earnings per share required by the SEC and the Financial Accounting Standards Board, gains or losses on sales or disposals by a REIT that do not qualify as discontinued operations are classified below income from discontinued operations in the condensed consolidated statements of income and included in the numerator for the computation of earnings per share for income from continuing operations.

 

The land parcels we sold during the three months ended March 31, 2012 did not meet the criteria for classification as discontinued operations because the land parcels did not have significant operations prior to disposition.  Accordingly, for the three months ended March 31, 2012, we classified approximately $1.9 million as gain on sales of land parcels below income from discontinued operations, net, in the accompanying condensed consolidated statements of income, and included the gain in income from continuing operations attributable to Alexandria Real Estate Equities, Inc.’s common stockholders in the “control number,” or numerator for computation of earnings per share.

 

We account for unvested restricted stock awards that contain nonforfeitable rights to dividends as participating securities and include these securities in the computation of earnings per share using the two-class method.  Our Series D convertible preferred stock (“Series D Convertible Preferred Stock”) and our 8.00% Unsecured Senior Convertible Notes are not participating securities, and are not included in the computation of earnings per share using the two-class method.  Under the two-class method, we allocate net income after preferred stock dividends, preferred stock redemption charge, and amounts attributable to noncontrolling interests to common stockholders and unvested restricted stock awards based on their respective participation rights to dividends declared (or accumulated) and undistributed earnings.  Diluted earnings per share is computed using the weighted average shares of common stock outstanding determined for the basic earnings per share computation plus the effect of any dilutive securities, including the dilutive effect of stock options using the treasury stock method.

 

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Table of Contents

 

8.                     Earnings per share (continued)

 

The table below is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three months ended March 31, 2013 and 2012 (dollars in thousands, except per share amounts):

 

 

 

Three Months Ended
March 31,

 

 

 

2013

 

2012

 

Income from continuing operations

 

$

29,423

 

$

26,266

 

Gain on sale of land parcel

 

 

1,864

 

Net income attributable to noncontrolling interests

 

(982

)

(711

)

Dividends on preferred stock

 

(6,471

)

(7,483

)

Preferred stock redemption charge

 

 

(5,978

)

Net income attributable to unvested restricted stock awards

 

(342

)

(235

)

Income from continuing operations attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – basic and diluted

 

21,628

 

13,723

 

 

 

 

 

 

 

Income from discontinued operations, net

 

814

 

4,645

 

Net income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – basic and diluted

 

$

22,442

 

$

18,368

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding – basic

 

63,161,319

 

61,507,807

 

Dilutive effect of stock options

 

 

1,160

 

Weighted average shares of common stock outstanding – diluted

 

63,161,319

 

61,508,967

 

 

 

 

 

 

 

Earnings per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – basic and diluted:

 

 

 

 

 

Continuing operations

 

$

0.35

 

$

0.22

 

Discontinued operations, net

 

0.01

 

0.08

 

Earnings per share – basic and diluted

 

$

0.36

 

$

0.30

 

 

For purposes of calculating diluted earnings per share, we did not assume conversion of our 8.00% Unsecured Senior Convertible Notes for the three months ended March 31, 2013 and 2012, since the impact was antidilutive to earnings per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders from continuing operations during those periods.

 

For purposes of calculating diluted earnings per share, we did not assume conversion of our Series D Convertible Preferred Stock for the three months ended March 31, 2013 and 2012, since the impact was antidilutive to earnings per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders from continuing operations during those periods.

 

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Table of Contents

 

9.                    Net income attributable to Alexandria Real Estate Equities, Inc.

 

The following table shows income from continuing and discontinued operations attributable to Alexandria Real Estate Equities, Inc. for the three months ended March 31, 2013 and 2012 (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2013

 

2012

 

Income from continuing operations

 

$

29,423

 

$

26,266

 

Gain on sale of land parcel

 

 

1,864

 

Less: net income attributable to noncontrolling interests

 

(982

)

(711

)

Income from continuing operations attributable to Alexandria Real Estate Equities, Inc.

 

28,441

 

27,419

 

 

 

 

 

 

 

Income from discontinued operations, net

 

814

 

4,645

 

Less: net income from discontinued operations attributable to noncontrolling interests

 

 

 

Net income attributable to Alexandria Real Estate Equities, Inc.

 

$

29,255

 

$

32,064

 

 

10.             Stockholders’ equity

 

“At the market” common stock offering program

 

In June 2012, we established an “at the market” common stock offering program under which we may sell, from time to time, up to an aggregate of $250.0 million of our common stock through our sales agents, BNY Mellon Capital Markets, LLC and Credit Suisse Securities (USA) LLC, during a three-year period.  Net proceeds from the sales were used to pay down the outstanding balance on our unsecured senior line of credit or other borrowings, and for general corporate purposes.  As of March 31, 2013, approximately $150.0 million of our common stock remained available for issuance under the “at the market” common stock offering program.

 

Dividends

 

In March 2013, we declared cash dividends for the first quarter of 2013 on our common stock aggregating approximately $38.2 million, or $0.60 per share.  In March 2013, we also declared cash dividends for the first quarter of 2013 on our Series D Convertible Preferred Stock aggregating approximately $4.4 million, or $0.4375 per share.  Additionally, we declared cash dividends for the third quarter of 2012 on our Series E Preferred Stock aggregating approximately $2.1 million, or $0.403125 per share.  In April 2013, we paid the cash dividends for the third quarter of 2012 on our common stock, Series D Convertible Preferred Stock, and Series E Preferred Stock.

 

Accumulated other comprehensive loss

 

Accumulated other comprehensive loss attributable to Alexandria Real Estate Equities, Inc. consists of the following (in thousands):

 

 

 

Unrealized gain on
marketable
securities

 

Unrealized gain
on interest rate
swap agreements

 

Unrealized loss
on foreign
currency
translation

 

Total

 

Balance as of December 31, 2012

 

$

1,473

 

$

(20,661

)

$

(5,645

)

$

(24,833

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before reclassifications

 

316

 

(133

)

(2,276

)

(2,093

)

Amounts reclassified from other comprehensive income

 

(272

)

4,308

 

 

4,036

 

Net other comprehensive income (loss)

 

44

 

4,175

 

(2,276

)

1,943

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2013

 

$

1,517

 

$

(16,486

)

$

(7,921

)

$

(22,890

)

 

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Table of Contents

 

10.             Stockholders’ equity (continued)

 

The effects on amounts reclassified from accumulated other comprehensive income related to unrealized gain on marketable securities and unrealized gain on interest rate swap agreements are recognized in other income and interest expenses, respectively, in the accompanying condensed consolidated statements of income.

 

Preferred stock and excess stock authorizations

 

Our charter authorizes the issuance of up to 100,000,000 shares of preferred stock, of which 15,200,000 shares were issued and outstanding as of March 31, 2013.  In addition, 200,000,000 shares of “excess stock” (as defined in our charter) are authorized, none of which were issued and outstanding as of March 31, 2013.

 

11.             Noncontrolling interests

 

Noncontrolling interests represent the third-party interests in certain entities in which we have a controlling interest.  These entities owned 10 properties and two development parcels as of March 31, 2013, and are included in our condensed consolidated financial statements.  Noncontrolling interests are 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 these entities are allocated in accordance with the respective operating agreements.

 

Certain of our noncontrolling interests have the right to require us to redeem their ownership interests in the respective entities.  We classify these ownership interests in the entities as redeemable noncontrolling interests outside of total equity in the accompanying condensed consolidated balance sheets.  Redeemable noncontrolling interests are 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 these entities are allocated in accordance with the respective operating agreements.  If the carrying amount of a redeemable noncontrolling interest is less than the maximum redemption value at the balance sheet date, such amount is adjusted to the maximum redemption value.  Subsequent declines in the redemption value are recognized only to the extent that previous increases have been recognized.  As of March 31, 2013, and December 31, 2012, our redeemable noncontrolling interest balances were approximately $14.5 million and $14.6 million, respectively.  Our remaining noncontrolling interests, aggregating approximately $47.1 million and $46.6 million as of March 31, 2013, and December 31, 2012, respectively, do not have rights to require us to purchase their ownership interests and are classified in total equity in the accompanying condensed consolidated balance sheets.

 

12.             Discontinued operations

 

The following is a summary of net assets of discontinued operations and income from discontinued operations, net (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

Properties “held for sale,” net

 

$

7,562

 

$

76,440

 

Other assets

 

574

 

4,546

 

Total assets

 

8,136

 

80,986

 

 

 

 

 

 

 

Total liabilities

 

(149

)

(3,233

)

Net assets of discontinued operations

 

$

7,987

 

$

77,753

 

 

 

 

Three Months Ended

 

 

 

March 31,