2Q15 - 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015
OR
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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)
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| | |
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.
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Large accelerated filer ý | 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 July 15, 2015, 72,307,596 shares of common stock, par value $.01 per share, were outstanding.
TABLE OF CONTENTS
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| FINANCIAL STATEMENTS (UNAUDITED) | |
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| Consolidated Balance Sheets as of June 30, 2015, and December 31, 2014 | |
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| Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014 | |
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| Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014 | |
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| Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests for the Six Months Ended June 30, 2015 | |
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| Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 | |
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| Notes to Consolidated Financial Statements | |
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GLOSSARY
The following abbreviations or acronyms that may be used in this document shall have the adjacent meanings set forth below:
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ABR | Annualized Base Rent |
AFFO | Adjusted Funds from Operations |
bps | Basis Points |
CIP | Construction in Progress |
EBITDA | Earnings before Interest, Taxes, Depreciation, and Amortization |
EPS | Earnings per Share |
FASB | Financial Accounting Standards Board |
FFO | Funds from Operations |
GAAP | U.S. Generally Accepted Accounting Principles |
HVAC | Heating, Ventilation, and Air Conditioning |
LEED® | Leadership in Energy and Environmental Design |
LIBOR | London Interbank Offered Rate |
NAREIT | National Association of Real Estate Investment Trusts |
NAV | Net Asset Value |
NBV | Net Book Value |
NOI | Net Operating Income |
NYSE | New York Stock Exchange |
REIT | Real Estate Investment Trust |
RSF | Rentable Square Feet/Foot |
SEC | Securities and Exchange Commission |
SoMa | South of Market (submarket of the San Francisco market) |
U.S. | United States |
VIE | Variable Interest Entity |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Alexandria Real Estate Equities, Inc.
Consolidated Balance Sheets
(In thousands)
(Unaudited)
|
| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
Assets | | | |
Investments in real estate | $ | 7,442,875 |
| | $ | 7,226,016 |
|
Cash and cash equivalents | 68,617 |
| | 86,011 |
|
Restricted cash | 44,191 |
| | 26,884 |
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Tenant receivables | 9,279 |
| | 10,548 |
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Deferred rent | 257,427 |
| | 234,124 |
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Deferred leasing and financing costs | 210,709 |
| | 201,798 |
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Investments | 360,614 |
| | 236,389 |
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Other assets | 131,179 |
| | 114,266 |
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Total assets | $ | 8,524,891 |
| | $ | 8,136,036 |
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| | | |
Liabilities, Noncontrolling Interests, and Equity | | | |
Secured notes payable | $ | 771,435 |
| | $ | 652,209 |
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Unsecured senior notes payable | 1,747,531 |
| | 1,747,370 |
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Unsecured senior line of credit | 624,000 |
| | 304,000 |
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Unsecured senior bank term loans | 950,000 |
| | 975,000 |
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Accounts payable, accrued expenses, and tenant security deposits | 531,612 |
| | 489,085 |
|
Dividends payable | 61,194 |
| | 58,814 |
|
Total liabilities | 4,685,772 |
| | 4,226,478 |
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| | | |
Commitments and contingencies |
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| |
|
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| | | |
Redeemable noncontrolling interests | 14,248 |
| | 14,315 |
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| | | |
Alexandria Real Estate Equities, Inc.’s stockholders’ equity: | | | |
Series D cumulative convertible preferred stock | 237,163 |
| | 237,163 |
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Series E cumulative redeemable preferred stock | 130,000 |
| | 130,000 |
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Common stock | 717 |
| | 715 |
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Additional paid-in capital | 3,371,016 |
| | 3,461,189 |
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Accumulated other comprehensive income (loss) | 83,980 |
| | (628 | ) |
Alexandria’s stockholders’ equity | 3,822,876 |
| | 3,828,439 |
|
Noncontrolling interests | 1,995 |
| | 66,804 |
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Total equity | 3,824,871 |
| | 3,895,243 |
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Total liabilities, noncontrolling interests, and equity | $ | 8,524,891 |
| | $ | 8,136,036 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenues: | | | | | | | |
Rental | $ | 151,805 |
| | $ | 134,992 |
| | $ | 295,413 |
| | $ | 265,562 |
|
Tenant recoveries | 49,594 |
| | 40,944 |
| | 97,988 |
| | 82,626 |
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Other income | 2,757 |
| | 466 |
| | 7,508 |
| | 4,400 |
|
Total revenues | 204,156 |
| | 176,402 |
| | 400,909 |
| | 352,588 |
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| | | | | | | |
Expenses: | | | | | | | |
Rental operations | 62,250 |
| | 52,353 |
| | 123,473 |
| | 104,860 |
|
General and administrative | 14,989 |
| | 13,836 |
| | 29,376 |
| | 27,060 |
|
Interest | 26,668 |
| | 17,433 |
| | 49,904 |
| | 36,556 |
|
Depreciation and amortization | 62,171 |
| | 57,314 |
| | 121,091 |
| | 107,735 |
|
Impairment of real estate | — |
| | — |
| | 14,510 |
| | — |
|
Loss on early extinguishment of debt | 189 |
| | — |
| | 189 |
| | — |
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Total expenses | 166,267 |
| | 140,936 |
| | 338,543 |
| | 276,211 |
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| | | | | | | |
Equity in earnings of unconsolidated joint ventures | 541 |
| | — |
| | 1,115 |
| | — |
|
Income from continuing operations | 38,430 |
| | 35,466 |
| | 63,481 |
| | 76,377 |
|
Loss from discontinued operations | — |
| | (147 | ) | | (43 | ) | | (309 | ) |
Gain on sales of real estate – land parcels | — |
| | 797 |
| | — |
| | 797 |
|
Net income | 38,430 |
| | 36,116 |
| | 63,438 |
| | 76,865 |
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| | | | | | | |
Dividends on preferred stock | (6,246 | ) | | (6,472 | ) | | (12,493 | ) | | (12,943 | ) |
Net income attributable to noncontrolling interests | (263 | ) | | (1,307 | ) | | (755 | ) | | (2,502 | ) |
Net income attributable to unvested restricted stock awards | (630 | ) | | (405 | ) | | (1,113 | ) | | (779 | ) |
Net income attributable to Alexandria’s common stockholders | $ | 31,291 |
| | $ | 27,932 |
| | $ | 49,077 |
| | $ | 60,641 |
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EPS attributable to Alexandria’s common stockholders – basic and diluted: | | | | | | | |
Continuing operations | $ | 0.44 |
| | $ | 0.39 |
| | $ | 0.69 |
| | $ | 0.85 |
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Discontinued operations | — |
| | — |
| | — |
| | — |
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EPS – basic and diluted | $ | 0.44 |
| | $ | 0.39 |
| | $ | 0.69 |
| | $ | 0.85 |
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Dividends declared per share of common stock | $ | 0.77 |
| | $ | 0.72 |
| | $ | 1.51 |
| | $ | 1.42 |
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The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net income | $ | 38,430 |
| | $ | 36,116 |
| | $ | 63,438 |
| | $ | 76,865 |
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Other comprehensive income: | | | | | | | |
Unrealized gains (losses) on marketable securities: | | | | | | | |
Unrealized holding gains (losses) arising during the period | 55,401 |
| | (2,734 | ) | | 83,836 |
| | 16,045 |
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Reclassification adjustment for losses included in net income | 1,362 |
| | 406 |
| | 2,465 |
| | 406 |
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Unrealized gains (losses) on marketable securities, net | 56,763 |
| | (2,328 | ) | | 86,301 |
| | 16,451 |
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Unrealized (losses) gains on interest rate swap agreements: | | | | | | | |
Unrealized interest rate swap losses arising during the period | (1,225 | ) | | (2,526 | ) | | (4,238 | ) | | (3,914 | ) |
Reclassification adjustment for amortization of losses to interest expense included in net income | 710 |
| | 1,123 |
| | 1,215 |
| | 4,613 |
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Unrealized (losses) gains on interest rate swap agreements, net | (515 | ) | | (1,403 | ) | | (3,023 | ) | | 699 |
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Unrealized (losses) gains on foreign currency translation: | | | | | | | |
Unrealized foreign currency translation (losses) gains arising during the period | (1,507 | ) | | 5,915 |
| | (7,778 | ) | | 2,809 |
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Reclassification adjustment for losses included in net income | — |
| | — |
| | 9,236 |
| | — |
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Unrealized (losses) gains on foreign currency translation, net | (1,507 | ) | | 5,915 |
| | 1,458 |
| | 2,809 |
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Total other comprehensive income | 54,741 |
| | 2,184 |
| | 84,736 |
| | 19,959 |
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Comprehensive income | 93,171 |
| | 38,300 |
| | 148,174 |
| | 96,824 |
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Less: comprehensive income attributable to noncontrolling interests | (237 | ) | | (1,307 | ) | | (883 | ) | | (2,502 | ) |
Comprehensive income attributable to Alexandria’s common stockholders | $ | 92,934 |
| | $ | 36,993 |
| | $ | 147,291 |
| | $ | 94,322 |
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The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests
(Dollars in thousands)
(Unaudited)
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| | 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) Income | | Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests |
Balance as of December 31, 2014 | | $ | 237,163 |
| | $ | 130,000 |
| | 71,463,876 |
| | $ | 715 |
| | $ | 3,461,189 |
| | $ | — |
| | $ | (628 | ) | | $ | 66,804 |
| | $ | 3,895,243 |
| | $ | 14,315 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 62,683 |
| | — |
| | 227 |
| | 62,910 |
| | 528 |
|
Total other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 84,608 |
| | 128 |
| | 84,736 |
| | — |
|
Contributions by noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 340 |
| | 340 |
| | — |
|
Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (595 | ) |
Issuances of common stock | | — |
| | — |
| | 56,874 |
| | 1 |
| | 5,051 |
| | — |
| | — |
| | — |
| | 5,052 |
| | — |
|
Issuances pursuant to stock plan | | — |
| | — |
| | 168,054 |
| | 1 |
| | 12,032 |
| | — |
| | — |
| | — |
| | 12,033 |
| | — |
|
Purchase of noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | (48,463 | ) | | — |
| | — |
| | (65,504 | ) | | (113,967 | ) | | — |
|
Dividends declared on common stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (108,983 | ) | | — |
| | — |
| | (108,983 | ) | | — |
|
Dividends declared on preferred stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (12,493 | ) | | — |
| | — |
| | (12,493 | ) | | — |
|
Distributions in excess of earnings | | — |
| | — |
| | — |
| | — |
| | (58,793 | ) | | 58,793 |
| | — |
| | — |
| | — |
| | — |
|
Balance as of June 30, 2015 | | $ | 237,163 |
| | $ | 130,000 |
| | 71,688,804 |
| | $ | 717 |
| | $ | 3,371,016 |
| | $ | — |
| | $ | 83,980 |
| | $ | 1,995 |
| | $ | 3,824,871 |
| | $ | 14,248 |
|
The accompanying notes are an integral part of these consolidated financial statements.
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Alexandria Real Estate Equities, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
|
| Six Months Ended June 30, |
| 2015 | | 2014 |
Operating Activities | | | |
Net income | $ | 63,438 |
| | $ | 76,865 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 121,091 |
| | 107,735 |
|
Loss on early extinguishment of debt | 189 |
| | — |
|
Gain on sales of real estate – land parcels | — |
| | (797 | ) |
Impairment of real estate | 14,510 |
| | — |
|
Equity in earnings from unconsolidated joint ventures | (1,115 | ) | | — |
|
Distributions of earnings from unconsolidated joint ventures | 648 |
| | — |
|
Amortization of loan fees | 5,723 |
| | 5,304 |
|
Amortization of debt (premiums) discounts | (182 | ) | | 136 |
|
Amortization of acquired below-market leases | (1,939 | ) | | (1,434 | ) |
Deferred rent | (23,193 | ) | | (24,619 | ) |
Stock compensation expense | 7,744 |
| | 6,304 |
|
Investment gains | (13,710 | ) | | (6,225 | ) |
Investment losses | 7,877 |
| | 5,240 |
|
Changes in operating assets and liabilities: | | | |
Restricted cash | 110 |
| | — |
|
Tenant receivables | 1,243 |
| | (735 | ) |
Deferred leasing costs | (24,503 | ) | | (17,452 | ) |
Other assets | (4,921 | ) | | (5,916 | ) |
Accounts payable, accrued expenses, and tenant security deposits | (1,610 | ) | | 85 |
|
Net cash provided by operating activities | 151,400 |
| | 144,491 |
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Investing Activities | | | |
Proceeds from sales of real estate | 92,455 |
| | 17,868 |
|
Additions to real estate | (226,302 | ) | | (210,792 | ) |
Purchase of real estate | (137,493 | ) | | (97,785 | ) |
Deposits for investing activities | (15,501 | ) | | — |
|
Change in restricted cash related to construction projects | — |
| | 5,650 |
|
Investment in unconsolidated real estate joint ventures | (3,182 | ) | | (1,405 | ) |
Additions to investments | (52,738 | ) | | (25,358 | ) |
Sales of investments | 22,474 |
| | 8,794 |
|
Repayment of notes receivable | 4,247 |
| | 29,851 |
|
Net cash used in investing activities | $ | (316,040 | ) | | $ | (273,177 | ) |
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Alexandria Real Estate Equities, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
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| Six Months Ended June 30, |
| 2015 | | 2014 |
Financing Activities | | | |
Borrowings from secured notes payable | $ | 42,867 |
| | $ | 77,762 |
|
Repayments of borrowings from secured notes payable | (10,075 | ) | | (219,427 | ) |
Borrowings from unsecured senior line of credit | 915,000 |
| | 637,000 |
|
Repayments of borrowings from unsecured senior line of credit | (595,000 | ) | | (270,000 | ) |
Repayments of borrowings from unsecured senior bank term loans | (25,000 | ) | | — |
|
Change in restricted cash related to financing activities | (1,520 | ) | | 1,212 |
|
Payment of loan fees | (3,559 | ) | | (310 | ) |
Proceeds from the issuance of common stock | 5,052 |
| | — |
|
Dividends on common stock | (106,603 | ) | | (98,867 | ) |
Dividends on preferred stock | (12,493 | ) | | (12,943 | ) |
Contributions by noncontrolling interests | 340 |
| | 19,410 |
|
Distributions to and purchases of noncontrolling interests | (61,890 | ) | | (1,983 | ) |
Net cash provided by financing activities | 147,119 |
| | 131,854 |
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| | | |
Effect of foreign exchange rate changes on cash and cash equivalents | 127 |
| | 837 |
|
| | | |
Net (decrease) increase in cash and cash equivalents | (17,394 | ) | | 4,005 |
|
Cash and cash equivalents as of the beginning of period | 86,011 |
| | 57,696 |
|
Cash and cash equivalents as of the end of period | $ | 68,617 |
| | $ | 61,701 |
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| | | |
Supplemental Disclosure of Cash Flow Information | | | |
Cash paid during the period for interest, net of interest capitalized | $ | 44,332 |
| | $ | 31,922 |
|
| | | |
Non-Cash Investing Activities | | | |
Change in accrued construction | $ | (27,469 | ) | | $ | 592 |
|
Assumption of secured notes payable in connection with purchase of real estate | $ | (82,000 | ) | | $ | (48,329 | ) |
| | | |
Non-Cash Financing Activities | | | |
Payable for purchase of noncontrolling interest | $ | (52,672 | ) | | $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
As used in this quarterly report on Form 10-Q, references to the “Company,” “Alexandria,” “ARE,” “we,” “us,” and “our” refer to Alexandria Real Estate Equities Inc., and its consolidated subsidiaries.
Alexandria Real Estate Equities, Inc. (NYSE:ARE) is a self-administered, and self-managed office REIT uniquely focused on collaborative science and technology campuses in urban innovation clusters with a total market capitalization of $10.7 billion as of June 30, 2015, and an asset base of 31.1 million square feet, including 18.8 million RSF of operating and current value-creation projects, as well as an additional 12.3 million square feet of near-term and future ground-up value-creation development projects. Alexandria pioneered this niche in 1994 and has since established a dominant market presence in AAA locations, including Greater Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and Research Triangle Park. Alexandria is known for its high-quality and diverse client tenant base. Alexandria has a longstanding and proven track record of developing Class A assets clustered in urban science and technology campuses that provide its innovative client tenants with highly dynamic and collaborative environments that enhance their ability to successfully recruit and retain world-class talent and inspire productivity, efficiency, creativity, and success. 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 our website at www.are.com.
Our asset base consisted of the following, as of June 30, 2015:
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| | | |
| | Square Feet |
Operating properties | | 16,822,194 |
|
Current value-creation projects (includes unconsolidated joint ventures) | | 1,995,729 |
|
Total operating and current value-creation projects | | 18,817,923 |
|
| | |
Near-term value-creation projects (CIP) | | 2,026,669 |
|
Future value-creation projects: | | |
North America | | 3,807,375 |
|
Asia | | 6,419,707 |
|
| | 10,227,082 |
|
| | |
Near-term and future value-creation projects | | 12,253,751 |
|
| | |
Total | | 31,071,674 |
|
As of June 30, 2015:
| |
• | Investment-grade client tenants represented approximately 53% of our total annualized base rent; |
| |
• | Approximately 94% 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 indices; |
| |
• | Approximately 96% of our leases (on an RSF basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area, and other operating expenses (including increases thereto) in addition to base rent; and |
| |
• | Approximately 94% of our leases (on an RSF basis) provided for the recapture of certain capital expenditures (such as HVAC systems maintenance and/or replacement, roof replacement, and parking lot resurfacing) that we believe would typically be borne by the landlord in traditional office leases. |
Any references to the number of buildings, square footage, number of leases, occupancy, and any amounts derived from these values in the notes to the consolidated financial statements are unaudited and outside the scope of our independent registered public accounting firm’s review of our interim consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.
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2. | Basis of presentation and summary of significant accounting policies (continued) |
| |
2. | Basis of presentation and summary of significant accounting policies |
We have prepared the accompanying interim consolidated financial statements in accordance with GAAP and in conformity with the rules and regulations of the SEC. In our opinion, the interim consolidated financial statements presented herein reflect all adjustments that are necessary to fairly present the interim consolidated financial statements. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. 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, 2014.
Basis of presentation and consolidation
The accompanying consolidated financial statements include the accounts of Alexandria Real Estate Equities, Inc. and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated.
In certain circumstances, we may enter into joint venture arrangements with outside partners. On a quarterly basis, we evaluate each joint venture arrangement under the VIE model, and if the entity is determined not to be a VIE, we then evaluate the entity under the voting model to determine if the entity should be consolidated.
Under the VIE model, an entity is determined to be a VIE if it has any of the following characteristics:
| |
• | The entity does not have sufficient equity to finance its activities without additional subordinated financial support; |
| |
• | The equity holders, as a group, lack the characteristics of a controlling financial interest; or |
| |
• | The legal entity is established with non-substantive voting rights. |
If an entity is determined to be a VIE, we evaluate whether we are the primary beneficiary using qualitative analyses. Factors considered include, but are not limited to, the purpose and design of the VIE, risks that the VIE was designed to create and pass through, the form of our ownership interest, our representation on the entity’s governing body, the size and seniority of our investment, our ability to participate in policy-making decisions, and the rights of the other investors to participate in the decision-making process and/or liquidate the venture, if applicable. We consolidate VIEs whenever we determine that we are the primary beneficiary.
If an entity is determined not to be a VIE, we then evaluate such entity under the voting model. Under the voting model, if we are the general partner or managing member, or have a similar role that can direct the operations of the entity, we have a presumption that we control the entity and we should consolidate regardless of our ownership percentage. If we determine that the other equity holders have any one of the following rights, it is assumed that we do not control the entity and therefore should not consolidate the entity: (i) the substantive ability to dissolve the entity or remove us from the lead role of the entity or (ii) substantive rights that allow them to participate in the activities that most significantly impact the entity’s economic performance.
As of June 30, 2015, we had two joint ventures that did not meet the requirements for consolidation and were accounted for under the equity method of accounting. Refer to Note 3 – “Investments in Real Estate,” appearing elsewhere in this quarterly report on Form 10-Q, for further information on our unconsolidated joint ventures.
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.
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2. | Basis of presentation and summary of significant accounting policies (continued) |
Investments in real estate and properties classified as “held-for-sale”
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 of an in-place lease, 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. Acquisition-related 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 terms 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 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: (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. Depreciation of assets ceases upon designation of a property as “held-for-sale.” Prior to our adoption of the new discontinued operations accounting standard on October 1, 2014, the operations of properties “held-for-sale” were classified as discontinued operations in our consolidated statements of income.
Subsequent to the adoption of the new discontinued operations accounting standard on October 1, 2014, if the disposal of the property represents a strategic shift that has (or will have) a major effect on our operations or financial results, such as (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, then the operations of the property “held-for-sale,” 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. The disposal of an individual property generally will not represent a strategic shift and therefore will typically not meet the criteria for classification as discontinued operations.
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2. | Basis of presentation and summary of significant accounting policies (continued) |
Impairment of long-lived assets
Long-lived assets to be held and used, including our rental properties, CIP, land held for development, 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, CIP, land held for development, and intangibles, are assessed by project and include significant fluctuations in estimated rental revenues less rental operating expenses, 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.”
On a quarterly basis, we review current activities and changes in the business conditions of all of our properties prior to and subsequent to the end of each quarter to determine the existence of any triggering events requiring an impairment analysis. If triggering events are identified, we review an estimate of the future undiscounted cash flows for the properties, including a probability-weighted approach if multiple outcomes are under consideration.
Investments
We hold equity investments in certain publicly traded companies and investments in certain privately held entities primarily involved in the 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 unless our interest in the entity is deemed to be 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 June 30, 2015, and December 31, 2014, our ownership percentage in the voting stock of each individual entity was less than 10%.
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 might 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.
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2. | Basis of presentation and summary of significant accounting policies (continued) |
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 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 or controls the physical use of the property.
Tenant recoveries related to reimbursement of real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, 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 tenant receivables and deferred rent arising from the straight-lining of rent. As of June 30, 2015, and December 31, 2014, we had no allowance for uncollectible tenant receivables and deferred rent.
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 client 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 science and technology industries, as well as in finance. Our research team is responsible for assessing and monitoring the credit quality of our client tenants and any material changes in their credit quality.
Other income
The following is a summary of the other income in the accompanying consolidated statements of income for the three and six months ended June 30, 2015 and 2014 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2015 | | 2014 | | 2015 | | 2014 |
Management fee income | | $ | 257 |
| | $ | 916 |
| | $ | 811 |
| | $ | 1,642 |
|
Interest and other income | | 379 |
| | 911 |
| | 864 |
| | 1,773 |
|
Investment income (loss) | | 2,121 |
| | (1,361 | ) | | 5,833 |
| | 985 |
|
Total other income | | $ | 2,757 |
| | $ | 466 |
| | $ | 7,508 |
| | $ | 4,400 |
|
Income taxes
We are organized and qualify as a REIT pursuant to the Internal Revenue Code (the “Code”). Under the Code, a REIT that distributes at least 90% of its REIT taxable income to its shareholders annually and meets certain other conditions is not subject to federal income taxes, but could be subject to certain state and local taxes. We distribute 100% of our taxable income annually; therefore, a provision for federal income taxes is not required. In addition to our REIT returns, we file federal, state, and local tax returns for our subsidiaries. We file with jurisdictions located in the U.S., Canada, India, China, and other international locations. Our tax returns are subject to routine examination in various jurisdictions for calendar years 2010 through 2013.
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2. | Basis of presentation and summary of significant accounting policies (continued) |
Recent accounting pronouncements
In February 2015, the FASB issued an Accounting Standards Update that requires reporting entities to evaluate whether they should consolidate certain legal entities. The Accounting Standards Update modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities and eliminates the presumption that a general partner should consolidate a limited partnership. This Accounting Standards Update affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related-party relationships. The Accounting Standards Update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. A reporting entity may apply the amendments in the Accounting Standards Update by (i) using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or (ii) applying the amendments retrospectively. We are currently assessing the potential impact that the adoption of the Accounting Standards Update will have on our consolidated financial statements.
In April 2015, the FASB issued an Accounting Standards Update that requires reporting entities to present debt issuance costs as a direct deduction from the face amount of the related note payable presented in the balance sheet. The Accounting Standards Update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. A reporting entity is required to apply the amendments in the Accounting Standards Update retrospectively to all prior periods. We are currently assessing the potential impact that the adoption of the Accounting Standards Update will have on our consolidated financial statements.
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3. | Investments in real estate |
Our investments in real estate consisted of the following as of June 30, 2015, and December 31, 2014 (in thousands):
|
| | | | | | | | |
| | June 30, 2015 | | December 31, 2014 |
Land (related to rental properties) | | $ | 683,670 |
| | $ | 624,681 |
|
Buildings and building improvements | | 6,690,157 |
| | 6,171,504 |
|
Other improvements | | 234,393 |
| | 192,128 |
|
Rental properties | | 7,608,220 |
| | 6,988,313 |
|
| | | | |
Current value-creation projects/Construction in progress (CIP): | | | | |
Current development in North America | | 409,619 |
| | 500,894 |
|
Current redevelopment in North America | | — |
| | 42,482 |
|
Current development in Asia | | — |
| | 14,065 |
|
| | 409,619 |
| | 557,441 |
|
| | | | |
Rental properties and current value-creation projects | | 8,017,839 |
| | 7,545,754 |
|
| | | | |
Near-term value-creation projects in North America (CIP): | | | | |
Alexandria Center® at Kendall Square – Binney Street (1) | | 140,488 |
| | 321,907 |
|
Other projects | | 105,623 |
| | 107,471 |
|
| | 246,111 |
| | 429,378 |
|
| | | | |
Future value-creation projects: | | | | |
North America | | 183,984 |
| | 175,175 |
|
Asia | | 78,911 |
| | 78,548 |
|
| | 262,895 |
| | 253,723 |
|
| | | | |
Near-term and future value-creation projects | | 509,006 |
| | 683,101 |
|
| | | | |
Value-creation pipeline | | 918,625 |
| | 1,240,542 |
|
| | | | |
Gross investments in real estate | | 8,526,845 |
| | 8,228,855 |
|
Equity method of accounting – unconsolidated joint ventures | | 121,055 |
| | 117,406 |
|
Gross investments in real estate – including unconsolidated joint ventures | | 8,647,900 |
| | 8,346,261 |
|
Less: accumulated depreciation | | (1,205,025 | ) | | (1,120,245 | ) |
Investments in real estate | | $ | 7,442,875 |
| | $ | 7,226,016 |
|
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(1) | Includes amounts related to 100 Binney Street as of June 30, 2015, and 50, 60, and 100 Binney Street as of December 31, 2014. |
Acquisitions
During the six months ended June 30, 2015, we acquired real estate and real estate related assets with an aggregate purchase price of $327.2 million, consisting of one operating property, including the assumption of debt, two land parcels, and the outstanding noncontrolling interest related to seven operating properties.
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3. | Investments in real estate (continued) |
Sales of real estate assets and related impairment charges
In June 2015, we completed the sale of 270 Third Street, a residential development project with 91 units at our Alexandria Center® at Kendall Square in our Cambridge submarket in Greater Boston, for a sales price of $43.0 million. The net proceeds of $25.5 million reflect the assumption by the buyer of the cost to complete the construction of $17.5 million. The net proceeds from the sale approximated our carrying amount.
During the three months ended March 31, 2015, we completed the sale of our land and land improvements at 661 University Avenue in Toronto, Canada, for $54.1 million. In December 2014, we recognized an impairment charge of $16.6 million to lower the carrying costs of this property to its estimated fair value less cost to sell, including an estimated $5.0 million foreign exchange loss. Also, during the three months ended March 31, 2015, we sold a 21,859 RSF rental property located in Pennsylvania for $1.9 million. The sales price less cost to sell for this property approximated its carrying value at the time of sale and resulted in no gain or loss on sale.
During the three months ended December 31, 2014, we placed into service a 175,000 RSF building in Hyderabad, India. We completed a probability-weighted cash flow analysis for this building, inclusive of the estimated costs to complete, and determined that the estimated undiscounted cash flows exceeded the carrying amount of the building as of December 31, 2014.
During the three months ended March 31, 2015, we determined that this building in Hyderabad, India, met the criteria for classification as “held-for-sale,” including, among others, the following: (i) management committed to sell the real estate and executed a purchase and sale agreement on March 23, 2015, and (ii) management determined that the sale was probable within one year. Upon classification as “held for sale,” we recognized an impairment charge of $14.5 million to lower the carrying costs of the real estate to its estimated fair value less cost to sell, including an estimated $4.2 million foreign exchange loss. On March 26, 2015, we completed the sale of the building to the Indian multispecialty healthcare provider for $12.4 million.
As a result of our sales in Canada and India discussed above, our statement of comprehensive income reflects an aggregate $9.2 million of losses that we realized during the six months ended June 30, 2015, related to foreign currency exchange translation losses, noted above, that were previously classified in accumulated other comprehensive income (loss) on our accompanying consolidated balance sheets.
Current value-creation development and redevelopment projects
As of June 30, 2015, we had eight ground-up development projects, including two unconsolidated joint venture development projects, in process in North America. The projects at completion will aggregate 2.6 million RSF. An aggregate of 2.0 million RSF are currently in construction in progress, with the remainder already placed into service.
Investments in unconsolidated joint ventures
Refer to our consolidation policy described in Note 2 – “Basis of Presentation and Summary of Significant Accounting Policies,” regarding the following two unconsolidated joint ventures.
360 Longwood Avenue
We are currently developing a building aggregating 413,536 RSF in our Longwood Medical submarket of the Greater Boston market through an unconsolidated joint venture. The cost at completion for this unconsolidated joint venture real estate project is approximately $350.0 million. As of June 30, 2015, the project was 63% leased and 209,628 RSF, or 51%, has been placed in service. The joint venture has a secured construction loan with commitments aggregating $213.2 million, $170.5 million of which was outstanding as of June 30, 2015. The remaining cost to complete the development is expected to be funded primarily from the remaining commitments of $42.7 million under the secured construction loan. The secured construction loan bears interest at LIBOR+3.75%, with a floor of 5.25%. The maturity date of the loan is April 1, 2017, with two, one-year options to extend the stated maturity date to April 1, 2019, subject to certain conditions.
We have a 27.5% interest in this unconsolidated joint venture that we account for under the equity method of accounting. Our investment under the equity method of accounting was $49.7 million as of June 30, 2015, and is classified in investments in real estate in our accompanying consolidated balance sheets.
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3. | Investments in real estate (continued) |
1455/1515 Third Street
In September 2014, Alexandria and Uber Technologies, Inc. (“Uber”), entered into a joint venture agreement and acquired two land parcels supporting the development of two buildings aggregating 422,980 RSF at 1455/1515 Third Street in the Mission Bay submarket of the San Francisco market for a total purchase price of $125.0 million. We have a 51% interest and Uber has a 49% interest in this unconsolidated joint venture. The purchase price was funded by contributions into the joint venture by Uber and us. We account for our investment in this joint venture under the equity method of accounting. Our investment under the equity method of accounting was $71.3 million as of June 30, 2015, and was classified in investments in real estate in our accompanying consolidated balance sheets. The project is expected to be funded by equity contributions from Uber and us. The joint venture may also fund a portion of the project with proceeds from a secured construction loan. The project is 100% leased to Uber for a 15-year term.
Near-term value-creation projects in North America (CIP)
Land undergoing predevelopment activities is classified as CIP and is undergoing activities prior to commencement of construction of aboveground building improvements. We generally will not commence ground-up development of any parcels without first securing pre-leasing for such space, except when there is solid market demand. If aboveground construction is not initiated at completion of predevelopment activities, the land parcel will be classified as future value-creation projects. 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-tenancy and multi-tenancy. As of June 30, 2015, we had $246.1 million of land undergoing predevelopment activities in North America aggregating 2.0 million square feet.
Predevelopment costs generally include the following activities prior to commencement of vertical construction:
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• | 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 |
| |
• | 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. |
Future value-creation projects
Future value-creation projects represent land that 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 June 30, 2015, we had $262.9 million of land held for future development supporting an aggregate of 10.2 million square feet of ground-up development.
Our investments in privately held entities are primarily accounted for under the cost method. Our investments in publicly traded companies are principally marketable equity securities that are accounted for as “available-for-sale” marketable equity securities that are carried at their fair values. Investments in “available-for-sale” marketable equity securities with gross unrealized losses as of June 30, 2015, 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; accordingly, there are no other-than-temporary impairments in accumulated other comprehensive income related to “available-for-sale” marketable equity securities as of June 30, 2015, or December 31, 2014.
The following table summarizes our investments as of June 30, 2015, and December 31, 2014 (in thousands):
|
| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
“Available-for-sale” marketable equity securities, cost basis | $ | 33,897 |
| | $ | 21,898 |
|
Unrealized gains | 139,459 |
| | 53,625 |
|
Unrealized losses | (791 | ) | | (1,258 | ) |
“Available-for-sale” marketable equity securities, at fair value | 172,565 |
| | 74,265 |
|
Investments accounted for under cost method | 188,049 |
| | 162,124 |
|
Total investments | $ | 360,614 |
| | $ | 236,389 |
|
The following table outlines our investment income (loss), which is classified in other income in the accompanying consolidated statements of income (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Investment gains | $ | 7,773 |
| | $ | 2,185 |
| | $ | 13,710 |
| | $ | 6,225 |
|
Investment losses | (5,652 | ) | | (3,546 | ) | | (7,877 | ) | | (5,240 | ) |
Investment income (loss) | $ | 2,121 |
| | $ | (1,361 | ) | | $ | 5,833 |
| | $ | 985 |
|
| |
5. | 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 six months ended June 30, 2015 and 2014.
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5. | 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 June 30, 2015, and December 31, 2014 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | | June 30, 2015 |
Description | | Total | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
Assets: | | | | | | | | |
“Available-for-sale” marketable equity securities | | $ | 172,565 |
| | $ | 172,565 |
| | $ | — |
| | $ | — |
|
Interest rate swap agreements | | $ | 19 |
| | $ | — |
| | $ | 19 |
| | $ | — |
|
Liabilities: | | | | | | | | |
Interest rate swap agreements | | $ | 3,951 |
| | $ | — |
| | $ | 3,951 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | | | December 31, 2014 |
Description | | Total | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
Assets: | | | | | | | | |
“Available-for-sale” marketable equity securities | | $ | 74,265 |
| | $ | 74,265 |
| | $ | — |
| | $ | — |
|
Liabilities: | | | | | | | | |
Interest rate swap agreements | | $ | 909 |
| | $ | — |
| | $ | 909 |
| | $ | — |
|
The carrying values 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” marketable equity securities and our interest rate swap agreements have been recognized at fair value. Refer to Note 7 – “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.
As of June 30, 2015, and December 31, 2014, the book and estimated fair values of our “available-for-sale” marketable equity securities, interest rate swap agreements, secured notes payable, unsecured senior notes payable, unsecured senior line of credit, and unsecured senior bank term loans were as follows (in thousands):
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| | | | | | | | | | | | | | | |
| June 30, 2015 | | December 31, 2014 |
| Book Value | | Fair Value | | Book Value | | Fair Value |
Assets: | | | | | | | |
“Available-for-sale” marketable equity securities | $ | 172,565 |
| | $ | 172,565 |
| | $ | 74,265 |
| | $ | 74,265 |
|
Interest rate swap agreements | $ | 19 |
| | $ | 19 |
| | $ | — |
| | $ | — |
|
| | | | | | | |
Liabilities: | | | | | | | |
Interest rate swap agreements | $ | 3,951 |
| | $ | 3,951 |
| | $ | 909 |
| | $ | 909 |
|
Secured notes payable | $ | 771,435 |
| | $ | 801,330 |
| | $ | 652,209 |
| | $ | 693,338 |
|
Unsecured senior notes payable | $ | 1,747,531 |
| | $ | 1,782,455 |
| | $ | 1,747,370 |
| | $ | 1,793,255 |
|
Unsecured senior line of credit | $ | 624,000 |
| | $ | 624,207 |
| | $ | 304,000 |
| | $ | 304,369 |
|
Unsecured senior bank term loans | $ | 950,000 |
| | $ | 953,387 |
| | $ | 975,000 |
| | $ | 976,010 |
|
Fair value measurements for other than on a non-recurring basis
Refer to Note 3 – “Investments in Real Estate” and Note 11 – “Noncontrolling Interests.”
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6. | Secured and unsecured senior debt |
The following table summarizes our secured and unsecured senior debt as of June 30, 2015 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Fixed-Rate/Hedged Variable-Rate | | Unhedged Variable-Rate | | Total Consolidated | | Percentage of Total Debt | | Weighted-Average Interest Rate at End of Period (1) | | Weighted-Average Remaining Term (in years) |
Secured notes payable | $ | 480,340 |
| | $ | 291,095 |
| | $ | 771,435 |
| | 18.8 | % | | 4.25 | % | | 2.9 |
Unsecured senior notes payable | 1,747,531 |
| | — |
| | 1,747,531 |
| | 42.7 |
| | 3.98 |
| | 7.8 |
$1.5 billion unsecured senior line of credit | — |
| | 624,000 |
| | 624,000 |
| | 15.2 |
| | 1.22 |
| | 3.5 |
2019 Unsecured Senior Bank Term Loan | 600,000 |
| | — |
| | 600,000 |
| | 14.7 |
| | 1.71 |
| | 3.5 |
2021 Unsecured Senior Bank Term Loan | 350,000 |
| | — |
| | 350,000 |
| | 8.6 |
| | 1.52 |
| | 5.5 |
Total/weighted average | $ | 3,177,871 |
| | $ | 915,095 |
| | $ | 4,092,966 |
| | 100.0 | % | | 3.07 | % | | 5.4 |
Percentage of total debt | 78 | % | | 22 | % | | 100 | % | | | | | | |
| |
(1) | Represents the weighted-average interest rate as of the end of the period plus the impact of debt premiums/discounts and our interest rate swap agreements. The weighted-average interest rate excludes bank fees and amortization of loan fees. |
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6. | Secured and unsecured senior debt (continued) |
The following table summarizes our outstanding indebtedness and respective principal maturities as of June 30, 2015 (dollars in thousands):
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stated Rate | | Weighted- Average Interest Rate(1) | | Maturity Date(2) | | Principal Payments Remaining for the Periods Ending December 31, | | | | |
Debt | | | | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total |
Secured notes payable | | | | | | | | | | | | | | | | | | | | | | |
|
Greater Boston, San Francisco, and San Diego | | 5.73 | % | | 5.73 | % | | 1/1/16 | | $ | 914 |
| | $ | 75,501 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 76,415 |
|
Greater Boston, San Diego, and New York City | | 5.82 | | | 5.82 | | | 4/1/16 | | 494 |
| | 29,389 |
| | — |
| | — |
| | — |
| | — |
| | 29,883 |
|
San Diego | | 5.74 | | | 3.00 | | | 4/15/16 | | 88 |
| | 6,916 |
| | — |
| | — |
| | — |
| | — |
| | 7,004 |
|
San Francisco | | L+1.40 | | | 1.59 | | | 6/1/16 | (3) | — |
| | 20,631 |
| | — |
| | — |
| | — |
| | — |
| | 20,631 |
|
San Francisco | | L+1.50 | | | 1.69 | | | 7/1/16 | (4) | — |
| | 47,183 |
| | — |
| | — |
| | — |
| | — |
| | 47,183 |
|
San Francisco | | 6.35 | | | 6.35 | | | 8/1/16 | | 1,313 |
| | 126,715 |
| | — |
| | — |
| | — |
| | — |
| | 128,028 |
|
Maryland | | 2.17 | | | 2.17 | | | 1/20/17 | | — |
| | — |
| | 76,000 |
| | — |
| | — |
| | — |
| | 76,000 |
|
Greater Boston | | L+1.35 | | | 1.54 | | | 8/23/17 | (5) | — |
| | — |
| | 147,281 |
| | — |
| | — |
| | — |
| | 147,281 |
|
San Diego, Maryland, and Seattle | | 7.75 | | | 7.75 | | | 4/1/20 | | 800 |
| | 1,696 |
| | 1,832 |
| | 1,979 |
| | 2,138 |
| | 104,352 |
| | 112,797 |
|
San Diego | | 4.66 | | | 4.66 | | | 1/1/23 | | 703 |
| | 1,464 |
| | 1,540 |
| | 1,614 |
| | 1,692 |
| | 31,674 |
| | 38,687 |
|
Greater Boston | | 3.93 | | | 3.10 | | | 3/10/23 | | — |
| | — |
| | — |
| | 1,091 |
| | 1,505 |
| | 79,404 |
| | 82,000 |
|
San Francisco | | 6.50 | | | 6.50 | | | 7/1/36 | | 10 |
| | 19 |
| | 20 |
| | 22 |
| | 23 |
| | 728 |
| | 822 |
|
Unamortized premiums | | | | | | | | | | 367 |
| | 610 |
| | 573 |
| | 588 |
| | 595 |
| | 1,971 |
| | 4,704 |
|
Secured notes payable weighted-average/subtotal | | 4.37 | % | | 4.25 | | | | | 4,689 |
| | 310,124 |
| | 227,246 |
| | 5,294 |
| | 5,953 |
| | 218,129 |
| | 771,435 |
|
| | | | | | | | | | | | | | | | | | | | | | |
2019 Unsecured Senior Bank Term Loan | | L+1.20 | % | | 1.71 | | | 1/3/19 | | — |
| | — |
| | — |
| | — |
| | 600,000 |
| | — |
| | 600,000 |
|
2021 Unsecured Senior Bank Term Loan | | L+1.10 | % | | 1.52 | | | 1/15/21 | | — |
| | — |
| | — |
| | — |
| | — |
| | 350,000 |
| | 350,000 |
|
$1.5 billion unsecured senior line of credit | | L+1.10 | % | (6) | 1.22 | | | 1/3/19 | | — |
| | — |
| | — |
| | — |
| | 624,000 |
| | — |
| | 624,000 |
|
Unsecured senior notes payable | | 2.75 | % | | 2.79 | | | 1/15/20 | | — |
| | — |
| | — |
| | — |
| | — |
| | 400,000 |
| | 400,000 |
|
Unsecured senior notes payable | | 4.60 | % | | 4.61 | | | 4/1/22 | | — |
| | — |
| | — |
| | — |
| | — |
| | 550,000 |
| | 550,000 |
|
Unsecured senior notes payable | | 3.90 | % | | 3.94 | | | 6/15/23 | | — |
| | — |
| | — |
| | — |
| | — |
| | 500,000 |
| | 500,000 |
|
Unsecured senior notes payable | | 4.50 | % | | 4.51 | | | 7/30/29 | | — |
| | — |
| | — |
| | — |
| | — |
| | 300,000 |
| | 300,000 |
|
Unamortized discounts | | | | | | | | | | (165 | ) | | (337 | ) | | (350 | ) | | (362 | ) | | (375 | ) | | (880 | ) | | (2,469 | ) |
Unsecured debt weighted-average/subtotal | | | | | 2.79 | | | | | (165 | ) | | (337 | ) | | (350 | ) | | (362 | ) | | 1,223,625 |
| | 2,099,120 |
| | 3,321,531 |
|
Weighted-average/total | | | | | 3.07 | % | | | | $ | 4,524 |
| | $ | 309,787 |
| | $ | 226,896 |
| | $ | 4,932 |
| | $ | 1,229,578 |
| | $ | 2,317,249 |
| | $ | 4,092,966 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Balloon payments | | | | | | | | | | $ | — |
| | $ | 304,713 |
| | $ | 223,281 |
| | $ | — |
| | $ | 1,224,000 |
| | $ | 2,304,466 |
| | $ | 4,056,460 |
|
Principal amortization | | | | | | | | | | 4,524 |
| | 5,074 |
| | 3,615 |
| | 4,932 |
| | 5,578 |
| | 12,783 |
| | 36,506 |
|
Total consolidated debt | | | | | | | | | | $ | 4,524 |
| | $ | 309,787 |
| | $ | 226,896 |
| | $ | 4,932 |
| | $ | 1,229,578 |
| | $ | 2,317,249 |
| | $ | 4,092,966 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Fixed-rate/hedged variable-rate debt | | | | | | | | | | $ | 4,524 |
| | $ | 241,973 |
| | $ | 3,615 |
| | $ | 4,932 |
| | $ | 605,578 |
| | $ | 2,317,249 |
| | $ | 3,177,871 |
|
Unhedged variable-rate debt | | | | | | | | | | — |
| | 67,814 |
| | 223,281 |
| | — |
| | 624,000 |
| | — |
| | 915,095 |
|
Total consolidated debt | | | | | | | | | | $ | 4,524 |
| | $ | 309,787 |
| | $ | 226,896 |
| | $ | 4,932 |
| | $ | 1,229,578 |
| | $ | 2,317,249 |
| | $ | 4,092,966 |
|
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(1) | Represents the weighted-average interest rate as of the end of the period plus the impact of debt premiums/discounts and our interest rate swap agreements. The weighted-average interest rate excludes bank fees and amortization of loan fees. |
| |
(2) | Includes any extension options that we control. |
| |
(3) | We have two, one-year options to extend the stated maturity date to June 1, 2018, subject to certain conditions. |
| |
(4) | We have a one-year option to extend the stated maturity date to July 1, 2017, subject to certain conditions. |
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(5) | We have a one-year option to extend the stated maturity date to August 23, 2018, subject to certain conditions. |
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(6) | Our unsecured senior line of credit contains a feature that allows lenders to competitively bid on the interest rate for borrowings under the facility. This may result in an interest rate that is below the stated rate of LIBOR+1.10%. In addition to the cost of borrowing, the facility is subject to an annual facility fee of 0.20%, based on the aggregate commitments outstanding. |
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6. | Secured and unsecured senior debt (continued) |
Interest expense
The following table summarizes interest expense for the three and six months ended June 30, 2015 and 2014 (in thousands):
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Gross interest | $ | 35,105 |
| | $ | 28,735 |
| | $ | 69,312 |
| | $ | 59,871 |
|
Capitalized interest | (8,437 | ) | | (11,302 | ) | | (19,408 | ) | | (23,315 | ) |
Interest expense | $ | 26,668 |
| | $ | 17,433 |
| | $ | 49,904 |
| | $ | 36,556 |
|
Amendment of unsecured senior bank term loan
In June 2015, we completed a partial principal repayment of $25.0 million and extended the maturity of the remaining $350.0 million unsecured senior bank term loan (“2021 Unsecured Senior Bank Term Loan”) from July 31, 2015, to June 30, 2019, subject to our option to extend the maturity up to three times upon the satisfaction of certain conditions, for an additional term of six months for the first and second extensions and for an additional term ending on January 15, 2021, for the third extension. In addition, we reduced the applicable interest rate margin with respect to borrowings outstanding under the loan to LIBOR+1.10% from LIBOR+1.20%. In conjunction with the amendment of our 2021 Unsecured Senior Bank Term Loan and the principal repayment, we recognized a loss on early extinguishment of debt aggregating $189 thousand related to the write-off of a portion of unamortized loan fees.
Secured construction loans
In June 2015, we exercised the first of two, one-year extensions on a $47.2 million secured construction loan, which extended the maturity date from July 1, 2015, to July 1, 2016.
The following table summarizes our secured construction loans as of June 30, 2015 (dollars in thousands):
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| | | | | | | | | | | | | | | | | | | | |
Market | | Stated Rate | | Maturity Date | | Outstanding Balance | | Remaining Commitments | | Total Commitments |
San Francisco | | | L+1.40 | % | | 6/1/16 | (1) | | $ | 20,631 |
| | $ | 15,369 |
| | $ | 36,000 |
|
San Francisco | | | L+1.50 | % | | 7/1/16 | (2) | | 47,183 |
| | 7,817 |
| | 55,000 |
|
Greater Boston | | | L+1.35 | % | | 8/23/17 | (3) | | 147,281 |
| | 103,119 |
| | 250,400 |
|
| | | | | | | | | | $ | 215,095 |
| | $ | 126,305 |
| | $ | 341,400 |
|
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(1) | We have two, one-year options to extend the stated maturity date to June 1, 2018, subject to certain conditions. |
| |
(2) | We have a one-year option to extend the stated maturity date to July 1, 2017, 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. |
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7. | 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 six months ended June 30, 2015 and 2014, our interest rate swap agreements were 100% effective; as a result, 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 agr