ARE-2014.03.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 1-12993

ALEXANDRIA REAL ESTATE EQUITIES, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
95-4502084
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification Number)
 385 East Colorado Boulevard, Suite 299, Pasadena, California 91101
(Address of principal executive offices) (Zip code)

(626) 578-0777
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ý     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o   (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý

 As of April 30, 2014, 71,649,262 shares of common stock, par value $.01 per share, were outstanding.



TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS (UNAUDITED)

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

 
March 31, 2014
 
December 31, 2013
Assets
 
 
 
Investments in real estate, net
$
6,930,262

 
$
6,776,914

Cash and cash equivalents
74,970

 
57,696

Restricted cash
30,454

 
27,709

Tenant receivables
10,619

 
9,918

Deferred rent
202,087

 
190,425

Deferred leasing and financing costs, net
192,618

 
192,658

Investments
169,322

 
140,288

Other assets
145,707

 
134,156

Total assets
$
7,756,039

 
$
7,529,764

 
 
 
 
Liabilities, Noncontrolling Interests, and Equity
 
 
 
Secured notes payable
$
597,511

 
$
708,831

Unsecured senior notes payable
1,048,270

 
1,048,230

Unsecured senior line of credit
506,000

 
204,000

Unsecured senior bank term loans
1,100,000

 
1,100,000

Accounts payable, accrued expenses, and tenant security deposits
443,893

 
435,342

Dividends payable
55,860

 
54,420

Total liabilities
3,751,534

 
3,550,823

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Redeemable noncontrolling interests
14,413

 
14,444

 
 
 
 
Alexandria Real Estate Equities, Inc.’s stockholders’ equity:
 
 
 
Series D cumulative convertible preferred stock
250,000

 
250,000

Series E cumulative redeemable preferred stock
130,000

 
130,000

Common stock
712

 
712

Additional paid-in capital
3,560,453

 
3,572,281

Accumulated other comprehensive loss
(18,429
)
 
(36,204
)
Alexandria’s stockholders’ equity
3,922,736

 
3,916,789

Noncontrolling interests
67,356

 
47,708

Total equity
3,990,092

 
3,964,497

Total liabilities, noncontrolling interests, and equity
$
7,756,039

 
$
7,529,764


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

3



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

 
Three Months Ended March 31,
 
2014
 
2013
Revenues:
 
 
 
Rental
$
130,570

 
$
111,526

Tenant recoveries
41,682

 
35,565

Other income
3,934

 
2,992

Total revenues
176,186

 
150,083

 
 
 
 
Expenses:
 
 
 
Rental operations
52,507

 
45,186

General and administrative
13,224

 
11,648

Interest
19,123

 
18,020

Depreciation and amortization
50,421

 
45,829

Total expenses
135,275

 
120,683

 
 
 
 
Income from continuing operations
40,911

 
29,400

(Loss) income from discontinued operations
(162
)
 
837

Net income
40,749

 
30,237

 
 
 
 
Net income attributable to noncontrolling interests
1,195

 
982

Dividends on preferred stock
6,471

 
6,471

Net income attributable to unvested restricted stock awards
374

 
342

Net income attributable to Alexandria’s common stockholders
$
32,709

 
$
22,442

 
 
 
 
Earnings per share attributable to Alexandria’s common stockholders – basic and diluted:
 
 
 
Continuing operations
$
0.46

 
$
0.35

Discontinued operations
—

 
0.01

Earnings per share – basic and diluted
$
0.46

 
$
0.36


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


4



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

 
Three Months Ended March 31,
 
2014
 
2013
Net income
$
40,749

 
$
30,237

Other comprehensive income:
 
 
 
Unrealized gains on marketable securities:
 
 
 
Unrealized holding gains arising during the period
18,779

 
316

Reclassification adjustment for gains included in net income
—

 
(272
)
Unrealized gains on marketable securities, net
18,779

 
44

 
 
 
 
Unrealized gains on interest rate swap agreements:
 
 
 
Unrealized interest rate swap gains (losses) arising during the period
5,592

 
(133
)
Reclassification adjustment for amortization of interest expense included in net income
(3,490
)
 
4,308

Unrealized gains on interest rate swap agreements, net
2,102

 
4,175

 
 
 
 
Foreign currency translation losses
(3,106
)
 
(2,360
)
 
 
 
 
Total other comprehensive income
17,775

 
1,859

Comprehensive income
58,524

 
32,096

Less: comprehensive income attributable to noncontrolling interests
(1,195
)
 
(898
)
Comprehensive income attributable to Alexandria’s common stockholders
$
57,329

 
$
31,198


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


5



Alexandria Real Estate Equities, Inc.
Consolidated Statements of Changes in Stockholders’ Equity and Noncontrolling Interests
(Dollars in thousands)
(Unaudited)

 
 
Alexandria Real Estate Equities, Inc.’s Stockholders’ Equity
 
 
 
 
 
 
 
 
Series D
Cumulative
Convertible
Preferred
Stock
 
Series E
Cumulative
Redeemable
Preferred
Stock
 
Number of
Common
Shares
 
Common
Stock
 
Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
Total
Equity
 
Redeemable
Noncontrolling
Interests
Balance as of December 31, 2013
 
$
250,000

 
$
130,000

 
71,172,197

 
$
712

 
$
3,572,281

 
$
—

 
$
(36,204
)
 
$
47,708

 
$
3,964,497

 
$
14,444

Net income
 
—

 
—

 
—

 
—

 
—

 
39,554

 
—

 
928

 
40,482

 
267

Total other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
—

 
17,775

 
—

 
17,775

 
—

Contributions by noncontrolling interests
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
19,410

 
19,410

 
—

Distributions to noncontrolling interests
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(690
)
 
(690
)
 
(298
)
Issuances pursuant to stock plan
 
—

 
—

 
73,984

 
—

 
5,243

 
—

 
—

 
—

 
5,243

 
—

Dividends declared on common stock
 
—

 
—

 
—

 
—

 
—

 
(50,154
)
 
—

 
—

 
(50,154
)
 
—

Dividends declared on preferred stock
 
—

 
—

 
—

 
—

 
—

 
(6,471
)
 
—

 
—

 
(6,471
)
 
—

Distributions in excess of earnings
 
—

 
—

 
—

 
—

 
(17,071
)
 
17,071

 
—

 
—

 
—

 
—

Balance as of March 31, 2014
 
$
250,000

 
$
130,000

 
71,246,181

 
$
712

 
$
3,560,453

 
$
—

 
$
(18,429
)
 
$
67,356

 
$
3,990,092

 
$
14,413


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

6



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

 
Three Months Ended March 31,
 
2014
 
2013
Operating Activities
 
 
 
Net income
$
40,749

 
$
30,237

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
50,421

 
46,995

Loss on sale of real estate
—

 
340

Amortization of loan fees and costs
2,561

 
2,386

Amortization of debt premiums/discounts
205

 
115

Amortization of acquired above and below market leases
(816
)
 
(830
)
Deferred rent
(11,882
)
 
(6,198
)
Stock compensation expense
3,228

 
3,349

Investment gains
(4,040
)
 
(446
)
Investment losses
1,694

 
386

Changes in operating assets and liabilities:
 
 
 
Restricted cash
—

 
1,506

Tenant receivables
(690
)
 
(818
)
Deferred leasing costs
(7,572
)
 
(11,757
)
Other assets
(17,315
)
 
(7,302
)
Accounts payable, accrued expenses, and tenant security deposits
16,716

 
(10,722
)
Net cash provided by operating activities
73,259

 
47,241

 
 
 
 
Investing Activities
 
 
 
Proceeds from sales of properties
—

 
80,203

Additions to properties
(111,587
)
 
(139,245
)
Purchase of properties
(42,338
)
 
—

Change in restricted cash related to construction projects
(140
)
 
(17
)
Contributions to unconsolidated real estate entity
(747
)
 
(2,074
)
Additions to investments
(11,905
)
 
(10,363
)
Proceeds from sales of investments
3,998

 
1,972

Net cash used in investing activities
$
(162,719
)
 
$
(69,524
)



7



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

 
Three Months Ended March 31,
 
2014
 
2013
Financing Activities
 
 
 
Borrowings from secured notes payable
$
51,030

 
$
17,215

Repayments of borrowings from secured notes payable
(210,844
)
 
(2,749
)
Principal borrowings from unsecured senior line of credit
360,000

 
179,000

Repayments of borrowings from unsecured senior line of credit
(58,000
)
 
(191,000
)
Change in restricted cash related to financings
1,059

 
8,656

Deferred financing costs paid
(8
)
 
(46
)
Dividends paid on common stock
(48,714
)
 
(35,687
)
Dividends paid on preferred stock
(6,471
)
 
(6,471
)
Contributions by noncontrolling interests
19,410

 
—

Distributions to noncontrolling interests
(988
)
 
(427
)
Net cash provided by (used in) financing activities
106,474

 
(31,509
)
 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
260

 
(178
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
17,274

 
(53,970
)
Cash and cash equivalents at beginning of period
57,696

 
140,971

Cash and cash equivalents at end of period
$
74,970

 
$
87,001

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest, net of interest capitalized
$
6,093

 
$
9,964

 
 
 
 
Non-Cash Investing Activities
 
 
 
Note receivable from sale of real estate
$
—

 
$
38,820

Change in accrued capital expenditures
$
(6,028
)
 
$
(37,045
)
Assumption of secured notes payable in connection with purchase of properties
$
(48,329
)
 
$
—


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


8

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

1.
Background

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

Alexandria Real Estate Equities, Inc. (NYSE:ARE), with a total market capitalization of almost $9 billion as of March 31, 2014, and an asset base of 31.2 million square feet, including 17.7 million RSF of operating and current value-creation projects, as well as an additional 13.5 million square feet in future ground-up development projects, is the largest and leading real estate investment trust (“REIT”) uniquely focused on Class A assets in collaborative science and technology campuses located in urban innovation clusters. Alexandria pioneered this niche in 1994 and has since established a dominant market presence in AAA locations including Greater Boston, the San Francisco Bay Area, New York City, Seattle, San Diego, Maryland, and Research Triangle Park. Alexandria is known for its high-quality and diverse client tenant base. As the Landlord of Choice to the Life Science Industry®, approximately 52% of Alexandria’s total annualized base rent (“ABR”) results from investment-grade client tenants (an industry-leading percentage). Alexandria has a longstanding and proven track record of developing Class A assets clustered in urban collaborative science and technology campuses that provide its client tenants with a highly collaborative, 24/7, live/work/play environment, as well as the critical ability to successfully recruit and retain best-in-class talent. We believe these advantages result in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value. For additional information on Alexandria, please visit www.are.com.

Our asset base contains 185 properties approximating 17.7 million rentable square feet (“RSF”), consisting of the following, as of March 31, 2014:
 
 
RSF
Operating properties
 
15,670,993

Development properties
 
1,823,713

Redevelopment properties
 
221,225

Total
 
17,715,931


Ÿ
Investment-grade client tenants represented approximately 52% of our total ABR;
Ÿ
Approximately 94% of our leases (on an RSF basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area, and other operating expenses (including increases thereto) in addition to base rent;
Ÿ
Approximately 95% of our leases (on an RSF basis) contained effective annual rent escalations that were either fixed (generally ranging from 3% to 3.5%) or indexed based on a consumer price index or other index; and
Ÿ
Approximately 92% of our leases (on an RSF basis) provided for the recapture of certain capital expenditures (such as heating, ventilation, and air conditioning (“HVAC”) systems maintenance and/or replacement, roof replacement, and parking lot resurfacing) that we believe would typically be borne by the landlord in traditional office leases.

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

2.
Basis of presentation

We have prepared the accompanying interim consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”).  In our opinion, the interim consolidated financial statements presented herein reflect all adjustments that are necessary to fairly present the interim consolidated financial statements.  The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2013.

9


2.
Basis of presentation (continued)


The accompanying consolidated financial statements include the accounts of Alexandria Real Estate Equities, Inc. and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated.

We hold interests, together with certain third parties, in companies that we consolidate in our financial statements. We consolidate the companies because we exercise significant control over major decisions by these entities, such as investment activity and changes in financing.

Use of estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and equity; the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements; and the amounts of revenues and expenses during the reporting period.  Actual results could materially differ from those estimates.

Reclassifications

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

Investments in real estate, net, and discontinued operations

We recognize real estate acquired (including the intangible value of above or below market leases, acquired in-place leases, client tenant relationships, and other intangible assets or liabilities), liabilities assumed, and any noncontrolling interest in an acquired entity at their fair value as of the acquisition date.  If there is a bargain fixed-rate renewal option for the period beyond the non-cancelable lease term, we evaluate factors such as the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, in order to determine the likelihood that the lessee will renew.  When we determine there is reasonable assurance that such bargain purchase option will be exercised, we consider its impact in determining the intangible value of such lease and its related amortization period.  The value of tangible assets acquired is based upon our estimation of value on an “as if vacant” basis.  The value of acquired in-place leases includes the estimated costs during the hypothetical lease-up period and other costs that would have been incurred in the execution of similar leases, considering market conditions at the acquisition date of the acquired in-place lease.  We assess the fair value of tangible and intangible assets based on numerous factors, including estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information.  Estimates of future cash flows are based on a number of factors, including the historical operating results, known trends, and market/economic conditions that may affect the property.  We also recognize the fair values of assets acquired, the liabilities assumed, and any noncontrolling interest in acquisitions of less than a 100% interest when the acquisition constitutes a change in control of the acquired entity.  Costs related to the acquisition of businesses, including real estate acquired with in-place leases, are expensed as incurred.

The values allocated to buildings and building improvements, land improvements, tenant improvements, and equipment are depreciated on a straight-line basis using the shorter of the term of the respective ground lease and up to 40 years for buildings and building improvements, an estimated life of 20 years for land improvements, the respective lease term for tenant improvements, and the estimated useful life for equipment. The values of acquired above and below market leases are amortized over the lives of the related leases and recognized as either an increase (for below market leases) or a decrease (for above market leases) to rental income. The values of acquired in-place leases are classified in other assets in the accompanying consolidated balance sheets, and amortized over the remaining terms of the related leases.

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


10


2.
Basis of presentation (continued)

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

Impairment of long-lived assets

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

We use the “held for sale” impairment model for our properties classified as “held for sale.”  The “held for sale” impairment model is different from the held and used impairment model.  Under the “held for sale” impairment model, an impairment loss is recognized if the amount of the long-lived asset classified as “held for sale” exceeds its fair value less cost to sell.  Because of these two different models, it is possible for a long-lived asset previously classified 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 investments in certain privately held entities primarily involved in the life science industry.  All of our investments in actively traded public companies are considered “available for sale” and are reflected in the accompanying consolidated balance sheets at fair value.  Fair value has been determined based upon the closing price as of each balance sheet date, with unrealized gains and losses shown as a separate component of comprehensive income.  The classification of each investment is determined at the time each investment is made, and such determination is reevaluated at each balance sheet date.  The cost of each investment sold is determined by the specific identification method, with realized gains or losses classified in other income in the accompanying consolidated statements of income.  Investments in privately held entities 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 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, 2014, and December 31, 2013, our ownership percentage in the voting stock of each individual entity was less than 10%.


11


2.
Basis of presentation (continued)

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

Income taxes

We are organized and qualify as a REIT pursuant to the Internal Revenue Code of 1986, as amended (the “Code”).  Under the Code, a REIT that distributes 100% of its REIT taxable income as a dividend to its shareholders each year and that meets certain other conditions is not subject to federal income taxes, but could be subject to certain state and local taxes.  We have distributed 100% or more of our taxable income.  Therefore, no provision for federal income taxes is required.  We file tax returns, including returns for our subsidiaries, with federal, state, and local jurisdictions, including jurisdictions located in the U.S., Canada, India, China, and other international locations.  Our tax returns are subject to examination in various jurisdictions for the calendar years 2009 through 2013.

Recognition of rental income and tenant recoveries

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

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

Tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes, and other expenses recoverable from client tenants.  Tenant receivables are expected to be collected within one year.  We may maintain an allowance for estimated losses that may result from the inability of our client tenants to make payments required under the terms of the lease and for tenant recoveries due.  If a client tenant fails to make contractual payments beyond any allowance, we may recognize additional 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, 2014, and December 31, 2013, we had no allowance for estimated losses.

Monitoring client tenant credit quality

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

Interest income

Interest income was $0.9 million and $1.3 million during the three months ended March 31, 2014 and 2013, respectively.  Interest income is included in other income in the accompanying consolidated statements of income.


12


2.
Basis of presentation (continued)

Impact of recently issued accounting standards

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




13



3.
Investments in real estate, net

Our investments in real estate, net, consisted of the following as of March 31, 2014, and December 31, 2013 (in thousands):
 
March 31, 2014
 
December 31, 2013
 
Rental properties:
 
 
 
 
Land (related to rental properties)
$
567,232

 
$
553,388

 
Buildings and building improvements
5,787,040

 
5,714,673

 
Other improvements
191,276

 
174,147

 
Rental properties
6,545,548

 
6,442,208

 
Less: accumulated depreciation
(992,818
)
 
(952,106
)
 
Rental properties, net
5,552,730

 
5,490,102

 
 
 
 
 
 
Construction in progress (“CIP”)/current value-creation projects:
 
 
 
 
Current development in North America
562,873

 
511,838

 
Investment in unconsolidated joint venture
47,390

(1) 
46,644

(1) 
Current redevelopment in North America
34,434

 
8,856

 
Current development and redevelopment in Asia
59,540

 
60,928

 
 
704,237

 
628,266

 
Subtotal
6,256,967

 
6,118,368

 
 
 
 
 
 
Land/value-creation projects:
 
 
 
 
Land undergoing predevelopment activities (CIP) in North America
379,997

 
367,225

 
Land held for development in North America
191,875

 
191,127

 
Land held for development/undergoing predevelopment activities (CIP) in Asia
78,569

 
77,251

 
Land subject to sale negotiations
22,854

 
22,943

 
 
673,295

 
658,546

 
Investments in real estate, net
$
6,930,262

 
$
6,776,914

 

(1)
Represents our investment under the equity method of accounting in the unconsolidated joint venture development project located at 360 Longwood Avenue.

Acquisitions

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

In March 2014, we acquired 225 Second Avenue, a vacant 112,500 RSF office property located in the Route 128 submarket of Greater Boston, for $16.3 million. The property is undergoing conversion into a laboratory/office space through redevelopment.

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


Current development and redevelopment projects

As of March 31, 2014, we had five ground-up development projects in process in North America, including an unconsolidated joint venture development project, aggregating 1.4 million RSF. We also had three projects undergoing conversion into laboratory/office space through redevelopment in North America aggregating 221,225 RSF.

14


3.
Investments in real estate, net (continued)


Investment in unconsolidated real estate entity

We have a 27.5% equity interest in an unconsolidated joint venture that is currently developing a building aggregating 413,536 RSF in the Longwood Medical Area submarket of Greater Boston. We account for this investment under the equity method of accounting. Our investment under the equity method of accounting was $47.4 million as of March 31, 2014.

We do not qualify as the primary beneficiary of the unconsolidated joint venture 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, including all major operating, investing, and financing decisions, as well as decisions involving major expenditures. Consequently, we do not consolidate this joint venture, and we account for our investment under the equity method of accounting.

Land undergoing predevelopment activities (CIP)
    
Land undergoing predevelopment activities is classified as construction in progress and is undergoing activities prior to commencement of construction of aboveground building improvements.  We generally will not commence ground-up development of any parcels undergoing predevelopment activities without first securing pre-leasing for such space, except when there is significant market demand.  If aboveground construction is not initiated at completion of predevelopment activities, the land parcel will be classified as land held for development.  Our objective with predevelopment is to reduce the time it takes to deliver projects to prospective client tenants.  Additionally, during predevelopment, we focus on the design of cost-effective buildings with generic and reusable infrastructure to accommodate single and multi-tenancy. As of March 31, 2014, we held land undergoing predevelopment activities in North America aggregating 2.7 million RSF. The largest project included in land undergoing predevelopment activities consists of substantially all of our 1.2 million square feet at the Alexandria Center™ at Kendall Square located in East Cambridge, Massachusetts.

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

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

Ÿ
Site and infrastructure construction costs, including belowground site work, utility connections, land grading, drainage, egress and regress access points, foundation, and other costs to prepare the site for construction of aboveground building improvements. For example, site and infrastructure costs for the 1.2 million RSF primarily related to 50, 60, and 100 Binney Street of the Alexandria Center™ at Kendall Square are classified as predevelopment prior to commencement of vertical construction.

Land held for development

Land held for development represents real estate we plan to develop in the future, but for which, as of each period presented, no construction or predevelopment activities were ongoing. As a result, interest, property taxes, insurance, and other costs are expensed as incurred. As of March 31, 2014, we held land in North America supporting an aggregate of 3.1 million RSF of ground-up development.



15



4.
Investments

We hold investments in certain publicly traded companies and privately held entities involved primarily in life science and related industries.  Our investments in publicly traded companies are accounted for as “available for sale” securities that are carried at their fair values.  Investments in “available for sale” securities with gross unrealized losses as of March 31, 2014, had been in a continuous unrealized loss position for less than 12 months. We have the ability and intent to hold these investments for a reasonable period of time sufficient for the recovery of our investment. We believe that these unrealized losses are temporary, and accordingly have not recognized other-than-temporary impairments related to “available for sale” securities as of March 31, 2014. As of March 31, 2014, and December 31, 2013, there were no unrealized losses in our investments in privately held entities.

The following table summarizes our investments as of March 31, 2014, and December 31, 2013 (in thousands):
 
March 31, 2014
 
December 31, 2013
“Available-for-sale” marketable equity securities, cost basis
$
12,608

 
$
2,879

Unrealized gains
21,447

(1) 
2,177

Unrealized losses
(1,078
)
 
(587
)
“Available-for-sale” marketable equity securities, at fair value
32,977

 
4,469

Investments accounted for under cost method
136,345

 
135,819

Total investments
$
169,322

 
$
140,288


(1)
Increase in our investments during the three months ended March 31, 2014, was primarily related to an increase in unrealized gains of approximately $18.8 million related to our investments in publicly traded life science companies. These unrealized gains are a component of our comprehensive income, within our stockholders’ equity, and have not been recognized in the accompanying consolidated statement of income for the three months ended March 31, 2014.
    
The following table outlines our investment income, which is classified in other income in the accompanying consolidated statements of income (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Investment gains
$
4,040

 
$
446

Investment losses
(1,694
)
 
(386
)
Investment income
$
2,346

 
$
60




16



5.
Secured and unsecured senior debt

The following table summarizes our secured and unsecured senior debt as of March 31, 2014 (dollars in thousands):
 
Fixed Rate/Hedged
Variable Rate
 
Unhedged
Variable Rate
 
Total
Consolidated
 
Percentage of Total
 
Weighted Average
Interest Rate at
End of Period (1)
 
Weighted Average
Remaining Term
(in years)
Secured notes payable
$
424,287

 
$
173,224

 
$
597,511

 
18.4
%
 
4.98
%
 
3.4
Unsecured senior notes payable
1,048,270

 
—

 
1,048,270

 
32.1

 
4.29

 
8.6
$1.5 billion unsecured senior line of credit
—

 
506,000

 
506,000

 
15.6

 
1.25

 
4.8
2016 Unsecured Senior Bank Term Loan
350,000

 
150,000

 
500,000

 
15.4

 
1.40

 
2.3
2019 Unsecured Senior Bank Term Loan
600,000

 
—

 
600,000

 
18.5

 
2.05

 
4.8
Total/weighted average
$
2,422,557

 
$
829,224

 
$
3,251,781

 
100.0
%
 
3.09
%
 
5.4
Percentage of total debt
74
%
 
26
%
 
100
%
 
 
 
 
 
 

(1)
Represents the weighted average contractual interest rate as of the end of the period plus the impact of debt premiums/discounts and our interest rate swap agreements. The weighted average interest rate excludes bank fees and amortization of loan fees.


17


5.
Secured and unsecured senior debt (continued)

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

San Diego
 
6.05
%
 
4.88
%
 
07/01/14
(3) 
$
6,419

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
6,419

San Diego
 
5.39
 
 
4.00
 
 
11/01/14
  
7,433

 
—

 
—

 
—

 
—

 
—

 
7,433

Seattle
 
6.00
 
 
6.00
 
 
11/18/14
  
180

 
—

 
—

 
—

 
—

 
—

 
180

Maryland
 
5.64
 
 
4.50
 
 
06/01/15
  
103

 
5,777

 
—

 
—

 
—

 
—

 
5,880

San Francisco Bay Area
 
L+1.50
 
 
1.66
 
 
07/01/15
(4) 
—

 
46,203

 
—

 
—

 
—

 
—

 
46,203

Greater Boston, San Francisco Bay Area, and San Diego
 
5.73
 
 
5.73
 
 
01/01/16
  
1,279

 
1,816

 
75,501

 
—

 
—

 
—

 
78,596

Greater Boston, San Diego, and Greater New York City
 
5.82
 
 
5.82
 
 
04/01/16
  
697

 
988

 
29,389

 
—

 
—

 
—

 
31,074

San Diego
 
5.74
 
 
3.00
 
 
04/15/16
 
125

 
175

 
6,916

 
—

 
—

 
—

 
7,216

San Francisco Bay Area
 
L+1.40
 
 
1.56
 
 
06/01/16
(5) 
—

 
—

 
6,419

 
—

 
—

 
—

 
6,419

San Francisco Bay Area
 
6.35
 
 
6.35
 
 
08/01/16
  
1,851

 
2,652

 
126,715

 
—

 
—

 
—

 
131,218

Maryland
 
2.15
 
 
2.15
 
 
01/20/17
 
—

 
—

 
—

 
76,000

 
—

 
—

 
76,000

Greater Boston
 
L+1.35
 
 
1.51
 
 
08/23/17
(6) 
—

 
—

 
—

 
44,422

 
—

 
—

 
44,422

San Diego, Maryland, and Seattle
 
7.75
 
 
7.75
 
 
04/01/20
  
1,100

 
1,570

 
1,696

 
1,832

 
1,979

 
106,491

 
114,668

San Diego
 
4.66
 
 
4.66
 
 
01/01/23
 
891

 
1,396

 
1,458

 
1,534

 
1,608

 
33,501

 
40,388

San Francisco Bay Area
 
6.50
 
 
6.50
 
 
06/01/37
  
17

 
18

 
19

 
20

 
22

 
751

 
847

Unamortized premiums
 
 
 
 
 
 
 
 
 
270

 
218

 
60

 
—

 
—

 
—

 
548

Secured notes payable average/subtotal
 
5.06
%
 
4.98
 
 
 
  
20,365

 
60,813

 
248,173

 
123,808

 
3,609

 
140,743

 
597,511

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 Unsecured Senior Bank Term Loan
 
L+1.20
%
 
1.40
 
 
07/31/16
 
—

 
—

 
500,000

 
—

 
—

 
—

 
500,000

2019 Unsecured Senior Bank Term Loan
 
L+1.20
%
 
2.05
 
 
01/03/19
 
—

 
—

 
—

 
—

 
—

 
600,000

 
600,000

$1.5 billion unsecured senior line of credit
 
L+1.10
%
(7) 
1.25
 
 
01/03/19
  
—

 
—

 
—

 
—

 
—

 
506,000

 
506,000

Unsecured senior notes payable
 
4.60
%
 
4.61
 
 
04/01/22
  
—

 
—

 
—

 
—

 
—

 
550,000

 
550,000

Unsecured senior notes payable
 
3.90
%
 
3.94
 
 
06/15/23
  
—

 
—

 
—

 
—

 
—

 
500,000

 
500,000

Unamortized discounts
 
 
 
 
 
 
 
 
 
(123
)
 
(170
)
 
(176
)
 
(184
)
 
(192
)
 
(885
)
 
(1,730
)
Unsecured debt average/subtotal
 
 
 
 
2.66
 
 
 
  
(123
)
 
(170
)
 
499,824

 
(184
)
 
(192
)
 
2,155,115

 
2,654,270

Average/total
 
 
 
 
3.09
%
 
 
  
$
20,242

 
$
60,643

 
$
747,997

 
$
123,624

 
$
3,417

 
$
2,295,858

 
$
3,251,781

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balloon payments
 
 
 
 
 
 
 
 
  
$
13,722

 
$
51,919

 
$
743,364

 
$
120,422

 
$
—

 
$
2,286,611

 
$
3,216,038

Principal amortization
 
 
 
 
 
 
 
 
  
6,520

 
8,724

 
4,633

 
3,202

 
3,417

 
9,247

 
35,743

Total consolidated debt
 
 
 
 
 
 
 
 
  
$
20,242

 
$
60,643

 
$
747,997

 
$
123,624

 
$
3,417

 
$
2,295,858

 
$
3,251,781

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate/hedged variable-rate debt
 
 
 
 
 
 
 
 
  
$
20,062

 
$
14,440

 
$
591,578

 
$
3,202

 
$
3,417

 
$
1,789,858

 
$
2,422,557

Unhedged variable-rate debt
 
 
 
 
 
 
 
 
  
180

 
46,203

 
156,419

 
120,422

 
—

 
506,000

 
829,224

Total consolidated debt
 
 
 
 
 
 
 
 
  
$
20,242

 
$
60,643

 
$
747,997

 
$
123,624

 
$
3,417

 
$
2,295,858

 
$
3,251,781


(1)
Represents the weighted average contractual interest rate as of the end of the period plus the impact of debt premiums/discounts and our interest rate swap agreements. The weighted average interest rate excludes bank fees and amortization of loan fees.
(2)
Includes any extension options that we control.
(3)
Secured note payable was repaid on April 2, 2014.
(4)
Secured construction loan with aggregate commitments of $55.0 million. We have two, one-year options to extend the stated maturity date to July 1, 2017, subject to certain conditions.
(5)
Secured construction loan with aggregate commitments of $36.0 million. We have two, one-year options to extend the stated maturity date to June 1, 2018, subject to certain conditions.
(6)
Secured construction loan with aggregate commitments of $250.4 million. We have a one-year option to extend the stated maturity date to August 23, 2018, subject to certain conditions.
(7)
In addition to the stated rate, the unsecured senior line of credit is subject to an annual facility fee of 0.20%.


18


5.
Secured and unsecured senior debt (continued)

Interest expense

The following table summarizes interest expense for the three months ended March 31, 2014 and 2013 (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Gross interest
$
31,136

 
$
32,041

Capitalized interest
(12,013
)
 
(14,021
)
Interest expense
$
19,123

 
$
18,020


Repayment of secured note payable

In January 2014, we repaid our $208.7 million secured note payable related to Alexandria Technology Square®. Our joint venture partner funded $20.9 million of the proceeds required to repay the secured note payable.

Secured construction loans

The following table summarizes our secured construction loans as of March 31, 2014 (dollars in thousands):
Market
 
Stated Rate
 
Maturity Date
 
Outstanding Loan Balance
 
Available Balance
 
Total Aggregate Commitments
San Francisco Bay Area
 
 
L+1.50
%
 
7/1/2015
(1) 
 
$
46,203

 
$
8,797

 
$
55,000

San Francisco Bay Area
 
 
L+1.40
%
 
6/1/2016
(2) 
 
6,419

 
29,581

 
36,000

Greater Boston
 
 
L+1.35
%
 
8/23/2017
(3) 
 
44,422

 
205,978

 
250,400

 
 
 
 
 
 
 
 
 
 
$
97,044

 
$
244,356

 
$
341,400


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

Secured construction loan of unconsolidated joint venture

We have a 27.5% equity interest in an unconsolidated joint venture that is currently developing a building in the Longwood Medical Area of the Greater Boston market. The remaining construction costs will be funded primarily from a non-recourse secured construction loan to the joint venture with aggregate commitments of $213.2 million and an outstanding balance of $107.0 million as of March 31, 2014. See Note 3 – Investments in Real Estate, Net, to our consolidated financial statements (unaudited) appearing elsewhere in this quarterly report on Form 10-Q for further information.


19

6.
Interest rate swap agreements

We use interest rate swap agreements to hedge the variable cash flows associated with certain of our existing LIBOR-based variable-rate debt, including our unsecured senior line of credit and unsecured senior bank term loans.  The ineffective portion of the change in fair value of our interest rate swap agreements is required to be recognized directly in earnings.  During the three months ended March 31, 2014 and 2013, our interest rate swap agreements were 100% effective; because of this, no hedge ineffectiveness was recognized in earnings.  Changes in fair value, including accrued interest and adjustments for non-performance risk, on the effective portion of our interest rate swap agreements that are designated and that qualify as cash flow hedges are classified in accumulated other comprehensive loss. Amounts classified in accumulated other comprehensive loss are subsequently reclassified into earnings in the period during which the hedged transactions affect earnings.  During the next 12 months, we expect to reclassify approximately $3.6 million in accumulated other comprehensive loss to interest expense as an increase to interest expense. As of March 31, 2014, and December 31, 2013, the fair values of our interest rate swap agreements aggregating an asset balance were classified in other assets and those aggregating a liability balance were classified in accounts payable, accrued expenses, and tenant security deposits, based upon their respective fair values. Under our interest rate swap agreements, we have no collateral posting requirements.

As of March 31, 2014, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $2.4 million. The Company has agreements with certain of its derivative counterparties that contain a provision where (i) the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness; or (ii) if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. If the Company had breached any of these provisions at March 31, 2014, it could have been required to settle its obligations under the agreements at their termination value of $2.4 million.

We had the following outstanding interest rate swap agreements that were designated as cash flow hedges of interest rate risk as of March 31, 2014 (dollars in thousands):
Effective Date
 
Maturity Date
 
Number of Contracts
 
Weighted Average Interest Pay
Rate (1)
 
Fair Value as of 3/31/14
 
Notional Amount in Effect as of
 
 
 
 
 
3/31/14
 
12/31/14
 
12/31/15
 
12/31/16
December 31, 2013
 
December 31, 2014
 
2
 
0.98%
 
$
(3,090
)
 
$
500,000

 
$
—

 
$
—

 
$
—

December 31, 2013
 
March 31, 2015
 
2
 
0.23%
 
(126
)
 
250,000

 
250,000

 
—

 
—

March 31, 2014
 
March 31, 2015
 
4
 
0.21%
 
(48
)
 
200,000

 
200,000

 
—

 
—

December 31, 2014
 
March 31, 2016
 
3
 
0.53%
 
394

 
—

 
500,000

 
500,000

 
—

March 31, 2016
 
March 31, 2017
 
3
 
1.40%
 
1,651

 
—

 
—

 
—

 
500,000

Total
 
 
 
 
 
 
 
$
(1,219
)
 
$
950,000

 
$
950,000

 
$
500,000

 
$
500,000


(1)
In addition to the interest pay rate, borrowings outstanding as of March 31, 2014, under our unsecured senior bank term loans include an applicable margin of 1.20% and borrowings outstanding under our unsecured senior line of credit include an applicable margin of 1.10%.

20



7.
Fair value measurements

We are required to disclose fair value information about all financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value.  We measure and disclose the estimated fair value of financial assets and liabilities utilizing a fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions.  This hierarchy consists of three broad levels, as follows: (i) quoted prices in active markets for identical assets or liabilities, (ii) “significant other observable inputs,” and (iii) “significant unobservable inputs.”  “Significant other observable inputs” can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.  “Significant unobservable inputs” are typically based on an entity’s own assumptions, since there is little, if any, related market activity.  In instances in which the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level of input that is significant to the fair value measurement in its entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.  There were no transfers between the levels in the fair value hierarchy during the three months ended March 31, 2014 and 2013.

The following tables set forth the assets and liabilities that we measure at fair value on a recurring basis by level within the fair value hierarchy as of March 31, 2014, and December 31, 2013 (in thousands):
 
 
 
 
March 31, 2014
Description
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Assets:
 
 
 
 
 
 
 
 
Available-for-sale securities
 
$
32,977

 
$
32,977

 
$
—

 
$
—

Interest rate swap agreements
 
$
2,045

 
$
—

 
$
2,045

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
3,264

 
$
—

 
$
3,264

 
$
—

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

 
$
4,469

 
$
—

 
$
—

Interest rate swap agreements
 
$
2,870

 
$
—

 
$
2,870

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
6,191

 
$
—

 
$
6,191

 
$
—


Cash and cash equivalents, restricted cash, tenant receivables, other assets, accounts payable, accrued expenses, and tenant security deposits approximate fair value.  Our “available-for-sale” securities and our interest rate swap agreements, respectively, have been recognized at fair value.  See Note 6 – Interest Rate Swap Agreements for further details on our interest rate swap agreements. The fair values of our secured notes payable, unsecured senior notes payable, unsecured senior line of credit, and unsecured senior bank term loans were estimated using widely accepted valuation techniques, including discounted cash flow analyses of “significant other observable inputs” such as available market information on discount and borrowing rates with similar terms, maturities, and credit ratings.  Because the valuations of our financial instruments are based on these types of estimates, the actual fair value of our financial instruments may differ materially if our estimates do not prove to be accurate.  Additionally, the use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.


21


7.
Fair value measurements (continued)

As of March 31, 2014, and December 31, 2013, the book and fair values of our marketable equity securities, interest rate swap agreements, secured notes payable, unsecured senior notes payable, unsecured senior line of credit, and unsecured senior bank term loans were as follows (in thousands):
 
March 31, 2014
 
December 31, 2013
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Marketable equity securities
$
32,977

 
$
32,977

 
$
4,469

 
$
4,469

Interest rate swap agreements
$
2,045

 
$
2,045

 
$
2,870

 
$
2,870

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate swap agreements
$
3,264

 
$
3,264

 
$
6,191

 
$
6,191

Secured notes payable
$
597,511

 
$
617,084

 
$
708,831

 
$
736,772

Unsecured senior notes payable
$
1,048,270

 
$
1,053,170

 
$
1,048,230

 
$
1,043,125

Unsecured senior line of credit
$
506,000

 
$
500,860

 
$
204,000

 
$
193,714

Unsecured senior bank term loans
$
1,100,000

 
$
1,099,448

 
$
1,100,000

 
$
1,099,897




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8.
Earnings per share

We use income from continuing operations attributable to Alexandria’s common stockholders as the “control number” in determining whether potential common shares 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 FASB, gains or losses on sales or disposals by a REIT that do not qualify as discontinued operations are classified below income from discontinued operations in the consolidated statements of income and included in the numerator for the computation of earnings per share for income from continuing operations.

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 cumulative convertible preferred stock (“Series D Preferred Stock”) is not a participating security, and is 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, during the period the securities were outstanding.

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, 2014 and 2013 (in thousands, except per share amounts):
 
Three Months Ended March 31,
 
2014
 
2013
Income from continuing operations
$
40,911

 
$
29,400

Net income attributable to noncontrolling interests
(1,195
)
 
(982
)
Dividends on preferred stock
(6,471
)
 
(6,471
)
Net income attributable to unvested restricted stock awards
(374
)
 
(342
)
Income from continuing operations attributable to Alexandria’s common stockholders – basic and diluted
32,871

 
21,605

(Loss) income from discontinued operations
(162
)
 
837

Net income attributable to Alexandria’s common stockholders – basic and diluted
$
32,709

 
$
22,442

 
 
 
 
Weighted average shares of common stock outstanding – basic and diluted
71,073

 
63,161

 
 
 
 
Earnings per share attributable to Alexandria’s common stockholders – basic and diluted:
 
 
 
Continuing operations
$
0.46

 
$
0.35

Discontinued operations
—

 
0.01

Earnings per share – basic and diluted
$
0.46

 
$
0.36


For purposes of calculating diluted earnings per share, we did not assume conversion of our Series D Preferred Stock for the three months ended March 31, 2014 and 2013, since the impact was antidilutive to earnings per share attributable to Alexandria’s common stockholders from continuing operations during those periods.


23



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

The following table presents income from continuing and discontinued operations attributable to Alexandria Real Estate Equities, Inc. for the three months ended March 31, 2014 and 2013 (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Income from continuing operations
$
40,911

 
$
29,400

Less: net income attributable to noncontrolling interests
(1,195
)
 
(982
)
Income from continuing operations attributable to Alexandria Real Estate Equities, Inc.
39,716

 
28,418

(Loss) income from discontinued operations
(162
)
 
837

Less: net income from discontinued operations attributable to noncontrolling interests
—

 
—

Net income attributable to Alexandria Real Estate Equities, Inc.
$
39,554

 
$
29,255


10.
Stockholders’ equity

Dividends

In March 2014, we declared cash dividends on our common stock for the first quarter of 2014, aggregating $50.2 million, or $0.70 per share.  In March 2014, we also declared cash dividends on our Series D Preferred Stock for the first quarter of 2014, aggregating approximately $4.4 million, or $0.4375 per share.  Additionally, we declared cash dividends on our Series E cumulative redeemable preferred stock (“Series E Preferred Stock”) for the first quarter of 2014, aggregating approximately $2.1 million, or $0.403125 per share.  In April 2014, we paid the cash dividends on our common stock, Series D Preferred Stock, and Series E Preferred Stock for the first quarter of 2014.

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 Loss on Interest Rate
Swap Agreements
 
Unrealized Loss on Foreign Currency Translation
 
Total
Balance as of December 31, 2013
$
1,590

 
$
(3,321
)
 
$
(34,473
)
 
$
(36,204
)
Other comprehensive income (loss) before reclassifications
18,779

 
5,592

 
(3,106
)
 
21,265

Amounts reclassified from other comprehensive income
—

 
(3,490
)
 
—

 
(3,490
)
Net other comprehensive income (loss)
18,779

 
2,102

 
(3,106
)
 
17,775

Balance as of March 31, 2014
$
20,369

 
$
(1,219
)
 
$
(37,579
)
 
$
(18,429
)

Preferred stock and excess stock authorizations

Our charter authorizes the issuance of up to 100.0 million shares of preferred stock, of which 15.2 million shares were issued and outstanding as of March 31, 2014.  In addition, 200.0 million shares of “excess stock” (as defined in our charter) are authorized, none of which were issued and outstanding as of March 31, 2014.


24



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 three development parcels as of March 31, 2014, and are included in our 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 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 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, 2014, and December 31, 2013, our redeemable noncontrolling interest balances were $14.4 million and $14.4 million, respectively.  Our remaining noncontrolling interests, aggregating $67.4 million and $47.7 million as of March 31, 2014, and December 31, 2013, respectively, do not have rights to require us to purchase their ownership interests and are classified in total equity in the accompanying consolidated balance sheets.

12.
Discontinued operations

The following is a summary of net assets of discontinued operations and (loss) income from discontinued operations (in thousands):
 
March 31, 2014
 
December 31, 2013
Properties “held for sale,” net
$
7,653

 
$
7,644

Other assets
157

 
103

Total assets
7,810

 
7,747

 
 

 
 
Total liabilities
(132
)
 
(266
)
Net assets of discontinued operations
$
7,678

 
$
7,481


 
 
Three Months Ended March 31,
 
 
2014
 
2013
Total revenues
 
$
—

 
$
3,792

Operating expenses
 
(162
)
 
(1,449
)
Total revenues less operating expenses from discontinued operations
 
(162
)
 
2,343

Depreciation expense
 
—

 
(1,166
)
Loss on sale of real estate
 
—

 
(340
)
(Loss) income from discontinued operations (1)
 
$
(162
)
 
$
837


(1)
(Loss) income from discontinued operations includes the results of operations of four properties that were classified as “held for sale” as of March 31, 2014, as well as the results of operations (prior to disposition) and loss on sale of real estate attributable to seven properties sold during the period from January 1, 2013, to March 31, 2014.



25



13.
Subsequent events

Amended and extended employment agreement with Mr. Marcus

In April 2014, the Board of Directors amended and extended the term of the employment agreement with Joel S. Marcus through December 31, 2016, subject to an extension to December 31, 2018, in the form of an option, exercisable by either the Company or Mr. Marcus, for Mr. Marcus to serve as full-time Executive Chairman. We believe changes in compensation arrangements appropriately address expressed concerns on the 2013 non-binding say-on-pay vote, and better align pay-for-performance, while at the same time continuing to retain Mr. Marcus’ highly valuable services.

Acquisition of 500 Townsend Street

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


26

14.
Condensed consolidating financial information

Alexandria Real Estate Equities, Inc. (the “Issuer”) has sold certain debt securities registered under the Securities Act, as amended, that are fully and unconditionally guaranteed by Alexandria Real Estate Equities, L.P. (the “LP” or the “Guarantor Subsidiary”), an indirectly 100% owned subsidiary of the Issuer. The Company’s other subsidiaries, including, but not limited to, the subsidiaries that own substantially all of its real estate (collectively, the “Combined Non-Guarantor Subsidiaries”) will not provide a guarantee of such securities, including the subsidiaries that are partially or 100% owned by the LP. The following condensed consolidating financial information presents the condensed consolidating balance sheets as of March 31, 2014, and December 31, 2013, and the condensed consolidating statements of income, comprehensive income, and cash flows for the three months ended March 31, 2014 and 2013, for the Issuer, the Guarantor Subsidiary, the Combined Non-Guarantor Subsidiaries, the eliminations necessary to arrive at the information for Alexandria Real Estate Equities, Inc. on a consolidated basis, and consolidated amounts. In presenting the condensed consolidating financial statements, the equity method of accounting has been applied to (i) the Issuer’s interests in the Guarantor Subsidiary and the Combined Non-Guarantor Subsidiaries, (ii) the Guarantor Subsidiary’s interests in the Combined Non-Guarantor Subsidiaries, and (iii) the Combined Non-Guarantor Subsidiaries’ interests in the Guarantor Subsidiary, where applicable, even though all such subsidiaries meet the requirements to be consolidated under GAAP. All intercompany balances and transactions between the Issuer, the Guarantor Subsidiary, and the Combined Non-Guarantor Subsidiaries have been eliminated, as shown in the column “Eliminations.” All assets and liabilities have been allocated to the Issuer, the Guarantor Subsidiary, and the Combined Non-Guarantor Subsidiaries generally based on legal entity ownership.


27


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Balance Sheet
as of March 31, 2014
(In thousands)
(Unaudited)

 
Alexandria Real Estate Equities, Inc.
(Issuer)
 
Alexandria
Real Estate
Equities, L.P.
(Guarantor
Subsidiary)
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Investments in real estate, net
$
—

 
$
—

 
$
6,930,262

 
$
—

 
$
6,930,262

Cash and cash equivalents
36,379

 
—

 
38,591

 
—

 
74,970

Restricted cash
54

 
—

 
30,400

 
—

 
30,454

Tenant receivables
—

 
—

 
10,619

 
—

 
10,619

Deferred rent
—

 
—

 
202,087

 
—

 
202,087

Deferred leasing and financing costs, net
35,051

 
—

 
157,567

 
—