ARE-2013.6.30-10Q
Table of Contents


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 June 30, 2013

OR

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

For the transition period from ____________ to ____________

Commission file number 1-12993

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes 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 July 31, 2013, 71,439,254 shares of common stock, par value $.01 per share, were outstanding.

Table of Contents


TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents


PART I – FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS (UNAUDITED)

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

 
June 30, 2013
 
December 31, 2012
Assets
 
 
 
Investments in real estate, net
$
6,453,379

 
$
6,424,578

Cash and cash equivalents
302,205

 
140,971

Restricted cash
30,914

 
39,947

Tenant receivables
7,577

 
8,449

Deferred rent
177,507

 
170,396

Deferred leasing and financing costs, net
164,362

 
160,048

Investments
122,605

 
115,048

Other assets
120,740

 
90,679

Total assets
$
7,379,289

 
$
7,150,116

 
 
 
 
Liabilities, Noncontrolling Interests, and Equity
 
 
 
Secured notes payable
$
711,029

 
$
716,144

Unsecured senior notes payable
1,048,395

 
549,805

Unsecured senior line of credit
—

 
566,000

Unsecured senior bank term loans
1,200,000

 
1,350,000

Accounts payable, accrued expenses, and tenant security deposits
368,249

 
423,708

Dividends payable
52,141

 
41,401

Total liabilities
3,379,814

 
3,647,058

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Redeemable noncontrolling interests
14,505

 
14,564

 
 
 
 
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
710

 
632

Additional paid-in capital
3,596,477

 
3,086,052

Accumulated other comprehensive loss
(39,565
)
 
(24,833
)
Alexandria’s stockholders’ equity
3,937,622

 
3,441,851

Noncontrolling interests
47,348

 
46,643

Total equity
3,984,970

 
3,488,494

Total liabilities, noncontrolling interests, and equity
$
7,379,289

 
$
7,150,116


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

3
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Alexandria Real Estate Equities, Inc.
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)


Three Months Ended June 30,
 
Six Months Ended June 30,

2013
 
2012
 
2013
 
2012
Revenues:


 


 


 
 
Rental
$
114,743

 
$
104,329

 
$
226,519

 
$
205,530

Tenant recoveries
35,923

 
31,881

 
71,534

 
63,763

Other income
3,569

 
9,383

 
6,562

 
12,011

Total revenues
154,235

 
145,593

 
304,615

 
281,304

 
 
 
 
 
 
 
 
Expenses:


 


 
 
 
 
Rental operations
46,323

 
42,102

 
91,547

 
82,555

General and administrative
12,472

 
12,298

 
24,120

 
22,655

Interest
15,978

 
17,922

 
33,998

 
34,148

Depreciation and amortization
46,580

 
50,741

 
92,645

 
92,527

Loss on early extinguishment of debt
560

 
1,602

 
560

 
2,225

Total expenses
121,913

 
124,665

 
242,870

 
234,110

 
 
 
 
 
 
 
 
Income from continuing operations
32,322

 
20,928

 
61,745

 
47,194

 
 
 
 
 
 
 
 
Income from discontinued operations, net
243

 
4,713

 
1,057

 
9,358

 
 
 
 
 
 
 
 
Gain on sale of land parcel
772

 
—

 
772

 
1,864

Net income
33,337

 
25,641

 
63,574

 
58,416

 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
980

 
851

 
1,962

 
1,562

Dividends on preferred stock
6,471

 
6,903

 
12,942

 
14,386

Preferred stock redemption charge
—

 
—

 
—

 
5,978

Net income attributable to unvested restricted stock awards
403

 
271

 
745

 
506

Net income attributable to Alexandria’s common stockholders
$
25,483

 
$
17,616

 
$
47,925

 
$
35,984

Earnings per share attributable to Alexandria’s common stockholders – basic and diluted:


 


 
 
 
 
Continuing operations
$
0.38

 
$
0.21

 
$
0.72

 
$
0.43

Discontinued operations, net
—

 
0.08

 
0.02

 
0.15

Earnings per share – basic and diluted
$
0.38

 
$
0.29

 
$
0.74

 
$
0.58


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

4
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Alexandria Real Estate Equities, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)


Three Months Ended June 30,
 
Six Months Ended June 30,

2013
 
2012
 
2013
 
2012
Net income
$
33,337

 
$
25,641

 
$
63,574

 
$
58,416

Other comprehensive income:


 


 
 
 
 
Unrealized gains (losses) on marketable securities:


 


 
 
 
 
Unrealized holding gains (losses) arising during the period
44

 
(107
)
 
360

 
567

Reclassification adjustment for (gains) losses included in net income
42

 
238

 
(230
)
 
(686
)
Unrealized gains (losses) on marketable securities, net
86

 
131

 
130

 
(119
)
 
 
 
 
 
 
 
 
Unrealized gains (losses) on interest rate swaps:


 


 
 
 
 
Unrealized interest rate swap gains (losses) arising during the period
105

 
(3,091
)
 
(28
)
 
(7,164
)
Reclassification adjustment for amortization of interest expense included in net income
3,834

 
5,895

 
8,142

 
11,670

Unrealized gains on interest rate swap agreements, net
3,939

 
2,804

 
8,114

 
4,506

 
 
 
 
 
 
 
 
Foreign currency translation losses
(20,698
)
 
(17,192
)
 
(23,057
)
 
(7,233
)
 
 
 
 
 
 
 
 
Total other comprehensive income
(16,673
)
 
(14,257
)
 
(14,813
)
 
(2,846
)
Comprehensive income
16,664

 
11,384

 
48,761

 
55,570

Less: comprehensive income attributable to noncontrolling interests
(1,008
)
 
(875
)
 
(1,906
)
 
(1,574
)
Comprehensive income attributable to Alexandria’s common stockholders
$
15,656

 
$
10,509

 
$
46,855

 
$
53,996


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

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Alexandria Real Estate Equities, Inc.
Consolidated Statement 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, 2012
$
250,000

 
$
130,000

 
63,244,645

 
$
632

 
$
3,086,052

 
$
—

 
$
(24,833
)
 
$
46,643

 
$
3,488,494

 
$
14,564

Net income
—

 
—

 
—

 
—

 
—

 
61,612

 
—

 
1,425

 
63,037

 
537

Unrealized gain on marketable securities
—

 
—

 
—

 
—

 
—

 
—

 
130

 
—

 
130

 
—

Unrealized gain on interest rate swap agreements
—

 
—

 
—

 
—

 
—

 
—

 
8,114

 
—

 
8,114

 
—

Foreign currency translation loss
—

 
—

 
—

 
—

 
—

 
—

 
(22,976
)
 
(81
)
 
(23,057
)
 
—

Contributions by noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(639
)
 
(639
)
 
(596
)
Issuance of common stock
—

 
—

 
7,590,000

 
76

 
534,774

 
—

 
—

 
—

 
534,850

 
—

Issuances pursuant to stock plan
—

 
—

 
162,745

 
2

 
11,661

 
—

 
—

 
—

 
11,663

 
—

Dividends declared on common stock
—

 
—

 
—

 
—

 
—

 
(84,680
)
 
—

 
—

 
(84,680
)
 
—

Dividends declared on preferred stock
—

 
—

 
—

 
—

 
—

 
(12,942
)
 
—

 
—

 
(12,942
)
 
—

Distributions in excess of earnings
—

 
—

 
—

 
—

 
(36,010
)
 
36,010

 
—

 
—

 
—

 
—

Balance as of June 30, 2013
$
250,000

 
$
130,000

 
70,997,390

 
$
710

 
$
3,596,477

 
$
—

 
$
(39,565
)
 
$
47,348

 
$
3,984,970

 
$
14,505


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

6
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Alexandria Real Estate Equities, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
Six Months Ended June 30,
 
2013
 
2012
Operating Activities


 


Net income
$
63,574

 
$
58,416

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


 


Depreciation and amortization
93,575

 
95,760

Loss on early extinguishment of debt
560

 
2,225

Gain on sale of land parcel
(772
)
 
(1,864
)
Loss (gain) on sale of real estate
121

 
(2
)
Amortization of loan fees and costs
4,813

 
4,857

Amortization of debt premiums/discounts
237

 
289

Amortization of acquired above and below market leases
(1,660
)
 
(1,578
)
Deferred rent
(14,437
)
 
(13,991
)
Stock compensation expense
7,812

 
6,567

Equity in loss related to investments
—

 
26

Gain on sales of investments
(2,666
)
 
(11,126
)
Loss on sales of investments
529

 
1,089

Changes in operating assets and liabilities:


 


Restricted cash
392

 
(610
)
Tenant receivables
847

 
1,366

Deferred leasing costs
(23,109
)
 
(13,791
)
Other assets
5,043

 
(9,331
)
Accounts payable, accrued expenses, and tenant security deposits
8,215

 
25,225

Net cash provided by operating activities
143,074

 
143,527

 
 
 
 
Investing Activities


 


Proceeds from sale of properties
101,815

 
1,905

Additions to properties
(298,927
)
 
(259,480
)
Purchase of properties
—

 
(42,171
)
Change in restricted cash related to construction projects
(8,889
)
 
(11,532
)
Distribution from unconsolidated real estate entity
274

 
22,250

Contributions to unconsolidated real estate entity
(5,163
)
 
(4,918
)
Loss in investments from unconsolidated entity
(293
)
 
—

Additions to investments
(14,833
)
 
(16,344
)
Proceeds from investments
9,544

 
17,559

Net cash used in investing activities
$
(216,472
)
 
$
(292,731
)

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

 
Six Months Ended June 30,

2013
 
2012
Financing Activities


 


Borrowings from secured notes payable
$
26,114

 
$
—

Repayments of borrowings from secured notes payable
(31,436
)
 
(4,525
)
Proceeds from issuance of unsecured senior notes payable
495,310

 
544,649

Principal borrowings from unsecured senior line of credit
305,000

 
529,147

Repayments of borrowings from unsecured senior line of credit
(871,000
)
 
(520,147
)
Repayment of unsecured senior bank term loan
(150,000
)
 
(250,000
)
Repurchase of unsecured senior convertible notes
—

 
(84,801
)
Redemption of Series C Cumulative Redeemable Preferred Stock
—

 
(129,638
)
Proceeds from issuance of Series E Cumulative Redeemable Preferred Stock
—

 
124,868

Change in restricted cash related to financings
16,634

 
(7,714
)
Deferred financing costs paid
(1,457
)
 
(15,739
)
Proceeds from common stock offering
535,536

 
37,385

Proceeds from exercise of stock options
—

 
155

Dividends paid on common stock
(73,932
)
 
(60,791
)
Dividends paid on preferred stock
(12,942
)
 
(14,178
)
Distributions to redeemable noncontrolling interests
(596
)
 
(630
)
Contributions by noncontrolling interests
—

 
1,125

Distributions to noncontrolling interests
(639
)
 
(598
)
Net cash provided by financing activities
236,592

 
148,568

 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
(1,960
)
 
3,034

 
 
 
 
Net increase in cash and cash equivalents
161,234

 
2,398

Cash and cash equivalents at beginning of period
140,971

 
78,539

Cash and cash equivalents at end of period
$
302,205

 
$
80,937

 
 
 
 
Supplemental Disclosure of Cash Flow Information


 


Cash paid during the period for interest, net of interest capitalized
$
29,259

 
$
22,693

 
 
 
 
Non-Cash Investing Activities


 


Note receivable from sale of real estate
$
38,820

 
$
—

Change in accrued capital expenditures
$
(48,198
)
 
$
4,370


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

8
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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 subsidiaries.

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

2.
Basis of presentation

We have prepared the accompanying interim 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, 2013.  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, 2012.

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

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

Use of estimates

The preparation of 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.


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2.
Basis of presentation (continued)

Investments in real estate, net, and discontinued operations

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

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

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

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


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2.
Basis of presentation (continued)

Impairment of long-lived assets

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

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

Investments

We hold equity investments in certain publicly traded companies and privately held entities primarily involved in the life science industry.  All of our investments in actively traded public companies are considered “available for sale” and are reflected in the accompanying consolidated balance sheets at fair value.  Fair value has been determined based upon the closing price as of each balance sheet date, with unrealized gains and losses shown as a separate component of comprehensive income.  The classification of each investment is determined at the time each investment is made, and such determination is reevaluated at each balance sheet date.  The cost of each investment sold is determined by the specific identification method, with net realized gains or losses classified in other income in the accompanying consolidated statements of income.  Investments in privately held entities are generally accounted for under the cost method when our interest in the entity is so minor that we have virtually no influence over the entity’s operating and financial policies.  Certain investments in privately held entities are accounted for under the equity method when our interest in the entity is not deemed so minor that we have virtually no influence over the entity’s operating and financial policies.  Under the equity method of accounting, we recognize our investment initially at cost and adjust the carrying amount of the investment to recognize our share of the earnings or losses of the investee subsequent to the date of our investment.  Additionally, we limit our ownership percentage in the voting stock of each individual entity to less than 10%.  As of June 30, 2013, and December 31, 2012, our ownership percentage in the voting stock of each individual entity was less than 10%.

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


11
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2.
Basis of presentation (continued)

Income taxes

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

We recognize tax benefits of uncertain tax positions only if it is more likely than not that the tax position will be sustained, based solely on its technical merits, with the taxing authority having full knowledge of all relevant information.  The measurement of a tax benefit for an uncertain tax position that meets the “more likely than not” threshold is based on a cumulative probability model under which the largest amount of tax benefit recognized is the amount with a greater than 50% likelihood of being realized upon ultimate settlement with the taxing authority having full knowledge of all the relevant information.  As of June 30, 2013, there were no unrecognized tax benefits.  We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

Interest expense and penalties, if any, would be recognized in the first period during which the interest or penalty would begin accruing, according to the provisions of the relevant tax law at the applicable statutory rate of interest.  We did not incur any material tax-related interest expense or penalties for the three and six months ended June 30, 2013 and 2012.

Interest income

Interest income was approximately $1.0 million and $0.8 million during the three months ended June 30, 2013 and 2012, respectively.  Interest income was approximately $2.3 million and $1.4 million during the six months ended June 30, 2013 and 2012, respectively. Interest income is classified in other income in the accompanying consolidated statements of income.

Recognition of rental income and tenant recoveries

Rental income from leases is recognized on a straight-line basis over the respective lease terms.  We classify amounts currently recognized as income, and expected to be received in later years, as an asset in deferred rent in the accompanying 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 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 June 30, 2013, and December 31, 2012, we had no allowance for estimated losses.

As of June 30, 2013, approximately 94% of our leases (on a rentable square footage basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses, and other operating expenses (including increases thereto) in addition to base rent.  Approximately 95% of our leases (on a rentable square footage basis) contained effective annual rent escalations that were either fixed or based on a consumer price index or another index.  Additionally, approximately 92% of our leases (on a rentable square footage basis) provided for the recapture of certain capital expenditures.


12
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3.
Investments in real estate

Our investments in real estate, net, consisted of the following as of June 30, 2013, and December 31, 2012 (in thousands):


June 30, 2013
 
December 31, 2012
Rental properties:
 
 
 
Land (related to rental properties)
$
512,915

 
$
522,664

Buildings and building improvements
5,006,987

 
4,933,314

Other improvements
166,894

 
189,793

Rental properties
5,686,796

 
5,645,771

Less: accumulated depreciation
(878,199
)
 
(875,035
)
Rental properties, net
4,808,597

 
4,770,736

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


 


Active development in North America
673,461

 
431,578

Investment in unconsolidated joint venture
33,838

 
28,656

Active redevelopment in North America
104,994

 
199,744

Active development and redevelopment in Asia
98,949

 
101,602

Generic infrastructure/building improvement projects in North America
53,333

(1) 
80,599


964,575

 
842,179

Subtotal
5,773,172

 
5,612,915

 
 
 
 
Land/future value-added projects:


 


Land undergoing predevelopment activities (CIP) in North America (2)
313,498

 
433,310

Land held for future development in North America
211,292

 
296,039

Land held for future development/undergoing predevelopment activities (CIP) in Asia
79,105

 
82,314

Land subject to sale negotiations
76,312

 
—


680,207

 
811,663

Investments in real estate, net
$
6,453,379

 
$
6,424,578


(1)
Represents the book value associated with approximately 96,372 square feet at four projects undergoing construction of generic laboratory improvements, of which approximately 81% was leased, but not delivered, as of June 30, 2013.
(2)
In addition to assets included in our gross investment in real estate, we hold options/rights for parcels supporting the future ground-up development of approximately 420,000 RSF in Alexandria CenterTM for Life Science - New York City related to an option under our ground lease. Also, our asset base contains additional embedded development opportunities aggregating approximately 715,000 RSF which represents additional development and expansion rights related to existing rental properties.

Land undergoing predevelopment activities

Land undergoing predevelopment activities includes activities prior to commencement of vertical construction of aboveground building improvements and is classified as construction in progress.  We generally will not commence ground-up development of any parcels undergoing predevelopment activities without first securing pre-leasing for such space.  If vertical aboveground construction is not initiated at completion of predevelopment activities, the land parcel will be classified as land held for future development.  Our objective with predevelopment is to reduce the time it takes to deliver projects to prospective client tenants.  The largest project included in land undergoing predevelopment consists of substantially all of our 1.2 million RSF at the Alexandria Center™ at Kendall Square in East Cambridge, Massachusetts.


13
Table of Contents

3.
Investments in real estate (continued)

We are required to capitalize project costs, including interest, property taxes, insurance, and other costs directly related and essential to the development or construction of a project during periods when activities necessary to prepare an asset for its intended use are in progress. Predevelopment costs generally include the following activities prior to commencement of vertical construction:

•
Traditional preconstruction costs including entitlement, design, construction drawings, Building Information Modeling (3-D virtual modeling), budgeting, sustainability and energy optimization reviews, permitting, and planning for all aspects of the project prior to vertical construction of aboveground building improvements including infrastructure, belowground site work, utility connections, land grading, and egress and regress access points.

•
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 vertical construction of aboveground building improvements. For example, site and infrastructure costs for the 1.2 million rentable square feet (“RSF”) related to 50 Binney Street, 100 Binney Street, and 228,000 RSF of residential at the Alexandria Center™ at Kendall Square are classified as preconstruction prior to commencement of vertical construction. Site and infrastructure costs related to 75/125 Binney Street and 225 Binney Street are included in our estimate of cost of completion and initial stabilized yields for each project.

Land held for future development

Land held for future development represents real estate we plan to develop in the future, but on which, as of each period presented, no construction or predevelopment activities were ongoing.  All predevelopment efforts have been advanced to appropriate stages and no further predevelopment activities are ongoing. As a result, interest, property taxes, insurance, and other costs are expensed as incurred.  As of June 30, 2013, and December 31, 2012, we held land in North America supporting an aggregate of 3.5 million and 4.7 million RSF of future ground-up development, respectively.  Additionally, as of June 30, 2013, and December 31, 2012, we held land undergoing predevelopment activities in North America totaling 1.9 million and 2.9 million RSF, respectively.

Real estate asset sales

During the six months ended June 30, 2013, we sold seven properties for aggregate consideration of $128.6 million, at a net loss of $121 thousand, which included an aggregate gain of $52 thousand on the sale of two properties in the Suburban Washington, D.C. market, an aggregate loss of $392 thousand on the sale of three properties in the Greater Boston market, no gain or loss on the sale of a property in the Seattle market, and a gain of $219 thousand on one property sold outside of our core markets. The net loss is a component of income from discontinued operations, net.

During the six months ended June 30, 2013, we sold three parcels of land for aggregate consideration of $18.1 million and recognized a gain of $772 thousand, which included a gain of $381 thousand on the sale of two parcels in the San Francisco Bay Area market, and a gain of $391 thousand on the sale of one parcel in the Greater NYC market.



14
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4.
Investments

We hold equity investments in certain publicly traded companies and privately held entities primarily involved in the life science industry.  Investments in “available for sale” securities with gross unrealized losses as of June 30, 2013, had been in a continuous unrealized loss position for less than 12 months.  We have the ability and intent to hold these investments for a reasonable period of time sufficient for the recovery of our investment.  We believe that these unrealized losses are temporary, and accordingly we have not recognized other-than-temporary impairment related to “available for sale” securities as of June 30, 2013.  As of June 30, 2013, and December 31, 2012, there were no unrealized losses in our investments in privately held entities.

The following table summarizes our investments as of June 30, 2013, and December 31, 2012 (in thousands):

 
June 30, 2013
 
December 31, 2012
“Available-for-sale” securities, cost basis
$
1,832

 
$
1,236

Gross unrealized gains
2,112

 
1,561

Gross unrealized losses
(509
)
 
(88
)
“Available-for-sale” securities, at fair value
3,435

 
2,709

Investments accounted for under cost method
119,164

 
112,333

Investments accounted for under equity method
6

 
6

Total investments
$
122,605

 
$
115,048

    
The following table outlines our net investment income, which is classified in other income in the accompanying consolidated statements of income for the three and six months ended June 30, 2013 and 2012 (in thousands):


Three Months Ended June 30,
 
Six Months Ended June 30,

2013
 
2012
 
2013
 
2012
Equity in loss related to equity method investments
$
—

 
$
—

 
$
—

 
$
(26
)
Gross realized gains
2,220

 
9,127

 
2,666

 
11,126

Gross realized losses
(143
)
 
(1,088
)
 
(529
)
 
(1,089
)
Net investment income
$
2,077

 
$
8,039

 
$
2,137

 
$
10,011

 
 
 
 
 
 
 
 
Amount of gains (losses) reclassified from accumulated other comprehensive income to realized gains, net
$
(42
)
 
$
(238
)
 
$
230

 
$
686



15
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5.
Secured and unsecured senior debt

The following table summarizes our secured and unsecured senior debts and their respective principal maturities, as of June 30, 2013 (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
(including extension options, in years)
Secured notes payable
$
591,623

 
$
119,406

 
$
711,029

 
24.0
%
 
5.48
%
 
2.7
Unsecured senior notes payable
1,048,395

 
—

 
1,048,395

 
35.4

 
4.29

 
9.3
$1.5 billion unsecured senior line of credit
—

 
—

 
—

 
—

 
1.39

 
3.8
2016 Unsecured Senior Bank Term Loan
400,000

 
200,000

 
600,000

 
20.3

 
2.24

 
3.0
2017 Unsecured Senior Bank Term Loan
600,000

 
—

 
600,000

 
20.3

 
3.93

 
3.6
Total / weighted average
$
2,640,018

 
$
319,406

 
$
2,959,424

 
100.0
%
 
4.09
%
 
5.3
Percentage of total debt
89
%
 
11
%
 
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.


16
Table of Contents

5.
Secured and unsecured senior debt (continued)

The following table summarizes our outstanding consolidated indebtedness, as of June 30, 2013 (dollars in thousands):

 
 
Stated Interest Rate
 
Weighted Average Interest Rate (1)
 
Maturity
Date (2)
 
Remaining for the Period Ending December 31,
 
 
 
 
Debt
 
 
 
 
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
 
Total
Secured notes payable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Greater Boston
 
5.26
%
 
 
5.59
%
 
4/1/14
 
 
$
1,945

 
$
208,683

 
$
—

 
$
—

 
$
—

 
$
—

 
$
210,628

Suburban Washington, D.C.
 
2.18

 
 
2.18

 
4/20/14
(3) 
 
—

 
76,000

 
—

 
—

 
—

 
—

 
76,000

San Diego
 
6.05

 
 
4.88

 
7/1/14
 
 
59

 
6,458

 
—

 
—

 
—

 
—

 
6,517

San Diego
 
5.39

 
 
4.00

 
11/1/14
 
 
74

 
7,495

 
—

 
—

 
—

 
—

 
7,569

Seattle
 
6.00

 
 
6.00

 
11/18/14
 
 
120

 
240

 
—

 
—

 
—

 
—

 
360

Suburban Washington, D.C.
 
5.64

 
 
4.50

 
6/1/15
 
 
54

 
138

 
5,788

 
—

 
—

 
—

 
5,980

Greater Boston, San Francisco Bay Area, and San Diego
 
5.73

 
 
5.73

 
1/1/16
 
 
814

 
1,713

 
1,816

 
75,501

 
—

 
—

 
79,844

Greater Boston, San Diego, and Greater NYC
 
5.82

 
 
5.82

 
4/1/16
 
 
438

 
931

 
988

 
29,389

 
—

 
—

 
31,746

San Francisco Bay Area
 
6.35

 
 
6.35

 
8/1/16
 
 
1,149

 
2,487

 
2,652

 
126,715

 
—

 
—

 
133,003

San Francisco Bay Area
 
LIBOR+1.50
 
 
1.70

 
7/1/17
(4) 
 
—

 
—

 
43,046

 
—

 
—

 
—

 
43,046

San Diego, Suburban Washington, D.C., and Seattle
 
7.75

 
 
7.75

 
4/1/20
 
 
685

 
1,453

 
1,570

 
1,696

 
1,832

 
108,469

 
115,705

San Francisco Bay Area
 
6.50

 
 
6.50

 
6/1/37
 
 
—

 
17

 
18

 
19

 
20

 
773

 
847

Average/Total
 
5.42
%

 
5.48

 
 
 
 
5,338

 
305,615

 
55,878

 
233,320

 
1,852

 
109,242

 
711,245

Unsecured debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$1.5 billion unsecured senior line of credit (5)
 
LIBOR+ 1.20%

(6) 
 
1.39

 
4/30/17

 
—

 
—

 
—

 
—

 
—

 
—

 
—

2016 Unsecured Senior Bank Term Loan (5)
 
LIBOR+ 1.75%

 
 
2.24

 
6/30/16
(3) 
 
—

 
—

 
—

 
600,000

 
—

 
—

 
600,000

2017 Unsecured Senior Bank Term Loan (5)
 
LIBOR+ 1.50%

 
 
3.93

 
1/31/17
(3) 
 
—

 
—

 
—

 
—

 
600,000

 
—

 
600,000

Unsecured senior notes payable
 
4.60
%
 
 
4.61

 
4/1/22
 
 
—

 
250

 
—

 
—

 
—

 
550,000

 
550,250

Unsecured senior notes payable
 
3.90
%
 
 
3.94

 
6/15/23
 
 
—

 
—

 
—

 
—

 
—

 
500,000

 
500,000

Average/Subtotal
 
 
 
 
4.09

 
 
 
 
5,338

 
305,865

 
55,878

 
833,320

 
601,852

 
1,159,242

 
2,961,495

Unamortized discounts
 
 
 
 
—

 
 
 
 
(294
)
 
(200
)
 
(139
)
 
(177
)
 
(184
)
 
(1,077
)
 
(2,071
)
Average/Total
 
 
 
 
4.09
%
 
 
 
 
$
5,044

 
$
305,665

 
$
55,739

 
$
833,143

 
$
601,668

 
$
1,158,165

 
$
2,959,424

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balloon payments
 
 
 
 
 
 
 
 
 
$
—

 
$
297,330

 
$
48,774

 
$
830,029

 
$
600,000

 
$
654,352

 
$
2,430,485

Principal amortization
 
 
 
 
 
 
 
 
 
5,044

 
8,335

 
6,965

 
3,114

 
1,668

 
503,813

 
528,939

Total consolidated debt
 
 
 
 
 
 
 
 
 
$
5,044

 
$
305,665

 
$
55,739

 
$
833,143

 
$
601,668

 
$
1,158,165

 
$
2,959,424

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate/hedged variable rate debt
 
 
$
4,924

 
$
229,425

 
$
12,693

 
$
633,143

 
$
601,668

 
$
1,158,165

 
$
2,640,018

Unhedged variable rate debt
 
 
120

 
76,240

 
43,046

 
200,000

 
—

 
—

 
319,406

Total consolidated debt
 
 
 
 
 
 
 
 
 
$
5,044

 
$
305,665

 
$
55,739

 
$
833,143

 
$
601,668

 
$
1,158,165

 
$
2,959,424


(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)
This loan may be prepaid without any prepayment penalty.
(4)
We have two, one year options to extend the stated maturity date of July 1, 2015.
(5)
Does not reflect amendments completed or in progress subsequent to June 30, 2013, that will reduce our borrowing costs and/or extend our maturity as noted in our Subsequent Events note to the consolidated financial statements. See Note 13 for amended terms.
(6)
In addition to the stated rate, we were subject to an annual facility fee of 0.25% as of June 30, 2013.




17
Table of Contents

5.
Secured and unsecured senior debt (continued)

3.90% Unsecured senior notes payable

In June 2013, we completed a $500 million public offering of our unsecured senior notes payable at a stated interest rate of 3.90% (“3.90% Unsecured Senior Notes”).  The unsecured senior notes payable were priced at 99.712% of the principal amount with a yield to maturity of 3.94% and are due June 15, 2023.  The unsecured senior notes payable are unsecured obligations of the Company and are fully and unconditionally guaranteed by Alexandria Real Estate Equities, L.P., a 100% owned subsidiary of the Company.  The unsecured senior notes payable rank equally in right of payment with all other senior unsecured indebtedness.  However, the unsecured senior notes payable are effectively subordinated to existing and future mortgages and other secured indebtedness (to the extent of the value of the collateral securing such indebtedness) and to all existing and future preferred equity and liabilities, whether secured or unsecured, of the Company’s subsidiaries, other than Alexandria Real Estate Equities, L.P.  We used the net proceeds of this offering to prepay $150 million of the outstanding principal balance of $750 million on our unsecured senior bank term loan due in 2016 (“2016 Unsecured Senior Bank Term Loan”), to reduce the outstanding borrowings on our unsecured senior line of credit to zero, and to hold the remaining proceeds in cash and cash equivalents to fund near-term opportunities related to development/redevelopment projects, to fund near-term property acquisitions, and for general corporate purposes. As a result of the $150 million prepayment, we recognized a loss on early extinguishment of debt related to the write-off of a portion of unamortized loan fees in June 2013, totaling $560 thousand.

Unsecured senior line of credit and unsecured senior bank term loans

The maturity date of the unsecured senior line of credit is April 2017, assuming we exercise our sole right to extend the maturity date twice by an additional six months after each exercise.  Borrowings under the unsecured senior line of credit will bear interest at LIBOR or the base rate specified in the amended unsecured senior line of credit agreement, plus in either case a specified margin (the “Applicable Margin”).  The Applicable Margin for LIBOR borrowings under the unsecured senior line of credit as of June 30, 2013, was 1.20%, which is based on our existing credit rating as set by certain rating agencies. As of June 30, 2013, we did not have any borrowings outstanding.  Our unsecured senior line of credit is subject to an annual facility fee of 0.25% based on the aggregate commitments outstanding.

In addition, the terms of the unsecured senior line of credit and unsecured senior bank term loan agreements, among other things, limit the ability of the Company, Alexandria Real Estate Equities, L.P., and the Company’s subsidiaries to i) consummate a merger, or consolidate or sell all or substantially all of the Company’s assets, and ii) incur certain secured or unsecured indebtedness.  Additionally, the terms of the unsecured senior line of credit and unsecured senior bank term loan agreements include a restriction that may limit our ability to pay dividends, including distributions with respect to common stock or other equity interests, during any time a default is continuing, except to enable us to continue to qualify as a REIT for federal income tax purposes.  As of June 30, 2013, we were in compliance with all such covenants.

The following table outlines our interest expense for the three and six months ended June 30, 2013 and 2012 (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,

2013
 
2012
 
2013
 
2012
Gross interest
$
31,668

 
$
33,747

 
$
63,709

 
$
65,239

Capitalized interest
(15,690
)
 
(15,825
)
 
(29,711
)
 
(31,091
)
Interest expense
$
15,978

 
$
17,922

 
$
33,998

 
$
34,148





18
Table of Contents


6.
Interest rate swap agreements

During the three and six months ended June 30, 2013 and 2012, our interest rate swap agreements were used primarily to hedge the variable cash flows associated with certain of our existing LIBOR-based variable rate debt, including our unsecured senior line of credit and unsecured senior bank term loans.  The ineffective portion of the change in fair value of our interest rate swap agreements is required to be recognized directly in earnings.  During the three and six months ended June 30, 2013 and 2012, our interest rate swap agreements were 100% effective; because of this, no hedge ineffectiveness was recognized in earnings.  The effective portion of changes in the fair values of our interest rate swap agreements that are designated and that qualify as cash flow hedges is classified in accumulated other comprehensive loss. Losses are subsequently reclassified into earnings in the period during which the hedged transactions affect earnings.  During the next 12 months, we expect to reclassify approximately $11.2 million in accumulated other comprehensive loss to interest expense as an increase to interest expense.

As of June 30, 2013, and December 31, 2012, the fair values of our interest rate swap agreements were classified in accounts payable, accrued expenses, and tenant security deposits based upon their respective fair values, aggregating a liability balance of approximately $12.5 million and $20.7 million, respectively, which included accrued interest and adjustments for non-performance risk, with the offsetting adjustment reflected as unrealized loss in accumulated other comprehensive loss in total equity.  Under our interest rate swap agreements, we have no collateral posting requirements.

We had the following outstanding interest rate swap agreements that were designated as cash flow hedges of interest rate risk as of June 30, 2013 (dollars in thousands):


 

 

 
Interest Pay
 
Fair Value as of
 
Notional Amount in Effect as of
Transaction Date
 
Effective Date
 
Termination Date
 
Rate (1)
 
June 30, 2013
 
June 30, 2013
 
December 31, 2013
December 2006
 
December 29, 2006
 
March 31, 2014
 
4.990
%
 
$
(1,804
)
 
$
50,000

 
$
50,000

October 2007
 
October 31, 2007
 
September 30, 2013
 
4.642
%
 
(563
)
 
50,000

 
—

December 2006
 
November 30, 2009
 
March 31, 2014
 
5.015
%
 
(2,721
)
 
75,000

 
75,000

December 2006
 
November 30, 2009
 
March 31, 2014
 
5.023
%
 
(2,725
)
 
75,000

 
75,000

December 2011
 
December 31, 2012
 
December 31, 2013
 
0.640
%
 
(553
)
 
250,000

 
—

December 2011
 
December 31, 2012
 
December 31, 2013
 
0.640
%
 
(553
)
 
250,000

 
—

December 2011
 
December 31, 2012
 
December 31, 2013
 
0.644
%
 
(279
)
 
125,000

 
—

December 2011
 
December 31, 2012
 
December 31, 2013
 
0.644
%
 
(279
)
 
125,000

 
—

December 2011
 
December 31, 2013
 
December 31, 2014
 
0.977
%
 
(1,536
)
 
—

 
250,000

December 2011
 
December 31, 2013
 
December 31, 2014
 
0.976
%
 
(1,534
)
 
—

 
250,000

Total
 

 

 


 
$
(12,547
)
 
$
1,000,000

 
$
700,000


(1)
In addition to the interest pay rate, borrowings outstanding under our unsecured senior bank term loans include an applicable margin currently ranging from 1.50% to 1.75% as of June 30, 2013.

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 and six months ended June 30, 2013 and 2012.


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Table of Contents

7.
Fair value measurements (continued)

The following tables set forth the assets and liabilities that we measure at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2013, and December 31, 2012 (in thousands):
 
 
 
 
June 30, 2013
Description
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Assets:
 
 
 
 
 
 
 
 
Marketable securities
 
$
3,435

 
$
3,435

 
$
—

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
12,547

 
$
—

 
$
12,547

 
$
—


 
 
 
 
December 31, 2012
Description
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Assets:
 
 
 
 
 
 
 
 
Marketable securities
 
$
2,709

 
$
2,709

 
$
—

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
20,661

 
$
—

 
$
20,661

 
$
—


The carrying amounts of cash and cash equivalents, restricted cash, tenant receivables, other assets, accounts payable, accrued expenses, and tenant security deposits approximate fair value.  Our “available-for-sale” securities and our interest rate swap agreements, respectively, have been recognized at fair value.  The fair values of our secured notes payable, unsecured senior notes payable, unsecured senior line of credit, 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, 2013, and December 31, 2012, the book and fair values of our marketable securities, interest rate swap agreements, secured notes payable, unsecured senior notes payable, unsecured senior line of credit, and unsecured senior bank term loans were as follows (in thousands):

 
June 30, 2013
 
December 31, 2012
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
Marketable securities
$
3,435

 
$
3,435

 
$
2,709

 
$
2,709

Interest rate swap agreements
(12,547
)
 
(12,547
)
 
(20,661
)
 
(20,661
)
Secured notes payable
(711,029
)
 
(766,262
)
 
(716,144
)
 
(788,455
)
Unsecured senior notes payable
(1,048,395
)
 
(1,039,170
)
 
(549,805
)
 
(593,350
)
Unsecured senior line of credit
—

 
—

 
(566,000
)
 
(567,196
)
Unsecured senior bank term loans
(1,200,000
)
 
(1,357,376
)
 
(1,350,000
)
 
(1,405,124
)

20
Table of Contents


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

The land parcels we sold during the three and six months ended June 30, 2013, and the six months ended June 30, 2012, did not meet the criteria for classification as discontinued operations because the land parcels did not have significant operations prior to disposition.  Accordingly, for the three and six months ended June 30, 2013, and the six months ended June 30, 2012, we classified approximately $0.8 million and $1.9 million, respectively, as gain on sales of land parcels below income from discontinued operations, net, in the accompanying consolidated statements of income, and included the gain in income from continuing operations attributable to Alexandria’s common stockholders in the “control number,” or numerator for computation of earnings per share.

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


21
Table of Contents

8.
Earnings per share (continued)

The table below is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three and six months ended June 30, 2013 and 2012 (in thousands, except per share amounts):

 
Three Months Ended June 30,
 
Six Months Ended June 30,

2013
 
2012
 
2013
 
2012
Income from continuing operations
$
32,322

 
$
20,928

 
$
61,745

 
$
47,194

Gain on sale of land parcel
772

 
—

 
772

 
1,864

Net income attributable to noncontrolling interests
(980
)
 
(851
)
 
(1,962
)
 
(1,562
)
Dividends on preferred stock
(6,471
)
 
(6,903
)
 
(12,942
)
 
(14,386
)
Preferred stock redemption charge
—

 
—

 
—

 
(5,978
)
Net income attributable to unvested restricted stock awards
(403
)
 
(271
)
 
(745
)
 
(506
)
Income from continuing operations attributable to Alexandria’s common stockholders – basic and diluted
25,240

 
12,903

 
46,868

 
26,626

Income from discontinued operations, net
243

 
4,713

 
1,057

 
9,358

Net income attributable to Alexandria’s common stockholders – basic and diluted
$
25,483

 
$
17,616

 
$
47,925

 
$
35,984

 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding – basic
66,973

 
61,663

 
65,078

 
61,586

Dilutive effect of stock options
—

 
1

 
—

 
—

Weighted average shares of common stock outstanding – diluted
66,973

 
61,664

 
65,078

 
61,586

 
 
 
 
 
 
 
 
Earnings per share attributable to Alexandria’s common stockholders – basic and diluted:


 


 


 
 
Continuing operations
$
0.38

 
$
0.21

 
$
0.72

 
$
0.43

Discontinued operations, net
—

 
0.08

 
0.02

 
0.15

Earnings per share – basic and diluted
$
0.38

 
$
0.29

 
$
0.74

 
$
0.58


For purposes of calculating diluted earnings per share, we did not assume conversion of our 8.00% Unsecured Senior Convertible Notes for the three and six months ended June 30, 2013 and 2012, since the impact was antidilutive to earnings per share attributable to Alexandria’s common stockholders from continuing operations during those periods.

For purposes of calculating diluted earnings per share, we did not assume conversion of our Series D Convertible Preferred Stock for the three and six months ended June 30, 2013 and 2012, since the impact was antidilutive to earnings per share attributable to Alexandria’s common stockholders from continuing operations during those periods.


22
Table of Contents


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

The following table shows income from continuing and discontinued operations attributable to Alexandria Real Estate Equities, Inc. for the three and six months ended June 30, 2013 and 2012 (in thousands):


Three Months Ended June 30,
 
Six Months Ended June 30,

2013
 
2012
 
2013
 
2012
Income from continuing operations
$
32,322

 
$
20,928

 
$
61,745

 
$
47,194

Gain on sale of land parcel
772

 
—

 
772

 
1,864

Less: net income attributable to noncontrolling interests
(980
)
 
(851
)
 
(1,962
)
 
(1,562
)
Income from continuing operations attributable to Alexandria
32,114

 
20,077

 
60,555

 
47,496

 
 
 
 
 
 
 
 
Income from discontinued operations, net
243

 
4,713

 
1,057

 
9,358

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

 
—

 
—

 
—

Net income attributable to Alexandria
$
32,357

 
$
24,790

 
$
61,612

 
$
56,854


10.
Stockholders’ equity

Secondary offering of common stock

In May 2013, we sold approximately 7.6 million shares of our common stock in a secondary offering (including 1.0 million shares issued pursuant to the exercise in full of the underwriters’ option to purchase additional shares). The shares were issued at a price of $73.50 per share, resulting in aggregate net proceeds of approximately $535.5 million (after deducting underwriting discounts and commissions).

“At the market” common stock offering program

In June 2012, we established an “at the market” common stock offering program under which we may sell, from time to time, up to an aggregate of $250 million of our common stock through our sales agents, BNY Mellon Capital Markets, LLC and Credit Suisse Securities (USA) LLC, during a three-year period. As of June 30, 2013, approximately $150 million of our common stock remained available for issuance under the “at the market” common stock offering program.

Dividends

In June 2013, we declared cash dividends for the three months ended June 30, 2013, on our common stock aggregating approximately $46.4 million, or $0.65 per share.  In June 2013, we also declared cash dividends for the three months ended June 30, 2013, on our Series D Convertible Preferred Stock aggregating approximately $4.4 million, or $0.4375 per share.  Additionally, we declared cash dividends for the three months ended June 30, 2013, on our Series E Cumulative Redeemable Preferred Stock aggregating approximately $2.1 million, or $0.403125 per share.  In July 2013, we paid the cash dividends for the three months ended June 30, 2013, on our common stock, Series D Convertible Preferred Stock, and Series E Preferred Stock.


23
Table of Contents

10.
Stockholders’ equity (continued)

Accumulated other comprehensive loss

Accumulated other comprehensive loss attributable to Alexandria 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, 2012
$
1,473

 
$
(20,661
)
 
$
(5,645
)
 
$
(24,833
)
Other comprehensive income (loss) before reclassifications
360

 
(28
)
 
(22,976
)
 
(22,644
)
Amounts reclassified from other comprehensive income
(230
)
 
8,142

 
—

 
7,912

Net other comprehensive income (loss)
130

 
8,114

 
(22,976
)
 
(14,732
)
Balance as of June 30, 2013
$
1,603

 
$
(12,547
)
 
$
(28,621
)
 
$
(39,565
)

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

Preferred stock and excess stock authorizations

Our charter authorizes the issuance of up to 100 million shares of preferred stock, of which 15.2 million shares were issued and outstanding as of June 30, 2013.  In addition, 200 million shares of “excess stock” (as defined in our charter) are authorized, none of which were issued and outstanding as of June 30, 2013.

11.
Noncontrolling interests

Noncontrolling interests represent the third-party interests in certain entities in which we have a controlling interest.  These entities owned 10 properties and three development parcels as of June 30, 2013, 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 carrying amount of a redeemable noncontrolling interest is less than the maximum redemption value at the balance sheet date, such amount is adjusted to the maximum redemption value.  Subsequent declines in the redemption value are recognized only to the extent that previous increases have been recognized.  As of June 30, 2013, and December 31, 2012, our redeemable noncontrolling interest balances were approximately $14.5 million and $14.6 million, respectively.  Our remaining noncontrolling interests, aggregating approximately $47.3 million and $46.6 million as of June 30, 2013, and December 31, 2012, respectively, do not have rights to require us to purchase their ownership interests and are classified in total equity in the accompanying consolidated balance sheets.


24
Table of Contents


12.
Discontinued operations

The following is a summary of net assets of discontinued operations and income from discontinued operations, net (in thousands):
 
June 30, 2013
 
December 31, 2012
Properties “held for sale,” net
$
4,180

 
$
76,440

Other assets
7

 
4,546

Total assets
4,187

 
80,986

 
 
 
 
Total liabilities
(8
)
 
(3,233
)
Net assets of discontinued operations
$
4,179

 
$
77,753


 
Three Months Ended June 30,
 
Six Months Ended June 30,

2013
 
2012
 
2013
 
2012
Total revenues
$
241

 
$
8,831

 
$
3,737

 
$
18,138

Operating expenses
217

 
2,506

 
1,629

 
5,549

Total revenues less operating expenses
24

 
6,325

 
2,108

 
12,589

Depreciation expense
—

 
1,614

 
930

 
3,233

(Gain) loss on sale of real estate
(219
)
 
(2
)
 
121

 
(2
)
Income from discontinued operations, net
$
243

 
$
4,713

 
$
1,057

 
$
9,358


Income from discontinued operations, net, for the periods presented in the preceding table, includes the results of operations attributable to each of the respective periods for two operating properties that were classified as “held for sale” as of June 30, 2013, as well as the results of operations attributable to each of the respective periods for (and loss related to the sale of) 10 properties sold during the time span starting on the first day of the earliest period presented above (January 1, 2012) and ending on the last day of the current reporting period (June 30, 2013).  For additional discussion regarding real estate asset sales, see discussion under Note 3, Investments in Real Estate.


25
Table of Contents


13.
Subsequent events

Ariad Pharmaceuticals, Inc. Expansion

On July 3, 2013, Ariad Pharmaceuticals, Inc. executed a letter of intent (“LOI”) to lease an additional 139,374 RSF for a 15 year term at our 75/125 Binney Street development in the Cambridge submarket of Greater Boston. An amendment to their lease is under negotiation to increase their lease to 383,497 RSF, or 99% of the total RSF of the project.

Sale of land parcel at 1600 Owens Street

On July 8, 2013, we executed a purchase and sale agreement to dispose of our land parcel at 1600 Owens Street in the Mission Bay submarket of the San Francisco Bay Area for an aggregate sales price of $55.2 million, inclusive of certain parking spaces. This sale is expected to close in December 2013.

Acquisition of 10121/10151 Barnes Canyon Road

On July 5, 2013, we agreed to make a $13.1 million investment in 10121/10151 Barnes Canyon Road, an approximate 116,000 RSF office property located in the Sorrento Mesa submarket of San Diego.  Our investment will be funded in two installments:  i) $5.4 million to be funded in August 2013 (which will earn a 7% return until the next payment is made), and ii) $7.7 million to be funded no later than October 2014.  The property is currently 100% occupied with leases that expire in 2014 and 2015. We intend to convert the existing office space into laboratory space through redevelopment when the space becomes available. Initial stabilized yields will be provided in the future upon commencement of the redevelopment.

Unsecured senior bank loan financings

On July 26, 2013, we amended our $600 million 2016 Unsecured Senior Bank Term Loan to reduce our interest rate on outstanding borrowings. We did not extend the maturity of this loan as we expect to repay the loan over the next one to three years. In addition, we expect to complete amendments to our $1.5 billion unsecured senior line of credit and our $600 million 2017 Unsecured Senior Bank Term Loan in the third quarter of 2013 to reduce our interest rate on outstanding borrowings, extend the maturity dates and amend certain financial covenants. The commitments available for each facility will not change.
 
 
 
 
Maturity Date (including extensions)
 
Applicable Rate

 
Facility Fee
Facility
 
Status
 
Prior/
Current
 
Extended/
Proposed
 
Prior/
Current
 
Extended/
Proposed
 
Prior/
Current
 
Extended/
Proposed
$600 million 2016 Unsecured Senior Bank Term Loan
 
Complete
 
June 2016
 
July 2016
 
L +1.75%
 
L +1.20%
 
N/A
 
N/A
$600 million 2017 Unsecured Senior Bank Term Loan
 
In Progress
 
January 2017
 
January 2019
 
L +1.50%
 
L +1.20%
 
N/A
 
N/A
$1.5 billion unsecured senior line of credit
 
In Progress
 
April 2017
 
January 2019
 
L +1.20%
 
L +1.10%
 
0.25%
 
0.20%

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”), 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 June 30, 2013, and December 31, 2012, the condensed consolidating statements of income and comprehensive income for the three and six months ended June 30, 2013 and 2012, and the condensed consolidating statements of cash flow for the six months ended June 30, 2013 and 2012, for the Issuer, the guarantor subsidiary (the LP), the Combined Non-Guarantor Subsidiaries, the eliminations necessary to arrive at the information for Alexandria 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.

26
Table of Contents


Condensed Consolidating Balance Sheet
as of June 30, 2013
(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
$
—

 
$
—

 
$
6,453,379

 
$
—

 
$
6,453,379

Cash and cash equivalents
256,299

 
—

 
45,906

 
—

 
302,205

Restricted cash
42

 
—

 
30,872

 
—

 
30,914

Tenant receivables
—

 
—

 
7,577

 
—

 
7,577

Deferred rent
—

 
—

 
177,507

 
—

 
177,507

Deferred leasing and financing costs, net
31,156

 
—

 
133,206

 
—

 
164,362

Investments
—

 
11,727

 
110,878

 
—

 
122,605

Investments in and advances to affiliates
5,976,349

 
5,520,444

 
113,244

 
(11,610,037
)
 
—

Intercompany note receivable
3,061

 
—

 
—

 
(3,061
)
 
—

Other assets
17,708

 
—

 
103,220

 
(188
)
 
120,740

Total assets
$
6,284,615

 
$
5,532,171

 
$
7,175,789

 
$
(11,613,286
)
 
$
7,379,289

Liabilities, Noncontrolling Interests, and Equity
 
 
 
 
 
 
 
 
 
Secured notes payable
$
—

 
$
—

 
$
711,029

 
$
—

 
$
711,029

Unsecured senior notes payable
1,048,395

 
—

 
—

 
—

 
1,048,395

Unsecured senior line of credit
—

 
—

 
—

 
—

 
—

Unsecured senior bank term loans
1,200,000

 
—

 
—

 
—

 
1,200,000

Accounts payable, accrued expenses, and tenant security deposits
46,748

 
—

 
321,689

 
(188
)
 
368,249

Dividends payable
51,850

 
—

 
291

 
—

 
52,141

Intercompany note payable
—

 
—

 
3,061

 
(3,061
)
 
—

Total liabilities
2,346,993

 
—

 
1,036,070

 
(3,249
)
 
3,379,814

Redeemable noncontrolling interests
—

 
—

 
14,505

 
—

 
14,505

Alexandria’s stockholders’ equity
3,937,622

 
5,532,171

 
6,077,866

 
(11,610,037
)
 
3,937,622

Noncontrolling interests
—

 
—

 
47,348

 
—

 
47,348

Total equity
3,937,622

 
5,532,171

 
6,125,214

 
(11,610,037
)
 
3,984,970

Total liabilities, noncontrolling interests, and equity
$
6,284,615

 
$
5,532,171

 
$
7,175,789

 
$
(11,613,286
)
 
$
7,379,289


27
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Balance Sheet
as of December 31, 2012
(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
$
38,616

 
$
—

 
$
6,385,962

 
$
—

 
$
6,424,578

Cash and cash equivalents
98,567

 
1,913

 
40,491

 
—

 
140,971

Restricted cash
52

 
—

 
39,895

 
—

 
39,947

Tenant receivables
1

 
—

 
8,448

 
—

 
8,449

Deferred rent
1,876

 
—

 
168,520

 
—

 
170,396

Deferred leasing and financing costs, net
31,373

 
—

 
128,675

 
—

 
160,048

Investments
—

 
12,591

 
102,457

 
—

 
115,048

Investments in and advances to affiliates
5,833,368

 
5,358,883

 
110,100

 
(11,302,351
)
 
—

Intercompany note receivable
3,021

 
—

 
—

 
(3,021
)
 
—

Other assets
17,613

 
—

 
73,066

 
—

 
90,679

Total assets
$
6,024,487

 
$
5,373,387

 
$
7,057,614

 
$
(11,305,372
)
 
$
7,150,116

Liabilities, Noncontrolling Interests, and Equity
 
 
 
 
 
 
 
 
 
Secured notes payable
$
—

 
$
—

 
$
716,144

 
$
—

 
$
716,144

Unsecured senior notes payable
549,805

 
—

 
—

 
—

 
549,805

Unsecured senior line of credit
566,000

 
—

 
—

 
—

 
566,000

Unsecured senior bank term loans
1,350,000

 
—

 
—

 
—

 
1,350,000

Accounts payable, accrued expenses, and tenant security deposits
75,728

 
—

 
347,980

 
—

 
423,708

Dividends payable
41,103

 
—

 
298

 
—

 
41,401

Intercompany notes payable
—

 
—

 
3,021

 
(3,021
)
 
—

Total liabilities
2,582,636

 
—

 
1,067,443

 
(3,021
)
 
3,647,058

Redeemable noncontrolling interests
—

 
—

 
14,564

 
—

 
14,564

Alexandria’s stockholders’ equity
3,441,851

 
5,373,387

 
5,928,964

 
(11,302,351
)
 
3,441,851

Noncontrolling interests
—

 
—

 
46,643

 
—

 
46,643

Total equity
3,441,851

 
5,373,387

 
5,975,607

 
(11,302,351
)
 
3,488,494

Total liabilities, noncontrolling interests, and equity
$
6,024,487

 
$
5,373,387

 
$
7,057,614

 
$
(11,305,372
)
 
$
7,150,116




28
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Income
for the Three Months Ended June 30, 2013
(In thousands)
(Unaudited)
 
Alexandria
Real Estate
Equities, Inc.
(Issuer)
 
Alexandria
Real Estate
Equities, L.P.
(Guarantor
Subsidiary)
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Rental
$
—

 
$
—

 
$
114,743

 
$
—

 
$
114,743

Tenant recoveries
—

 
—

 
35,923

 
—

 
35,923

Other income (loss)
2,675

 
(75
)
 
4,098

 
(3,129
)
 
3,569

Total revenues
2,675

 
(75
)
 
154,764

 
(3,129
)
 
154,235

 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Rental operations
—

 
—

 
46,323

 
—

 
46,323

General and administrative
12,154

 
—

 
3,447

 
(3,129
)
 
12,472

Interest
10,089

 
—

 
5,889

 
—

 
15,978

Depreciation and amortization
1,447

 
—

 
45,133

 
—

 
46,580

Loss on early extinguishment of debt
560

 
—

 
—

 
—

 
560

Total expenses
24,250

 
—

 
100,792

 
(3,129
)
 
121,913

(Loss) income from continuing operations before equity in earnings of affiliates
(21,575
)
 
(75
)
 
53,972

 
—

 
32,322

Equity in earnings of affiliates
53,939

 
48,944

 
940

 
(103,823
)
 
—

Income from continuing operations
32,364

 
48,869

 
54,912

 
(103,823
)
 
32,322

Income from discontinued operations, net
(7
)
 
—

 
250

 
—

 
243

Gain on sale of land parcel
—

 
—

 
772

 
—

 
772

Net income
32,357

 
48,869

 
55,934

 
(103,823
)
 
33,337

 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
—

 
—

 
980

 
—

 
980

Dividends on preferred stock
6,471

 
—

 
—

 
—

 
6,471

Net income attributable to unvested restricted stock awards
403

 
—

 
—

 
—

 
403

Net income attributable to Alexandria’s common stockholders
$
25,483

 
$
48,869

 
$
54,954

 
$
(103,823
)
 
$
25,483


29
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Income
for the Three Months Ended June 30, 2012
(In thousands)
(Unaudited)
 
Alexandria
Real Estate
Equities, Inc.
(Issuer)
 
Alexandria
Real Estate
Equities, L.P.
(Guarantor
Subsidiary)
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Rental
$
—

 
$
—

 
$
104,329

 
$
—

 
$
104,329

Tenant recoveries
—

 
—

 
31,881

 
—

 
31,881

Other income (loss)
2,271

 
255

 
10,005

 
(3,148
)
 
9,383

Total revenues
2,271

 
255

 
146,215

 
(3,148
)
 
145,593

 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Rental operations
—

 
—

 
42,102

 
—

 
42,102

General and administrative
12,944

 
1

 
2,501

 
(3,148
)
 
12,298

Interest
12,106

 
—

 
5,816

 
—

 
17,922

Depreciation and amortization
1,039

 
—

 
49,702

 
—

 
50,741

Loss on early extinguishment of debt
1,602

 
—

 
—

 
—

 
1,602

Total expenses
27,691

 
1

 
100,121

 
(3,148
)
 
124,665

(Loss) income from continuing operations before equity in earnings of affiliates
(25,420
)
 
254

 
46,094

 
—

 
20,928

Equity in earnings of affiliates
48,878

 
46,584

 
944

 
(96,406
)
 
—

Income from continuing operations
23,458

 
46,838

 
47,038

 
(96,406
)
 
20,928

Income from discontinued operations, net
1,332

 
—

 
3,381

 
—

 
4,713

Net income
24,790

 
46,838

 
50,419

 
(96,406
)
 
25,641

 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
—

 
—

 
851

 
—

 
851

Dividends on preferred stock
6,903

 
—

 
—

 
—

 
6,903

Net income attributable to unvested restricted stock awards
271

 
—

 
—

 
—

 
271

Net income attributable to Alexandria’s common stockholders
$
17,616

 
$
46,838

 
$
49,568

 
$
(96,406
)
 
$
17,616



30
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Income
for the Six Months Ended June 30, 2013
(In thousands)
(Unaudited)
 
Alexandria
Real Estate
Equities, Inc.
(Issuer)
 
Alexandria
Real Estate
Equities, L.P.
(Guarantor
Subsidiary)
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Rental
$
—

 
$
—

 
$
226,519

 
$
—

 
$
226,519

Tenant recoveries
—

 
—

 
71,534

 
—

 
71,534

Other income (loss)
5,269

 
(141
)
 
7,671

 
(6,237
)
 
6,562

Total revenues
5,269

 
(141
)
 
305,724

 
(6,237
)
 
304,615

 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Rental operations
—

 
—

 
91,547

 
—

 
91,547

General and administrative
22,433

 
—

 
7,924

 
(6,237
)
 
24,120

Interest
21,810

 
—

 
12,188

 
—

 
33,998

Depreciation and amortization
2,921

 
—

 
89,724

 
—

 
92,645

Loss on early extinguishment of debt
560

 
—

 
—

 
—

 
560

Total expenses
47,724

 
—

 
201,383

 
(6,237
)
 
242,870

(Loss) income from continuing operations before equity in earnings of affiliates
(42,455
)
 
(141
)
 
104,341

 
—

 
61,745

Equity in earnings of affiliates
103,719

 
96,183

 
1,899

 
(201,801
)
 
—

Income from continuing operations
61,264

 
96,042

 
106,240

 
(201,801
)
 
61,745

Income from discontinued operations, net
348

 
—

 
709

 
—

 
1,057

Gain on sale of land parcel
—

 
—

 
772

 
—

 
772

Net income
61,612

 
96,042

 
107,721

 
(201,801
)
 
63,574

 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
—

 
—

 
1,962

 
—

 
1,962

Dividends on preferred stock
12,942

 
—

 
—

 
—

 
12,942

Net income attributable to unvested restricted stock awards
745

 
—

 
—

 
—

 
745

Net income attributable to Alexandria’s common stockholders
$
47,925

 
$
96,042

 
$
105,759

 
$
(201,801
)
 
$
47,925



31
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Income
for the Six Months Ended June 30, 2012
(In thousands)
(Unaudited)
 
Alexandria
Real Estate
Equities, Inc.
(Issuer)
 
Alexandria
Real Estate
Equities, L.P.
(Guarantor
Subsidiary)
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Rental
$
—

 
$
—

 
$
205,530

 
$
—

 
$
205,530

Tenant recoveries
—

 
—

 
63,763

 
—

 
63,763

Other income (loss)
4,807

 
840

 
12,887

 
(6,523
)
 
12,011

Total revenues
4,807

 
840

 
282,180

 
(6,523
)
 
281,304

 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Rental operations
—

 
—

 
82,555

 
—

 
82,555

General and administrative
22,442

 
1

 
6,735

 
(6,523
)
 
22,655

Interest
22,676

 
—

 
11,472

 
—

 
34,148

Depreciation and amortization
2,056

 
—

 
90,471

 
—

 
92,527

Loss on early extinguishment of debt
2,225

 
—

 
—

 
—

 
2,225

Total expenses
49,399

 
1

 
191,233

 
(6,523
)
 
234,110

(Loss) income from continuing operations before equity in earnings of affiliates
(44,592
)
 
839

 
90,947

 
—

 
47,194

Equity in earnings of affiliates
98,888

 
92,282

 
1,857

 
(193,027
)
 
—

Income from continuing operations
54,296

 
93,121

 
92,804

 
(193,027
)
 
47,194

Income from discontinued operations, net
2,558

 
—

 
6,800

 
—

 
9,358

Gain on sale of land parcel
—

 
—

 
1,864

 
—

 
1,864

Net income
56,854

 
93,121

 
101,468

 
(193,027
)
 
58,416

 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
—

 
—

 
1,562

 
—

 
1,562

Dividends on preferred stock
14,386

 
—

 
—

 
—

 
14,386

Preferred stock redemption charge
5,978

 
—

 
—

 
—

 
5,978

Net income attributable to unvested restricted stock awards
506

 
—

 
—

 
—

 
506

Net income attributable to Alexandria’s common stockholders
$
35,984

 
$
93,121

 
$
99,906

 
$
(193,027
)
 
$
35,984



32
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Comprehensive Income
for the Three Months Ended June 30, 2013
(In thousands)
(Unaudited)
 
Alexandria
Real Estate
Equities, Inc.
(Issuer)
 
Alexandria
Real Estate
Equities, L.P.
(Guarantor
Subsidiary)
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
32,357

 
$
48,869

 
$
55,934

 
$
(103,823
)
 
$
33,337

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on marketable securities:
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
—

 
(244
)
 
288

 
—

 
44

Reclassification adjustment for (gains) losses included in net income
—

 
106

 
(64
)
 
—

 
42

Unrealized gains (losses) on marketable securities, net
—

 
(138
)
 
224

 
—

 
86

 
 
 
 
 
 
 
 
 
 
Unrealized gains on interest rate swaps:
 
 
 
 
 
 
 
 
 
Unrealized interest rate swap gains arising during the period
105

 
—

 
—

 
—

 
105

Reclassification adjustment for amortization of interest expense included in net income
3,834

 
—

 
—

 
—

 
3,834

Unrealized gains on interest rate swaps, net
3,939

 
—

 
—

 
—

 
3,939

 
 
 
 
 
 
 
 
 
 
Foreign currency translation losses
—

 
—

 
(20,698
)
 
—

 
(20,698
)
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income
3,939

 
(138
)
 
(20,474
)
 
—

 
(16,673
)
Comprehensive income
36,296

 
48,731

 
35,460

 
(103,823
)
 
16,664

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(1,008
)
 
—

 
(1,008
)
Comprehensive income attributable to Alexandria’s common stockholders
$
36,296

 
$
48,731

 
$
34,452

 
$
(103,823
)
 
$
15,656


33
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Comprehensive Income
for the Three Months Ended June 30, 2012
(In thousands)
(Unaudited)
 
Alexandria
Real Estate
Equities, Inc.
(Issuer)
 
Alexandria
Real Estate
Equities, L.P.
(Guarantor
Subsidiary)
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
24,790

 
$
46,838

 
$
50,419

 
$
(96,406
)
 
$
25,641

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on marketable securities:
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
—

 
74

 
(181
)
 
—

 
(107
)
Reclassification adjustment for losses included in net income
—

 
75

 
163

 
—

 
238

Unrealized gains (losses) on marketable securities, net
—

 
149

 
(18
)
 
—

 
131

 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on interest rate swaps:
 
 
 
 
 
 
 
 
 
Unrealized interest rate swap gains (losses) arising during the period
(3,091
)
 
—

 
—

 
—

 
(3,091
)
Reclassification adjustment for amortization of interest expense included in net income
5,895

 
—

 
—

 
—

 
5,895

Unrealized gains (losses) on interest rate swaps, net
2,804

 
—

 
—

 
—

 
2,804

 
 
 
 
 
 
 
 
 
 
Foreign currency translation losses
—

 
—

 
(17,192
)
 
—

 
(17,192
)
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income
2,804

 
149

 
(17,210
)
 
—

 
(14,257
)
Comprehensive income
27,594

 
46,987

 
33,209

 
(96,406
)
 
11,384

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(875
)
 
—

 
(875
)
Comprehensive income attributable to Alexandria’s common stockholders
$
27,594

 
$
46,987

 
$
32,334

 
$
(96,406
)
 
$
10,509



34
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Comprehensive Income
for the Six Months Ended June 30, 2013
(In thousands)
(Unaudited)
 
Alexandria
Real Estate
Equities, Inc.
(Issuer)
 
Alexandria
Real Estate
Equities, L.P.
(Guarantor
Subsidiary)
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
61,612

 
$
96,042

 
$
107,721

 
$
(201,801
)
 
$
63,574

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Unrealized gains on marketable securities:


 


 


 


 


Unrealized holding gains (losses) arising during the period
—

 
405

 
(45
)
 
—

 
360

Reclassification adjustment for (gains) losses included in net income
—

 
(375
)
 
145

 
—

 
(230
)
Unrealized gains on marketable securities, net
—

 
30

 
100

 
—

 
130

 
 
 
 
 
 
 
 
 
 
Unrealized gains on interest rate swaps:
 
 
 
 
 
 
 
 
 
Unrealized interest rate swap losses arising during the period
(28
)
 
—

 
—

 
—

 
(28
)
Reclassification adjustment for amortization of interest expense included in net income
8,142

 
—

 
—

 
—

 
8,142

Unrealized gains on interest rate swaps, net
8,114

 
—

 
—

 
—

 
8,114

 
 
 
 
 
 
 
 
 
 
Foreign currency translation losses
—

 
—

 
(23,057
)
 
—

 
(23,057
)
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income
8,114

 
30

 
(22,957
)
 
—

 
(14,813
)
Comprehensive income
69,726

 
96,072

 
84,764

 
(201,801
)
 
48,761

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(1,906
)
 
—

 
(1,906
)
Comprehensive income attributable to Alexandria's common stockholders
$
69,726

 
$
96,072

 
$
82,858

 
$
(201,801
)
 
$
46,855



35
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Comprehensive Income
for the Six Months Ended June 30, 2012
(In thousands)
(Unaudited)
 
Alexandria
Real Estate
Equities, Inc.
(Issuer)
 
Alexandria
Real Estate
Equities, L.P.
(Guarantor
Subsidiary)
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
56,854

 
$
93,121

 
$
101,468

 
$
(193,027
)
 
$
58,416

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on marketable securities:
 
 
 
 
 
 
 
 
 
Unrealized holding gains arising during the period
—

 
106

 
461

 
—

 
567

Reclassification adjustment for (gains) losses included in net income
—

 
64

 
(750
)
 
—

 
(686
)
Unrealized gains (losses) on marketable securities, net
—

 
170

 
(289
)
 
—

 
(119
)
 
 
 
 
 
 
 
 
 
 
Unrealized gains on interest rate swaps:
 
 
 
 
 
 
 
 
 
Unrealized interest rate swap losses arising during the period
(7,164
)
 
—

 
—

 
—

 
(7,164
)
Reclassification adjustment for amortization of interest expense included in net income
11,670

 
—

 
—

 
—

 
11,670

Unrealized gains on interest rate swaps, net
4,506

 
—

 
—

 
—

 
4,506

 
 
 
 
 
 
 
 
 
 
Foreign currency translation losses
—

 
—

 
(7,233
)
 
—

 
(7,233
)
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income
4,506

 
170

 
(7,522
)
 
—

 
(2,846
)
Comprehensive income
61,360

 
93,291

 
93,946

 
(193,027
)
 
55,570

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(1,574
)
 
—

 
(1,574
)
Comprehensive income attributable to Alexandria’s common stockholders
$
61,360

 
$
93,291

 
$
92,372

 
$
(193,027
)
 
$
53,996




36
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Cash Flows
for the Six Months Ended June 30, 2013
(In thousands)
(Unaudited)
 
Alexandria Real
Estate Equities,
Inc. (Issuer)
 
Alexandria Real
Estate Equities,
L.P. (Guarantor
Subsidiary)
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Operating Activities
 
 
 
 
 
 
 
 
 
Net income
$
61,612

 
$
96,042

 
$
107,721

 
$
(201,801
)
 
$
63,574

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
2,921

 
—

 
90,654

 
—

 
93,575

Loss on early extinguishment of debt
560

 
—

 
—

 
—

 
560

Gain on sale of land parcel
—

 
—

 
(772
)
 
—

 
(772
)
Loss on sale of real estate
—

 
—

 
121

 
—

 
121

Amortization of loan fees and costs
3,381

 
—

 
1,432

 
—

 
4,813

Amortization of debt premiums/discounts
31

 
—

 
206

 
—

 
237

Amortization of acquired above and below market leases
—

 
—

 
(1,660
)
 
—

 
(1,660
)
Deferred rent
—

 
—

 
(14,437
)
 
—

 
(14,437
)
Stock compensation expense
7,812

 
—

 
—

 
—

 
7,812

Equity in (income) loss related to subsidiaries
(103,719
)
 
(96,183
)
 
(1,899
)
 
201,801

 
—

Gain on sales of investments
—

 
(152
)
 
(2,514
)
 
—

 
(2,666
)
Loss on sales of investments
—

 
297

 
232

 
—

 
529

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Restricted cash
10

 
—

 
382

 
—

 
392

Tenant receivables
1

 
—

 
846

 
—

 
847

Deferred leasing costs
(792
)
 
—

 
(22,317
)
 
—

 
(23,109
)
Other assets
30,367

 
—

 
(25,512
)
 
188

 
5,043

Intercompany receivables and payables
(40
)
 
—

 
40

 
—

 
—

Accounts payable, accrued expenses, and tenant security deposits
(20,871
)
 
—

 
29,274

 
(188
)
 
8,215

Net cash provided by (used in) operating activities
(18,727
)
 
4

 
161,797

 
—

 
143,074

 
 
 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
 
 
Proceeds from sale of properties
10,796

 
—

 
91,019

 
—

 
101,815

Additions to properties
—

 
—

 
(298,927
)
 
—

 
(298,927
)
Change in restricted cash related to construction projects
—

 
—

 
(8,889
)
 
—

 
(8,889
)
Distributions from unconsolidated real estate entity
—

 
—

 
274

 
—

 
274

Contributions to unconsolidated real estate entity
—

 
—

 
(5,163
)
 
—

 
(5,163
)
Loss in investments from unconsolidated entity
—

 
—

 
(293
)
 
—

 
(293
)
Investments in subsidiaries
(61,214
)
 
(88,247
)
 
(1,243
)
 
150,704

 
—

Additions to investments
—

 
100

 
(14,933
)
 
—

 
(14,833
)
Proceeds from investments
—

 
641

 
8,903

 
—

 
9,544

Net cash used in investing activities
(50,418
)
 
(87,506
)
 
(229,252
)
 
150,704

 
(216,472
)

37
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14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Cash Flows (continued)
for the Six Months Ended June 30, 2013
(In thousands)
(Unaudited)
 
Alexandria Real
Estate Equities,
Inc. (Issuer)
 
Alexandria Real
Estate Equities,
L.P. (Guarantor
Subsidiary)
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Financing Activities
 
 
 
 
 
 
 
 
 
Borrowings from secured notes payable
$
—

 
$
—

 
$
26,114

 
$
—

 
$
26,114

Repayments of borrowings from secured notes payable
—

 
—

 
(31,436
)
 
—

 
(31,436
)
Proceeds from issuance of senior notes payable
495,310

 
—

 
—

 
—

 
495,310

Principal borrowings from unsecured senior line of credit
305,000

 
—

 
—

 
—

 
305,000

Repayments of borrowings from unsecured senior line of credit
(871,000
)
 
—

 
—

 
—

 
(871,000
)
Repayments of unsecured senior bank term loans
(150,000
)
 
—

 
—

 
—

 
(150,000
)
Transfer to/from parent company
—

 
85,589

 
65,115

 
(150,704
)
 
—

Change in restricted cash related to financings
—

 
—

 
16,634

 
—

 
16,634

Deferred financing costs paid
(1,095
)
 
—

 
(362
)
 
—

 
(1,457
)
Proceeds from common stock offerings
535,536

 
—

 
—

 
—

 
535,536

Dividends paid on common stock
(73,932
)
 
—

 
—

 
—

 
(73,932
)
Dividends paid on preferred stock
(12,942
)
 
—

 
—

 
—

 
(12,942
)
Distributions to redeemable noncontrolling interests
—

 
—

 
(596
)
 
—

 
(596
)
Distributions to noncontrolling interests
—

 
—

 
(639
)
 
—

 
(639
)
Net cash provided by (used in) financing activities
226,877

 
85,589

 
74,830

 
(150,704
)
 
236,592

 
 
 
 
 
 
 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
—

 
—

 
(1,960
)
 
—

 
(1,960
)
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
157,732

 
(1,913
)
 
5,415

 
—

 
161,234

Cash and cash equivalents at beginning of period
98,567

 
1,913

 
40,491

 
—

 
140,971

Cash and cash equivalents at end of period
$
256,299

 
$
—

 
$
45,906

 
$
—

 
$
302,205

 
 
 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
 
 
 
 
Cash paid during the period for interest, net of interest capitalized
17,969

 
—

 
11,290

 
—

 
29,259

 
 
 
 
 
 
 
 
 
 
Non-Cash Investing Activities
 
 
 
 
 
 
 
 
 
Note receivable from sale of real estate
29,820

 
—

 
9,000

 
—

 
38,820

Changes in accrued capital expenditures
—

 
—

 
(48,198
)
 
—

 
(48,198
)


38
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Cash Flows
for the Six Months Ended June 30, 2012
(In thousands)
(Unaudited)
 
Alexandria Real
Estate Equities,
Inc. (Issuer)
 
Alexandria Real
Estate Equities,
L.P. (Guarantor
Subsidiary)
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Operating Activities
 
 
 
 
 
 
 
 
 
Net income
$
56,854

 
$
93,121

 
$
101,468

 
$
(193,027
)
 
$
58,416

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
2,785

 
—

 
92,975

 
—

 
95,760

Loss on early extinguishment of debt
2,225

 
—

 
—

 
—

 
2,225

Gain on sale of land parcel
—

 
—

 
(1,864
)
 
—

 
(1,864
)
Gain on sale of real estate
—

 
—

 
(2
)
 
—

 
(2
)
Amortization of loan fees and costs
3,628

 
—

 
1,229

 
—

 
4,857

Amortization of debt premiums/discounts
92

 
—

 
197

 
—

 
289

Amortization of acquired above and below market leases
—

 
—

 
(1,578
)
 
—

 
(1,578
)
Deferred rent
18

 
—

 
(14,009
)
 
—

 
(13,991
)
Stock compensation expense
6,567

 
—

 
—

 
—

 
6,567

Equity in loss related to investments
—

 
26

 
—

 
—

 
26

Equity in (income) loss related to subsidiaries
(98,888
)
 
(92,282
)
 
(1,857
)
 
193,027

 
—

Gain on sales of investments
—

 
(1,048
)
 
(10,078
)
 
—

 
(11,126
)
Loss on sales of investments
—

 
183

 
906

 
—

 
1,089

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Restricted cash
5

 
—

 
(615
)
 
—

 
(610
)
Tenant receivables
(3
)
 
—

 
1,369

 
—

 
1,366

Deferred leasing costs
4,839

 
—

 
(18,630
)
 
—

 
(13,791
)
Other assets
960

 
—

 
(10,291
)
 
—

 
(9,331
)
Intercompany receivables and payables
(55
)
 
—

 
55

 
—

 
—

Accounts payable, accrued expenses, and tenant security deposits
2,739

 
—

 
22,486

 
—

 
25,225

Net cash provided by (used in) operating activities
(18,234
)
 
—

 
161,761

 
—

 
143,527

 
 
 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
 
 
Proceeds from sale of properties
—

 
—

 
1,905

 
—

 
1,905

Additions to properties
(661
)
 
—

 
(258,819
)
 
—

 
(259,480
)
Purchase of properties
—

 
—

 
(42,171
)
 
—

 
(42,171
)
Change in restricted cash related to construction projects
—

 
—

 
(11,532
)
 
—

 
(11,532
)
Distribution from unconsolidated real estate entity
—

 
—

 
22,250

 
—

 
22,250

Contributions to unconsolidated real estate entity
—

 
—

 
(4,918
)
 
—

 
(4,918
)
Investments in subsidiaries
(123,118
)
 
(100,360
)
 
216

 
223,262

 
—

Additions to investments
—

 
(308
)
 
(16,036
)
 
—

 
(16,344
)
Proceeds from investments
—

 
1,882

 
15,677

 
—

 
17,559

Net cash used in investing activities
$
(123,779
)
 
$
(98,786
)
 
$
(293,428
)
 
$
223,262

 
$
(292,731
)


39
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Cash Flows (continued)
for the Six Months Ended June 30, 2012
(In thousands)
(Unaudited)
 
Alexandria Real
Estate Equities,
Inc. (Issuer)
 
Alexandria Real
Estate Equities,
L.P. (Guarantor
Subsidiary)
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Financing Activities
 
 
 
 
 
 
 
 
 
Repayments of borrowings from secured notes payable
$
—

 
$
—

 
$
(4,525
)
 
$
—

 
$
(4,525
)
Proceeds from issuance of unsecured senior notes payable
544,649

 
—

 
—

 
—

 
544,649

Principal borrowings from unsecured senior line of credit
529,147

 
—

 
—

 
—

 
529,147

Repayments of borrowings from unsecured senior line of credit
(520,147
)
 
—

 
—

 
—

 
(520,147
)
Repayment of unsecured senior bank term loan
(250,000
)
 
—

 
—

 
—

 
(250,000
)
Repurchase of unsecured senior convertible notes
(84,801
)
 
—

 
—

 
—

 
(84,801
)
Redemption of Series C Cumulative Redeemable Preferred Stock
(129,638
)
 
—

 
—

 
—

 
(129,638
)
Proceeds from issuance of Series E Cumulative Redeemable Preferred Stock
124,868

 
—

 
—

 
—

 
124,868

Change in restricted cash related to financing
—

 
—

 
(7,714
)
 
—

 
(7,714
)
Deferred financing costs paid
(14,983
)
 
—

 
(756
)
 
—

 
(15,739
)
Proceeds from common stock offering
37,385

 
—

 
—

 
—

 
37,385

Proceeds from exercise of stock options
155

 
—

 
—

 
—

 
155

Dividends paid on common stock
(60,791
)
 
—

 
—

 
—

 
(60,791
)
Dividends paid on preferred stock
(14,178
)
 
—

 
—

 
—

 
(14,178
)
Distributions to redeemable noncontrolling interests
—

 
—

 
(630
)
 
—

 
(630
)
Transfers to/from parent company
—

 
98,786

 
124,476

 
(223,262
)
 
—

Contributions by noncontrolling interests
—

 
—

 
1,125

 
—

 
1,125

Distributions to noncontrolling interests
—

 
—

 
(598
)
 
—

 
(598
)
Net cash provided by financing activities
161,666

 
98,786

 
111,378

 
(223,262
)
 
148,568

 
 
 
 
 
 
 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
—

 
—

 
3,034

 
—

 
3,034

 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
19,653

 
—

 
(17,255
)
 
—

 
2,398

Cash and cash equivalents at beginning of period
10,608

 
—

 
67,931

 
—

 
78,539

Cash and cash equivalents at end of period
$
30,261

 
$
—

 
$
50,676

 
$
—

 
$
80,937

 
 
 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
 
 
 
 
Cash paid during the period for interest, net of interest capitalized
$
12,405

 
$
—

 
$
10,288

 
$
—

 
$
22,693

 
 
 
 
 
 
 
 
 
 
Non-Cash Investing Activities
 
 
 
 
 
 
 
 
 
Changes in accrued capital expenditures
$
—

 
$
—

 
$
4,370

 
$
—

 
$
4,370



40
Table of Contents


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Certain information and statements included in this quarterly report on Form 10-Q, including, without limitation, statements containing the words “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates,” or the negative of these words or similar words, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements involve inherent risks and uncertainties regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, results of operations, and financial position.  A number of important factors could cause actual results to differ materially from those included within or contemplated by the forward-looking statements, including, but not limited to, the following:
 
•  Negative economic, financial, credit market, and banking conditions, in the U.S. economy;
•  Worldwide economic recession, lack of confidence, and/or high structural unemployment;
•  Potential defaults on national debt by certain countries;
•  Potential and further downgrade of the U.S. credit rating;
•
The continuation of the ongoing economic crisis in Europe;
•
Failure of the U.S. government to agree on a debt ceiling or deficit reduction plan;
•
Inability of the U.S. government to avoid the fiscal cliff or sequestration;
•
The end of quantitative easing monetary policies by the Federal Reserve;
•
Potential and further downgrades of the credit ratings of major financial institutions, or their perceived creditworthiness;
•
The seizure or illiquidity of credit markets;
•
Failure to meet market expectations for our financial performance;
•
Our inability to obtain capital (debt, construction financing, and/or equity) or refinance debt maturities;
•
Potential negative impact of capital plan objectives to reduce our balance sheet leverage;
•
Our inability to comply with financial covenants in our debt agreements;
•
Inflation or deflation;
•
Prolonged period of stagnant growth;
•
Increased interest rates and operating costs;
•
Adverse economic or real estate developments in our markets;
•
Our failure to successfully complete and lease our existing space held for redevelopment and new properties acquired for that purpose and any properties undergoing development;
•
Significant decreases in our active development, active redevelopment, or predevelopment activities, resulting in significant increases in our interest, operating, and payroll expenses;
•
Our failure to successfully operate or lease acquired properties;
•
The financial condition of our insurance carriers;
•
Government changes to the healthcare system and its negative impact on our client tenants;
•
Adverse developments concerning the life science industry and/or our life science client tenants;
•
Client tenant base concentration within life science industry;
•
Potential decreases in U.S. National Institutes of Health (“NIH”) funding;
•
U.S. government client tenants’ not receiving government funding;
•
Government-driven changes to the healthcare system that may reduce pricing of drugs, negatively impact healthcare coverage, or negatively impact reimbursement of healthcare services and products;
•
The nature and extent of future competition;
•
Lower rental rates and/or higher vacancy rates;
•
Failure to renew or replace expiring leases;
•
Defaults on or non-renewal of leases by client tenants;
•
Availability of and our ability to attract and retain qualified personnel;
•
Our failure to comply with laws or changes in law;
•
Compliance with environmental laws;
•
Extreme weather conditions or climate change;
•
Our failure to maintain our status as a REIT for federal tax purposes;
•
Changes in laws, regulations, and financial accounting standards;
•
Certain ownership interests outside the U.S. that may subject us to different or greater risks than those associated with our domestic operations;
•
Fluctuations in foreign currency exchange rates;
•
Security breaches through cyber-attacks or cyber-intrusions;

41
Table of Contents


•
Changes in the method of determining the LIBOR; and
•
Negative impact on economic growth resulting from the combination of federal income tax increases and government spending restrictions.

This list of risks and uncertainties is not exhaustive.  Additional information regarding risk factors that may affect us is included under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the fiscal year ended December 31, 2012.  Readers of this quarterly report on Form 10-Q should also read our other documents filed publicly with the SEC for further discussion regarding such factors.

As used in this quarterly report on Form 10-Q, references to the “Company,” “Alexandria,” “we,” “our,” and “us” refer to Alexandria Real Estate Equities, Inc. and its subsidiaries.  The following discussion should be read in conjunction with the consolidated financial statements and the accompanying notes appearing elsewhere in this quarterly report on Form 10-Q.  References to “GAAP” used herein refer to United States generally accepted accounting principles.

Overview

We are a self-administered and self-managed investment-grade REIT.  We are the largest and leading REIT focused principally on owning, operating, developing, redeveloping, and acquiring high-quality, sustainable real estate for the broad and diverse life science industry.  Founded in 1994, we are the first REIT to identify and pursue the laboratory niche and have focused our operations in core life science cluster locations including Greater Boston; the San Francisco Bay Area; San Diego; New York City; Seattle; Suburban Washington, D.C.; and Research Triangle Park.  Our high-credit client tenants span the life science industry, including renowned academic and medical institutions, multinational pharmaceutical companies, public and private biotechnology entities, United States government research agencies, medical device companies, industrial biotech companies, venture capital firms, and life science product and service companies.

Our primary business objective is to maximize stockholder value by providing our stockholders with the greatest possible total return and long-term asset value based on a multifaceted platform of internal and external growth.  The key elements to our strategy include our consistent focus on high-quality assets and operations in the top life science cluster locations, with our properties located in close proximity to life science entities, driving growth and technological advances within each cluster.  These locations are characterized by high barriers to entry for new landlords, high barriers to exit for client tenants, and limited supply of available space.  They represent highly desirable locations for tenancy by life science entities because of the close proximity to concentrations of specialized skills, knowledge, institutions, and related businesses.  Our strategy also includes drawing upon our deep and broad life science and real estate relationships in order to attract new and leading life science client tenants and value-added real estate.  We executed our initial public offering in 1997 and received our investment-grade ratings in 2011.

As of June 30, 2013, we had 173 properties aggregating approximately 17.0 million RSF, composed of approximately 14.2 million RSF of operating properties, approximately 2.5 million RSF undergoing active development, and approximately 0.3 million RSF undergoing active redevelopment.  Our operating properties were approximately 93.3% leased as of June 30, 2013.   Investment-grade client tenants represented 46% of our total annualized base rent as of June 30, 2013.  The comparability of financial data from period to period is affected by the timing of our property acquisition, development, and redevelopment activities.

Second Quarter Ended June 30, 2013 Highlights

•
Funds from operations (“FFO”) attributable to Alexandria’s common stockholders - diluted, as adjusted:
•
$71.6 million, or $1.07 per share, for the three months ended June 30, 2013 (“2Q13”), compared to $65.8 million, or $1.07 per share, for the three months ended June 30, 2012 (“2Q12”)
•
$141.6 million, or $2.18 per share, for the six months ended June 30, 2013 (“YTD 2Q13”), compared to $132.0 million, or $2.14 per share, for the six months ended June 30, 2012 (“YTD 2Q12”)
•
Adjusted funds from operations (“AFFO”) attributable to Alexandria's common stockholders - diluted:
•
$66.8 million, or $1.00 per share, for 2Q13 compared to $64.0 million, or $1.04 per share, for 2Q12
•
$134.7 million, or $2.07 per share, for YTD 2Q13 compared to $126.4 million, or $2.05 per share, for YTD 2Q12
•
Net income attributable to Alexandria's common stockholders - diluted:
•
$25.5 million, or $0.38 per share, for 2Q13 compared to $17.6 million, or $0.29 per share, for 2Q12
•
$47.9 million, or $0.74 per share, for YTD 2Q13 compared to $36.0 million, or $0.58 per share, for YTD 2Q12



42
Table of Contents


Core operating metrics

•
Total revenues from continuing operations:
•
$154.2 million for 2Q13, up 5.9%, compared to $145.6 million for 2Q12
•
$304.6 million YTD 2Q13, up 8.3%, compared to $281.3 million for YTD 2Q12
•
Net operating income (“NOI”) from continuing operations:
•
$107.9 million for 2Q13, up 4.3%, compared to $103.5 million for 2Q12
•
$213.1 million for YTD 2Q13, up 7.2%, compared to $198.7 million for YTD 2Q12
•
Same property NOI performance:
•
7.2% and 3.2% increases on a cash and GAAP basis, respectively, for 2Q13 compared to 2Q12
•
8.3% and 2.0% increases on a cash and GAAP basis, respectively, for YTD 2Q13 compared to YTD 2Q12
•
Leasing activity solid during the three months ended June 30, 2013:
•
Executed 66 leases for 768,000 RSF, including 270,000 RSF of development and redevelopment space
•
Rental rate increase of 6.7% and 12.7% on a cash and GAAP basis, respectively, on renewed/re-leased space
•
Key life science space leasing:
•
Investment-grade entity leased 121,632 RSF at 430 East 29th Street development in the Greater NYC market
•
Illumina, Inc. leased 97,702 RSF at 499 Illinois Street development in the San Francisco Bay Area market
•
Sarepta Therapeutics, Inc. leased 46,376 RSF at 215 First Street in the Greater Boston market
•
Eli Lilly and Company leased 27,950 RSF at 620 Professional Drive in the Suburban Washington, D.C. market
•
Nominal remaining expiring leases in 2013 of 410,254 RSF, or 3% of total operating RSF
•
Occupancy for North American Properties, as of June 30, 2013:
•
94.6% for operating properties and 92.9% for operating and redevelopment properties, up 40 basis points and 110 basis points, respectively, since March 31, 2013
•
Investment-grade client tenants represented 46% of total annualized base rent (“ABR”)
•
Investment-grade client tenants represented 72% of ABR from our top 10 client tenants
•
Contractual annual rent escalations in 95% of our leases

Balance sheet

•
We completed in 2Q13 a secondary offering of 7.6 million shares of common stock at a price of $73.50 per share. The net proceeds of $535.5 million were used to repay outstanding balances under our unsecured senior line of credit.
•
We completed in 2Q13 a $500 million 3.90% 10-year unsecured senior notes payable offering. Net proceeds of $495.3 million were used to reduce outstanding variable rate bank debt, including a $150 million partial repayment of our $750 million 2016 Unsecured Senior Bank Term Loan and to increase our available cash balance. In connection with the partial repayment of our 2016 Unsecured Bank Term Loan, we recognized a loss on the early extinguishment of debt related to the write-off of unamortized loan fees totaling $0.6 million, or $0.01 per share.
•
Liquidity of $1.8 billion, including $1.5 billion available under our unsecured senior line of credit and $302.2 million in cash and cash equivalents as of June 30, 2013.
•
We closed in 2Q13 a secured construction loan, with aggregate commitments of $36 million at a rate of LIBOR + 1.40%, for 100% pre-leased development project at 269 East Grand Avenue in the San Francisco Bay Area market.
•
Net debt to EBITDA of 6.6x for the twelve months ended June 30, 2013.
•
Fixed charge coverage ratio of 2.7x for the twelve months ended June 30, 2013.
•
Unhedged variable rate debt totaling 11% of total consolidated debt as of June 30, 2013.
•
We completed in 2Q13 $22.5 million of real estate property sales, at a gain of $1.0 million, as follows:
•
$4.4 million of non-strategic income producing assets at a gain of $0.2 million
•
$18.1 million of non-income-producing land at a gain of $0.8 million

Subsequent events

See Note 13 to our consolidated financial statements in Item 1 of this Report for further information.



43
Table of Contents


Operating Summary

Core operations

The key elements to our strategy include our consistent focus on high-quality assets and operations in the top life science cluster locations; our properties are located adjacent to life science entities, driving growth and technological advances within each cluster.  These adjacency locations are characterized by high barriers to entry for new landlords, high barriers to exit for client tenants, and limited supply of available space.  They represent highly desirable locations for tenancy by life science entities because of the close proximity to concentrations of specialized skills, knowledge, institutions, and related businesses.  Our strategy also includes drawing upon our deep and longstanding life science and real estate relationships in order to attract new and leading life science client tenants that provide us with our unique ability to create value through strong tenant retention and strategic development and redevelopment projects.

The following table presents information regarding our asset base and value-added projects as of June 30, 2013, and December 31, 2012:

Rentable square feet
June 30, 2013
 
December 31, 2012
Operating properties
14,251,293

 
14,500,845

Development properties
2,473,835

 
2,473,835

Redevelopment properties
309,969

 
547,092

Total rentable square feet
17,035,097

 
17,521,772

Number of properties
173

 
179

Occupancy of operating properties
93.3
%
 
93.4
%
Occupancy of operating and redevelopment properties
91.2
%
 
89.8
%
Annualized base rent per leased rentable square foot
$
34.98

 
$
34.59


Leasing

For the three months ended June 30, 2013, we executed a total of 66 leases for approximately 768,000 RSF at 38 different properties (excluding month-to-month leases).  Of this total, approximately 331,000 RSF related to new or renewal leases of previously leased space (renewed/re-leased space), and approximately 437,000 RSF related to developed, redeveloped, or previously vacant space.  Of the 437,000 RSF, approximately 270,000 RSF related to our development or redevelopment projects, and the remaining approximately 167,000 RSF related to previously vacant space.  Rental rates for renewed/re-leased spaces were, on average, approximately 6.7% higher on a cash basis and approximately 12.7% higher on a GAAP basis than rental rates for the respective expiring leases.  Additionally, we granted tenant concessions, including free rent averaging approximately 1.8 months, with respect to the 768,000 RSF leased during the three months ended June 30, 2013.  Approximately 58% of the number of leases executed during the three months ended June 30, 2013, did not include concessions for free rent.  The weighted average lease term based on leased square feet for the leases executed during the three months ended June 30, 2013, was 8.4 years. 

For the six months ended June 30, 2013, we executed a total of 108 leases for approximately 1.5 million RSF at 54 different properties (excluding month-to-month leases).  Of this total, approximately 487,000 RSF related to new or renewal leases of previously leased space (renewed/re-leased space), and approximately 984,000 RSF related to developed, redeveloped, or previously vacant space.  Of the 984,000 RSF, approximately 727,000 RSF related to our development or redevelopment projects, and the remaining approximately 257,000 RSF related to previously vacant space.  Rental rates for renewed/re-leased spaces were, on average, approximately 6.5% higher on a cash basis and approximately 12.7% higher on a GAAP basis than rental rates for the respective expiring leases.  Additionally, we granted tenant concessions, including free rent averaging approximately 1.8 months, with respect to the 1,471,000 RSF leased during the six months ended June 30, 2013.  Approximately 59% of the number of leases executed during the six months ended June 30, 2013, did not include concessions for free rent.  The weighted average lease term based on leased square feet for the leases executed during the six months ended June 30, 2013, was 8.6 years.

As of June 30, 2013, approximately 94% of our leases (on a rentable square footage basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses, and other operating expenses (including increases thereto) in addition to base rent.  Additionally, approximately 95% of our leases (on a rentable square footage basis) contained effective annual rent escalations that were either fixed or indexed based on a consumer price index or another index, and approximately 92% of our leases (on a rentable square footage basis) provided for the recapture of certain capital expenditures.

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The following table summarizes our leasing activity at our properties:
 
Three Months Ended
 
Six Months Ended
 
Year Ended
 
June 30, 2013
 
June 30, 2013
 
December 31, 2012
Leasing activity:
Cash
 
GAAP
 
Cash
 
GAAP
 
Cash
 
GAAP
Renewed/re-leased space
 
 
 
 
 
 
 
 
 
 
 
Rental rate changes
6.7
%
 
12.7
%
 
6.5
%
 
12.7
%
 
(2.0
)%
 
5.2
%
New rates
$
33.22

 
$
33.61

 
$
32.65

 
$
33.00

 
$
29.86

 
$
30.36

Expiring rates
$
31.12

 
$
29.82

 
$
30.66

 
$
29.28

 
$
30.47

 
$
28.87

Rentable square footage
331,043

 
 
 
486,924

 
 
 
1,475,403

 
 
Number of leases
33

 
 
 
50

 
 
 
102

 
 
TI’s/lease commissions per square foot
$
9.03

 
 
 
$
7.95

 
 
 
$
6.22

 
 
Average lease terms
4.8 years

 
 
 
4.1 years

 
 
 
4.7 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Developed/redeveloped/previously vacant space leased
 
 
 
 
 
 
 
 
 
 
 
New rates
$
46.73

 
$
54.11

 
$
49.04

 
$
53.24

 
$
30.66

 
$
32.56

Rentable square footage
436,892

 
 
 
983,912

 
 
 
1,805,693

 
 
Number of leases
33

 
 
 
58

 
 
 
85

 
 
TI’s/lease commissions per square foot
$
31.40

 
 
 
$
18.12

 
 
 
$
11.02

 
 
Average lease terms
11.2 years

 
 
 
10.7 years

 
 
 
9.0 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Leasing activity summary:
 
 
 
 
 
 
 
 
 
 
 
Totals (1)
 
 
 
 
 
 
 
 
 
 
 
New rates
$
40.91

 
$
45.27

 
$
43.62

 
$
46.54

 
$
30.30

 
$
31.57

Rentable square footage
767,935

 
 
 
1,470,836

 
 
 
3,281,096

 
 
Number of leases
66

 
 
 
108

 
 
 
187

 
 
TI’s/lease commissions per square foot
$
21.76

 
 
 
$
14.75

 
 
 
$
8.87

 
 
Average lease terms
8.4 years

 
 
 
8.6 years

 
 
 
7.1 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease expirations
 
 
 
 
 
 
 
 
 
 
 
Expiring rates
$
31.15

 
$
29.86

 
$
31.44

 
$
29.42

 
$
30.03

 
$
27.65

Rentable square footage
440,712

 
 
 
747,722

 
 
 
2,350,348

 
 
Number of leases
50

 
 
 
81

 
 
 
162

 
 

(1)
Excludes ten month-to-month leases for 37,011 RSF at June 30, 2013.

During the three months ended June 30, 2013, we granted tenant concessions/free rent averaging approximately 1.8 months with respect to the 767,935 RSF leased. During the six months ended June 30, 2013, we granted tenant concessions/free rent averaging approximately 1.8 months with respect to the 1,470,836 RSF leased.
Lease Structure
 
June 30, 2013
 
Percentage of triple net leases
 
94%
 
Percentage of leases containing annual rent escalations
 
95%
 
Percentage of leases providing for the recapture of capital expenditures
 
92%
 
    

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The following chart presents our total RSF leased (in thousands) by development/redevelopment/previously vacant space and renewed/re-leased space:

Summary of Lease Expirations

The following table summarizes information with respect to the lease expirations at our properties as of June 30, 2013:
Year of Lease Expiration
 
Number of Leases Expiring
 
RSF of Expiring Leases
 
Percentage of
Aggregate Total RSF
 
Annualized Base Rent of Expiring Leases (per RSF)
2013
 
43

(1) 
 
410,254

(1) 
 
3.0
%
 
$31.83
2014
 
102

 
 
1,176,749

 
 
8.6
%
 
$28.93
2015
 
77

 
 
1,411,738

 
 
10.3
%
 
$32.45
2016
 
66

 
 
1,413,108

 
 
10.3
%
 
$30.38
2017
 
64

 
 
1,585,740

 
 
11.5
%
 
$30.67
2018
 
36

 
 
1,296,499

 
 
9.4
%
 
$39.48
2019
 
24

 
 
690,566

 
 
5.0
%
 
$32.83
2020
 
17

 
 
789,909

 
 
5.8
%
 
$39.93
2021
 
20

 
 
828,009

 
 
6.0
%
 
$37.02
2022
 
16

 
 
567,703

 
 
4.1
%
 
$29.32
Thereafter
 
29

 
 
2,318,276

 
 
16.9
%
 
$39.73

(1)
Excludes 10 month-to-month leases for 37,011 RSF.


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The following tables present information by market with respect to our lease expirations as of June 30, 2013, for the remainder of this year and all of next year:

 
 
2013 RSF of Expiring Leases
 
Annualized Base Rent of Expiring Leases (per RSF)
 
Market
 
Leased
 
Negotiating/Anticipating
 
Targeted for Redevelopment
 
Remaining Expiring Leases
 
Total (1)
 
 
Greater Boston
 
47,160

 
21,396

 
—

 
33,620

 
102,176

 
$
38.04

 
San Francisco Bay Area
 
12,313

 
16,818

 
—

 
36,003

 
65,134

 
22.13

 
San Diego
 
—

 
—

 
—

 
34,013

 
34,013

 
29.51

 
Greater NYC
 
—

 
—

 
—

 
—

 
—

 
—

 
Suburban Washington, D.C.
 
—

 
114,568

(2) 
—

 
54,352

 
168,920

 
34.53

 
Seattle
 
—

 
1,350

 
—

 
9,574

 
10,924

 
27.46

 
Research Triangle Park
 
—

 
16,587

 
—

 
1,603

 
18,190

 
25.24

 
Canada
 
—

 
—

 
—

 
—

 
—

 
—

 
Non-cluster markets
 
—

 
3,508

 
—

 
1,000

 
4,508

 
12.35

 
Asia
 
—

 
4,069

 
—

 
2,320

 
6,389

 
12.00

(3) 
Total
 
59,473

 
178,296

 
—

 
172,485

 
410,254

 
$
31.83

 
Percentage of expiring leases
 
15
%
 
43
%
 
—
%
 
42
%
 
100
%
 
 
 

 
 
2014 RSF of Expiring Leases
 
Annualized Base Rent of Expiring Leases (per RSF)
 
Market
 
Leased
 
Negotiating/Anticipating
 
Targeted for Redevelopment
 
Remaining Expiring Leases
 
Total
 
 
Greater Boston
 
—

 
87,516

 
—

 
237,327

 
324,843

 
$
38.03

 
San Francisco Bay Area
 
19,291

 
31,760

 
—

 
280,164

 
331,215

 
27.08

 
San Diego
 
—

 
—

 
—

 
52,153

 
52,153

 
23.25

 
Greater NYC
 
—

 
48,281

 
—

 
42,487

 
90,768

 
38.65

 
Suburban Washington, D.C.
 
—

 
8,319

 
85,297

(4) 
74,017

 
167,633

 
19.18

 
Seattle
 
—

 
13,401

 
—

 
9,571

 
22,972

 
43.57

 
Research Triangle Park
 
—

 
10,527

 
—

 
45,812

 
56,339

 
22.91

 
Canada
 
—

 
—

 
—

 
81,870

 
81,870

 
21.51

 
Non-cluster markets
 
—

 
—

 
—

 
22,407

 
22,407

 
18.35

 
Asia
 
—

 
15,760

 
—

 
10,789

 
26,549

 
11.89

(3) 
Total
 
19,291

 
215,564

 
85,297

 
856,597

 
1,176,749

 
$
28.93

 
Percentage of expiring leases
 
2
%
 
18
%
 
7
%
 
73
%
 
100
%
 
 
 

(1)
Excludes 10 month-to-month leases for 37,011 RSF.
(2)
Includes approximately 55,000 RSF at 5 Research Court. We expect the tenant to extend their lease beyond the 2013 lease expiration date. This property consists of non-laboratory space and upon rollover may undergo conversion into laboratory space through redevelopment subsequent to the final lease expiration.
(3)
Expirations relate to two properties with an average investment of $101 per RSF.
(4)
Represents projects containing approximately 60,000 RSF and 25,000 RSF at 930 Clopper Road and 1500 East Gude Drive, respectively, which we expect to convert from non-laboratory space to laboratory space through redevelopment.


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Location of properties

The locations of our properties are diversified among a number of life science cluster markets.  The following table sets forth, as of June 30, 2013, the total RSF and annualized base rent of our properties in each of our existing markets (dollars in thousands):
 
 
Rentable Square Feet
 
Number of
 
 
Market
 
Operating
 
Development
 
Redevelopment
 
Total
 
% Total
 
Properties
 
Annualized Base Rent (1)
Greater Boston
 
3,093,019

 
691,487

 
26,270

 
3,810,776

 
22
%
 
36

 
$
119,616

 
27
%
San Francisco Bay Area
 
2,504,258

 
330,030

 
36,473

 
2,870,761

 
17

 
26

 
95,849

 
22

San Diego
 
2,575,382

 
—

 
68,423

 
2,643,805

 
16

 
33

 
84,267

 
20

Greater NYC
 
494,656

 
419,806

 
—

 
914,462

 
5

 
6

 
32,048

 
7

Suburban Washington, D.C.
 
2,088,291

 
—

 
67,055

 
2,155,346

 
13

 
29

 
43,627

 
10

Seattle
 
720,496

 
—

 
26,020

 
746,516

 
4

 
10

 
29,170

 
7

Research Triangle Park
 
941,807

 
—

 
—

 
941,807

 
6

 
14

 
18,764

 
4

Canada
 
1,103,507

 
—

 
—

 
1,103,507

 
7

 
5

 
9,397

 
2

Non-cluster markets
 
61,002

 
—

 
—

 
61,002

 
—

 
2

 
609

 
—

North America
 
13,582,418

 
1,441,323

 
224,241

 
15,247,982

 
90

 
161

 
433,347

 
99

Asia
 
617,602

 
618,976

 
85,728

 
1,322,306

 
8

 
9

 
4,736

 
1

Continuing operations
 
14,200,020

 
2,060,299

 
309,969

 
16,570,288

 
98

 
170

 
438,083

 
100
%
Discontinued operations
 
51,273

 
—

 
—

 
51,273

 
—

 
2

 
—

 
 
Consolidated
 
14,251,293

 
2,060,299

 
309,969

 
16,621,561

 
98

 
172

 
$
438,083

 
 
Greater Boston - unconsolidated
 
—

 
413,536

 
—

 
413,536

 
2

 
1

 
 
 
 
Total consolidated and unconsolidated
 
14,251,293

 
2,473,835

 
309,969

 
17,035,097

 
100
%
 
173

 
 
 
 

(1)
Annualized base rent means the annualized fixed base rental amount in effect as of June 30, 2013 (using rental revenue computed on a straight-line basis in accordance with GAAP).  Represents annualized base rent related to our operating rentable square feet.


The chart below illustrates our annualized base rent as of June 30, 2013, in leading “brain trust” cluster markets:


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Table of Contents


Summary of occupancy percentages

The occupancy percentages of our properties are consistent throughout our science cluster markets.  The following table sets forth the occupied percentage for our operating assets and our assets under redevelopment in each of our existing markets as of June 30, 2013:
 
 
Operating Properties
 
Operating and Redevelopment Properties
Market
 
June 30, 2013
 
March 31, 2013
 
June 30, 2012
 
June 30, 2013
 
March 31, 2013
 
June 30, 2012
Greater Boston
 
95.5
%
 
95.8
%
 
93.1
%
 
94.7
%
 
93.5
%
 
84.1
%
San Francisco Bay Area
 
97.3

 
95.8

 
97.0

 
95.9

 
93.8

 
94.7

San Diego
 
94.2

 
93.4

 
95.5

 
91.7

 
91.0

 
85.5

Greater NYC
 
98.4

 
98.4

 
94.2

 
98.4

 
98.4

 
94.2

Suburban Washington, D.C.
 
92.3

 
90.8

 
90.1

 
89.4

 
88.0

 
86.3

Seattle
 
93.1

(1) 
96.7

 
96.1

 
89.9

 
88.2

 
90.8

Research Triangle Park
 
91.4

(2) 
93.6

 
95.5

 
91.4

 
93.6

 
95.5

Canada
 
96.8

 
94.7

 
92.7

 
96.8

 
94.7

 
92.7

Non-cluster markets
 
54.0

 
54.0

 
51.4

 
54.0

 
54.0

 
51.4

North America
 
94.6

 
94.2

 
93.9

 
92.9

 
91.8

 
88.4

Asia
 
68.1

 
67.1

 
67.4

 
59.8

 
57.7

 
55.0

Continuing operations
 
93.3
%
 
93.0
%
 
92.9
%
 
91.2
%
 
90.1
%
 
86.9
%

(1)
Decrease primarily attributable to the delivery of 39,661 vacant RSF at our redevelopment project at 1551 Eastlake Avenue in the Lake Union submarket. Excluding this delivery, the occupancy percentage of operating properties was 98.5%.
(2)
We anticipate an increase in occupancy during the three months ended December 31, 2013.

For a detailed listing of our properties portfolio please see our “Earnings Release and Supplemental Information for the Second Quarter Ended June 30, 2013.”


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Client tenants

Our life science properties are leased to a diverse group of client tenants, with no client tenant accounting for more than 7.3% of our annualized base rent.  The following table sets forth information regarding leases with our 20 largest client tenants based upon annualized base rent as of June 30, 2013 (dollars in thousands):
 
 
 
Number of Leases
 
Remaining Lease Term in 
Years (1)
 
Aggregate Rentable Square Feet
 
Percentage
of
Aggregate Total Square  Feet
 

 
Percentage
of
Aggregate Annualized Base Rent
 
Investment-Grade
Client Tenants
 

 
Client Tenant
 
 
 
 
 
Annualized Base Rent
 
 
Fitch Rating
 
Moody’s Rating
 
S&P Rating
 
Education/Research
1
Novartis AG
 
13

 
3.7

 
635,917

 
3.8
%
 
$
31,993

 
7.3
%
 
AA
 
Aa3
 
AA-
 
−
2
Illumina, Inc.
 
1

 
18.3

 
497,078

 
3.0

 
19,531

 
4.5

 
−
 
−
 
−
 
−
3
Bristol-Myers Squibb Company
 
6

 
4.6

 
419,624

 
2.5

 
15,840

 
3.6

 
A-
 
A2
 
A+
 
−
4
Eli Lilly and Company
 
6

 
9.7

 
290,132

 
1.7

 
15,563

 
3.6

 
A
 
A2
 
AA-
 
−
5
FibroGen, Inc.
 
1

 
10.4

 
234,249

 
1.4

 
14,197

 
3.3

 
−
 
−
 
−
 
−
6
Roche
 
3

 
4.8

 
348,918

 
2.1

 
13,867

 
3.2

 
AA
 
A1
 
AA
 
−
7
United States Government
 
9

 
4.8

 
332,578

 
2.0

 
13,119

 
3.0

 
AAA
 
Aaa
 
AA+
 
−
8
GlaxoSmithKline plc
 
5

 
6.1

 
208,394

 
1.3

 
10,187

 
2.3

 
A+
 
A1
 
A+
 
−
9
Celgene Corporation
 
3

 
8.1

 
250,586

 
1.5

 
9,340

 
2.1

 
−
 
Baa2
 
BBB+
 
−
10
Onyx Pharmaceuticals, Inc.
 
2

 
9.0

 
228,373

 
1.4

 
8,498

 
1.9

 
−
 
−
 
−
 
−
11
Massachusetts Institute of Technology
 
4

 
3.8

 
185,403

 
1.1

 
8,496

 
1.9

 
−
 
Aaa
 
AAA
 
ü
12
NYU-Neuroscience Translational Research Institute
 
2

 
10.5

 
86,756

 
0.5

 
8,012

 
1.8

 
−
 
Aa3
 
AA-
 
ü
13
The Regents of the University of California
 
3

 
8.2

 
188,654

 
1.1

 
7,787

 
1.8

 
AA
 
Aa1
 
AA
 
ü
14
Alnylam Pharmaceuticals, Inc.
 
1

 
3.3

 
129,424

 
0.8

 
6,081

 
1.4

 
−
 
−
 
−
 
−
15
Gilead Sciences, Inc.
 
1

 
7.0

 
109,969

 
0.7

 
5,824

 
1.3

 
−
 
Baa1
 
A-
 
−
16
Pfizer Inc.
 
2

 
5.7

 
116,518

 
0.7

 
5,502

 
1.3

 
A+
 
A1
 
AA
 
−
17
The Scripps Research Institute
 
2

 
3.4

 
101,775

 
0.6

 
5,200

 
1.2

 
AA-
 
Aa3
 
−
 
ü
18
Theravance, Inc. (2)
 
2

 
6.9

 
130,342

 
0.8

 
4,895

 
1.1

 
−
 
−
 
−
 
−
19
Infinity Pharmaceuticals, Inc.
 
2

 
1.6

 
68,020

 
0.4

 
4,423

 
1.0

 
−
 
−
 
−
 
−
20
Quest Diagnostics Incorporated
 
1

 
3.5

 
248,186

 
1.5

 
4,341

 
1.0

 
BBB+
 
Baa2
 
BBB+
 
−
 
Total/weighted average top 20
 
69

 
7.3

 
4,810,896

 
28.9
%
 
$
212,696

 
48.6
%
 
 
 
 
 
 
 
 

(1)
Represents remaining lease term in years based on percentage of aggregate annualized base rent in effect as of June 30, 2013.
(2)
As of April 25, 2013, GlaxoSmithKline plc owned approximately 27% of the outstanding stock of Theravance, Inc.

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The chart below shows client tenant business type by annualized base rent as of June 30, 2013:

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 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 life science research team is responsible for assessing and monitoring the credit quality of our tenants and any material changes in credit quality.


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Investment in real estate, net

Our investments in real estate, net, consisted of the following as of June 30, 2013 (dollars in thousands):
 
June 30, 2013
 
Book Value
 
Square Feet
Rental properties:
 
 
 
Land (related to rental properties)
$
512,915

 
 
Buildings and building improvements
5,006,987

 
 
Other improvements
166,894

 
 
Rental properties
5,686,796

 
14,251,293

Less: accumulated depreciation
(878,199
)
 
 
Rental properties, net
4,808,597

 
 
 
 
 
 
Construction in progress/current value-added projects:
 
 
 
Active development in North America
673,461

 
1,441,323

Investment in unconsolidated joint venture
33,838

 
413,536

Active redevelopment in North America
104,994

 
224,241

Active development and redevelopment in Asia
98,949

 
704,704

Generic infrastructure/building improvement projects in North America
53,333

(1) 
 
 
964,575

 
2,783,804

 
 
 
 
Subtotal
5,773,172

 
17,035,097

 
 
 
 
Land/future value-added projects:
 
 
 
Land undergoing predevelopment activities (CIP) in North America (2)
313,498

 
1,917,667

Land held for future development in North America
211,292

 
3,531,843

Land held for future development/undergoing predevelopment activities (CIP) in Asia
79,105

 
6,828,864

Land subject to sale negotiations
76,312

 
458,724

 
680,207

 
12,737,098

 
 
 
 
Investments in real estate, net
$
6,453,379

 
29,772,195

Add: accumulated depreciation
878,199

 
 
Gross investments in real estate (2)
$
7,331,578

 
29,772,195


(1)
Represents the book value associated with approximately 96,372 square feet at four projects undergoing construction of generic laboratory improvements, of which approximately 81% was leased, but not delivered, as of June 30, 2013.
(2)
In addition to assets included in our gross investments in real estate, we hold options/rights for parcels supporting the future ground-up development of approximately 420,000 RSF in Alexandria CenterTM for Life Science - New York City related to an option under our ground lease. Also, our asset base contains additional embedded development opportunities aggregating approximately 715,000 RSF which represents additional development and expansion rights related to existing rental properties.



Development, Redevelopment, and Future Value-Added Projects

A key component of our business model is our value-added development and redevelopment projects.  These programs are focused on providing high-quality, generic, and reusable life science laboratory space to meet the real estate requirements of a wide range of client tenants in the life science industry.  During the period of construction, these assets are non-income-producing assets.


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A significant amount of our active development and redevelopment projects are pre-leased and expected to be primarily delivered over the next one to six quarters.  The largest project in our land undergoing predevelopment activities in North America includes 1.2 million RSF at Alexandria CenterTM at Kendall Square in East Cambridge, Massachusetts.  Upon completion, each value-added project is expected to generate significant revenues and cash flows.  Our development and redevelopment projects are generally in locations that are highly desirable to life science entities, which we believe results in higher occupancy levels, longer lease terms, and higher rental income and returns. We intend to reduce our land held for future development through sales. We currently have $76.3 million of land assets under sale negotiations.  Non-income-producing assets as a percentage of our gross investments in real estate is targeted to decrease to a range of 15% to 17% by December 31, 2013, and targeted to be 15% or less for the subsequent periods.

Development projects generally consist of the ground-up development of generic and reusable life science laboratory facilities.  Redevelopment projects generally consist of the permanent change in use of office, warehouse, and shell space into generic life science laboratory space.  We anticipate execution of new active development projects for aboveground vertical construction of new life science laboratory space generally with significant pre-leasing.  Predevelopment activities include entitlements, permitting, design, site work, and other activities prior to commencement of vertical construction of aboveground building improvements.  Our objective also includes the advancement of predevelopment efforts to reduce the time required to deliver projects to prospective client tenants.  These critical activities add significant value for future ground-up development and are required for the vertical construction of buildings.  Ultimately, these projects will provide high-quality facilities for the life science industry and are expected to generate significant revenue and cash flows for the Company.

As of June 30, 2013, we had six ground-up development projects in process, including an unconsolidated joint venture development project, aggregating approximately 1,854,859 RSF.  We also had five projects undergoing conversion into laboratory space through redevelopment, aggregating approximately 224,241 RSF.  These projects, along with recently delivered projects, certain future projects, and contribution from same properties, are expected to contribute significant increases in rental income, NOI, and cash flows.

The chart below shows the historical trend of non-income-producing assets as a percentage of our gross investments in real estate:


Investment in unconsolidated real estate entity

We have a 27.5% equity interest in a joint venture that is currently developing a building totaling 413,536 RSF in the Longwood Medical Area of the Greater Boston market. Construction of this $350 million project commenced in April 2012 and is being funded with a $213 million construction loan, as well as capital contributions from each of the partners to the joint venture. The initial occupancy date for this project is expected during the three months ended December 31, 2014, and the project is 37% pre-leased to Dana-Farber Cancer Institute, Inc. In addition, Dana-Farber Cancer Institute, Inc. has an option to lease an additional two floors approximating 99,000 RSF, or 24%, of the total RSF of the project. We expect to earn construction management and other fees of approximately $3.5 million through 2015, and recurring annual property management fees thereafter, from this project. The project is expected to stabilize in 2016.


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Our total investment into this project is approximately $33.8 million as of June 30, 2013. We expect to fund an additional $16.8 million of construction costs and our total investment at completion is expected to be approximately $50.6 million. The $350 million total project costs are being funded primarily from a non-recourse $213 million secured construction loan of which approximately $75.0 million was drawn and outstanding as of June 30, 2013. The construction loan has an interest rate of LIBOR + 3.75%, with a floor of 5.25%, and a maturity date of April 1, 2019, assuming the joint venture exercises its two separate one-year options to extend the stated maturity date of April 1, 2017. Our joint venture partners and the Company will fund the remaining development cost. Our projected investment at completion of the development is $50.6 million. We expect to earn yields of: 8.3% Initial Stabilized Yield on a cash basis, 8.9% Initial Stabilized Yield on a GAAP basis, and 9.3% on an average cash basis. Our Initial Stabilized Yields are based on our total projected $50.6 million investment at completion and exclude construction management fees or recurring annual property management fees to be earned from this project.

Summary of capital expenditures

Our projected capital expenditures for the remainder of 2013, and thereafter, consisted of the following (in thousands):

 
 
Projected
Projected construction spending
 
Six Months Ended December 31, 2013
 
Thereafter
Development projects - North America
 
$
202,148

 
$
340,612

Redevelopment projects - North America
 
27,562

 
10,451

Development and redevelopment projects - Asia
 
14,185

 
37,798

Future value-added construction projects
 
41,237

(1) 
TBD

Total development and redevelopment projects
 
285,132

 
388,861

 
 
 
 
 
Value-added predevelopment (2)
 
43,024

(3) 
TBD

Generic infrastructure/building improvement projects in North America (4)
 
29,534

 
TBD

Non-revenue-enhancing capital expenditures
 
3,549

 
TBD

Total construction spending
 
$
361,239

 
$
388,861

 
 
 
 
 
Guidance range for development, redevelopment, and construction for the six months ended December 31, 2013
 
$346,000 - 376,000

(5) 
 

(1)
Includes future value-added projects, including among others, 3033 Science Park Road, and remaining construction costs related to certain value-added projects recently transferred into rental properties upon substantial completion. The recently completed projects include certain spaces, generally less than 10% of the project, that may require additional construction prior to occupancy. For example, this includes our recently delivered redevelopments at 400 Technology Square, 1551 Eastlake Avenue, and 10300 Campus Point Drive which generally have 15,000 to 30,000 RSF of value added activities to complete in connection with the lease-up of the space.
(2)
Refer to the land undergoing predevelopment activities (additional CIP) section in the definition of future value-added projects.
(3)
Includes traditional preconstruction costs plus predevelopment costs related to: i) approximately $16 million related to site and infrastructure costs for the 1.2 million RSF related to 50 Binney Street, 100 Binney Street and the 228,000 RSF of residential at the Alexandria Center™ at Kendall Square, including utility access and roads, installation of storm drain lines, infiltration systems, water lines, traffic lighting/signals, streets, and sidewalks, and ii) approximately $5 million related to the design, permitting, and construction of the building foundation for a new residential building adjacent to the 75/125 Binney Street development project at the Alexandria Center™ at Kendall Square. Site and infrastructure costs related to 75/125 Binney Street and 225 Binney Street are included in our estimate of cost at completion and initial stabilized yields for each project.
(4)
Includes, among others, generic infrastructure building improvement projects in North America, including 2625/2627/2631 Hanover Street, 7030 Kit Creek Road, 1300 Quince Orchard Boulevard, 44 Hartwell Avenue, 215 First Street, and 300 Technology Square.
(5)
The estimated development, redevelopment, and construction amounts for the six months ended December 31, 2013, represent the mid-point of our guidance for total spending.  Our guidance provides a range for the total construction spending for 2013 primarily to accommodate timing of construction activity.


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Our historical capital expenditures as of June 30, 2013, consisted of the following (in thousands):
Historical construction spending
 
Six Months Ended June 30, 2013
Development projects - North America
 
$
152,955

Redevelopment projects - North America
 
53,779

Development and redevelopment projects - Asia
 
4,461

Total development and redevelopment projects
 
211,195

 
 
 
Value-added predevelopment (1)
 
28,194

Generic infrastructure/building improvement projects in North America (2)
 
13,197

Total construction spending
 
$
252,586


(1)
Includes traditional preconstruction costs plus predevelopment costs related to the 1.2 million RSF related to 50 Binney Street, 100 Binney Street and the 228,000 RSF of residential at the Alexandria Center™ at Kendall Square including: i) site and infrastructure costs for, including utility access and roads, installation of storm drain lines, infiltration systems, water lines, traffic lighting/signals, streets, and sidewalks, ii) building design, and iii) other related project costs including capitalized interest.
(2)
Includes revenue-enhancing projects and amounts shown in the table below related to non-revenue-enhancing capital expenditures.

The table below shows the average per square foot of property-related non-revenue-enhancing capital expenditures, tenant improvements, and leasing costs, excluding capital expenditures and tenant improvements that are recoverable from client tenants, revenue-enhancing, or related to properties that have undergone redevelopment (dollars in thousands, except per square foot amounts):

 
 
Six Months Ended June 30, 2013
Non-revenue enhancing capital expenditures (1)
 
$
933

Square feet in asset base
 
14,010,754

Non-revenue enhancing capital expenditures per square foot
 
$
0.07

Tenant improvements and leasing costs:
 
 
Re-tenanted space (2)
 
 
Tenant improvements and leasing costs
 
$
2,231

Re-tenanted square feet
 
132,585

Per square foot
 
$
16.83

Renewal space
 
 
Tenant improvements and leasing costs
 
$
1,641

Renewal square feet
 
354,339

Per square foot
 
$
4.63


(1)
Includes, among other costs, capital expenditures such as roof and HVAC system replacements.
(2)
Excludes space that has undergone redevelopment before re-tenanting.


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The following table provides details on our active development projects in North America as of June 30, 2013 (dollars in thousands, except per square foot amounts):
 
 
 
 
Leased Status RSF
 
 
 
Project Start Date
 
Initial Occupancy Date
 
Stabilization Date
 
 
 
 
 
 
Leased
 
Negotiating
 
Total Leased/Negotiating
 
 
 
 
 
Property/Market - Submarket
 
CIP RSF
 
RSF
 
%
 
RSF
 
%
 
RSF
 
%
 
 
 
 
Client Tenants
Consolidated development projects in North America
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
75/125 Binney Street/Greater Boston - Cambridge
 
386,275

 
244,123

 
63
%
 
139,374

(1) 
36
%
 
383,497

 
99
%
 
1Q13
 
1Q15
 
2015
 
ARIAD Pharmaceuticals, Inc.
225 Binney Street/Greater Boston - Cambridge
 
305,212

 
305,212

 
100
%
 
—

 
—
%
 
305,212

 
100
%
 
4Q11
 
Oct 2013
 
Oct 2013
 
Biogen Idec Inc.
499 Illinois Street/San Francisco Bay Area - Mission Bay
 
222,780

 
97,702

 
44
%
 
64,848

(2) 
29
%
 
162,550

 
73
%
 
2Q11
 
2Q14
 
2014
 
Illumina, Inc.
269 East Grand Avenue/San Francisco Bay Area - So. San Francisco
 
107,250

 
107,250

 
100
%
 
—

 
—
%
 
107,250

 
100
%
 
1Q13
 
4Q14
 
2014
 
Onyx Pharmaceuticals, Inc.
430 East 29th Street/Greater NYC - Manhattan
 
419,806

 
182,448

 
44
%
 
52,257

 
12
%
 
234,705

 
56
%
 
4Q12
 
Dec 2013
 
2015
 
Roche/Investment-grade entity
Consolidated development projects in North America
 
1,441,323

 
936,735

 
65
%
 
256,479

 
18
%
 
1,193,214

 
83
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unconsolidated joint venture
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
360 Longwood Avenue/Greater Boston - Longwood
 
413,536

 
154,100

 
37
%
 
70,000

 
17
%
 
224,100

 
54
%
 
2Q12
 
4Q14
 
2016
 
Dana-Farber Cancer Institute, Inc.
Total/weighted average
 
1,854,859

 
1,090,835

 
59
%
 
326,479

 
17
%
 
1,417,314

 
76
%
 
 
 
 
 
 
 
 
 
 
Investment
 
 
 
 
 
 
 
 
 
 
Cost To Complete
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
2014 and Thereafter
 
 
 
 
 
Initial Stabilized Yield (unlevered)
 
 
 
 
 
 
Construction Loans
 
Internal Funding
 
Construction Loans
 
Internal Funding
 
Total at Completion
 
Cost
Per RSF
 
 
Average
Cash Yield
Property/Market - Submarket
 
CIP
 
 
 
 
 
 
 
Cash
 
GAAP
 
Consolidated development projects in North America
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
75/125 Binney Street/Greater Boston - Cambridge
 
$
123,218

 
$
57,173

 
$
—

 
$
171,048

 
$
—

 
$
351,439

(3) 
$
910

 
8.0%
 
8.2%
 
9.1%
225 Binney Street/Greater Boston - Cambridge
 
$
145,172

 
$
—

 
$
35,101

 
$
—

 
$
—

 
$
180,273

 
$
591

 
7.5%
 
8.1%
 
8.1%
499 Illinois Street/San Francisco Bay Area - Mission Bay
 
$
116,776

 
$
—

 
$
14,033

 
$
—

 
$
22,400

 
$
153,209

 
$
688

 
6.4%
 
7.2%
 
7.3%
269 East Grand Avenue/ San Francisco Bay Area - So. San Francisco
 
$
9,626

 
$
1,572

 
$
5,674

 
$
34,428

 
$
—

 
$
51,300

 
$
478

 
8.1%
 
9.3%
 
9.3%
430 East 29th Street/Greater NYC - Manhattan
 
$
278,669

 
$
—

 
$
75,035

 
$
—

 
$
109,541

 
$
463,245

 
$
1,103

 
6.6%
 
6.5%
 
7.1%
Consolidated development projects in North America
 
$
673,461

 
$
58,745

 
$
129,843

 
$
205,476

 
$
131,941

 
$
1,199,466

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property/Market - Submarket
 
CIP
 
Construction Loans and
JV Capital
 
Internal Funding
 
Construction Loans and
JV Capital
 
Internal Funding
 
Total at Completion
 
 
 
 
 
 
 
 
Unconsolidated joint venture
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
100% of JV: 360 Longwood Avenue/Greater Boston - Longwood
 
$
168,776

 
$
38,934

 
$
13,560

 
$
125,535

 
$
3,195

 
$
350,000

 
$
846

 
8.3%
 
8.9%
 
9.3%
Less: Funding from Secured Construction Loans and JV Partner Capital (4)
 
$
(134,938
)
 
$
(38,934
)
 
$
—

 
$
(125,535
)
 
$
—

 
$
(299,407
)
 
 
 
 
 
 
 
 
ARE investment in 360 Longwood Avenue (27.5% interest)
 
$
33,838

 
$
—

 
$
13,560

 
$
—

 
$
3,195

 
$
50,593

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total ARE investment
 
$
707,299

 
$
58,745

 
$
143,403

 
$
205,476

 
$
135,136

 
$
1,250,059

 
 
 
 
 
 
 
 
Total 2013 and Thereafter
 
 
 
 
 
$
202,148

 
 
 
$
340,612

 
 
 
 
 
 
 
 
 
 

(1)
ARIAD Pharmaceuticals, Inc. executed an LOI at 75/125 Binney Street 139,374 RSF of expansion space. An amendment to their lease is in process to increase their RSF to 383,497, or 99% of the development.
(2)
Includes 30,000 RSF subject to an executed LOI and lease negotiations. The remaining 34,848 RSF is under negotiation.
(3)
We expect to close a construction loan financing during the three months ended September 30, 2013, to provide funding for 65% of the total cost at completion.
(4)
Includes non-recourse secured construction loan of approximately $213.2 million, at a rate of L+3.75% with a floor of 5.25%, of which approximately $75.0 million was drawn as of June 30, 2013.

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All project information, including rentable square feet; investment; Initial Stabilized Yields; Average Cash Yields; and project start, occupancy and stabilization dates, relates to the discrete portion of each property undergoing active redevelopment. A redevelopment project does not necessarily represent the entire property or the entire vacant portion of a property. The following table provides details on all of our active redevelopment projects in North America as of June 30, 2013 (dollars in thousands, except per rentable square foot amounts):
 
 
Project RSF
 
Leased Status
 
 
 
 
 
 
 
 
In
 
 
 
 
 
Leased
 
Negotiating
 
Total Leased/Negotiating
 
Former
 
Use After
 
 
Property/Market − Submarket
 
Service
 
CIP
 
Total
 
RSF
 
%
 
RSF
 
%
 
RSF
 
%
 
Use
 
Conversion
 
Client Tenants
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
285 Bear Hill Road/Greater Boston - Route 128
 
—

 
26,270

 
26,270

 
26,270

 
100
%
 
—

 
—
%
 
26,270

 
100%
 
Office/
Manufacturing
 
Laboratory
 
Intelligent Medical Devices, Inc.
343 Oyster Point/San Francisco Bay Area - South San Francisco
 
17,507

 
36,473

 
53,980

 
42,445

 
79
%
 
—

 
—
%
 
42,445

 
79%
 
Office
 
Laboratory
 
Calithera BioSciences, Inc.;
CytomX Therapeutics, Inc.
4757 Nexus Center Drive/San Diego - University Town Center
 
—

 
68,423

(1) 
68,423

 
68,423

(1) 
100
%
 
—

 
—
%
 
68,423

 
100%
 
Office/R&D/
Manufacturing/
Warehouse
 
Laboratory
 
Genomatica, Inc.
9800 Medical Center Drive/Suburban Washington, D.C. - Rockville
 
8,001

 
67,055

 
75,056

 
75,056

 
100
%
 
—

 
—
%
 
75,056

 
100%
 
Office/
Laboratory
 
Laboratory
 
National Institutes of Health
1616 Eastlake Avenue/Seattle - Lake Union
 
40,756

 
26,020

 
66,776

 
40,756

 
61
%
 
—

 
—
%
 
40,756

 
61%
 
Office
 
Laboratory
 
Infectious Disease Research Institute
Total/weighted average
 
66,264

 
224,241

 
290,505

 
252,950

 
87
%
 
—

 
—
%
 
252,950

 
87%
 
 
 
 
 
 

 
 
Investment
 
Initial Stabilized Yield (unlevered)
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
To Complete
 
 
 
 
 
 
 
 
Project Start Date
 
Initial Occupancy Date
 
Stabilization Date
 
 
In Service
 
CIP
 
2013
 
2014 and Thereafter
 
Total at Completion
 
Cost Per RSF
 
 
Average Cash Yield
 
 
 
Property/Market − Submarket
 
 
 
 
 
 
 
Cash
 
GAAP
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
285 Bear Hill Road/Greater Boston - Route 128
 
$
—

 
$
5,173

 
$
4,023

 
$
—

 
$
9,196

 
$
350

 
8.4%
 
8.8%
 
9.2%
 
4Q11
 
3Q13
 
3Q13
343 Oyster Point/San Francisco Bay Area - South San Francisco
 
$
5,222

 
$
9,882

 
$
1,317

 
$
918

 
$
17,339

 
$
321

 
9.6%
 
9.8%
 
10.1%
 
1Q12
 
3Q13
 
4Q13
4757 Nexus Center Drive/San Diego - University Town Center
 
$
—

 
$
10,619

 
$
18,694

 
$
5,516

 
$
34,829

 
$
509

 
7.6%
 
7.8%
 
8.5%
 
4Q12
 
4Q13
 
4Q13 (1)
9800 Medical Center Drive/Suburban Washington, D.C. - Rockville
 
$
8,275

 
$
69,279

 
$
3,150

 
$
—

 
$
80,704

 
$
1,075

(2) 
5.4%
 
5.4%
 
5.4%
 
3Q09
 
1Q13
 
3Q13
1616 Eastlake Avenue/Seattle - Lake Union
 
$
23,380

 
$
10,041

 
$
378

 
$
4,017

 
$
37,816

 
$
566

 
8.4%
 
8.6%
 
9.4%
 
4Q12
 
2Q13
 
2014
Total/weighted average
 
$
36,877

 
$
104,994

 
$
27,562

 
$
10,451

 
$
179,884

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
We expect to deliver 54,102 RSF, or 79% of the total project, to Genomatica, Inc. during the three months ended December 31, 2013. Genomatica, Inc. is contractually required to lease the remaining 14,411 RSF 18 to 24 months following the delivery of the initial 54,102 rentable square foot space.
(2)
Our multi-tenant four-building property at 9800 Medical Center Drive contains an aggregate of 281,586 RSF. Our total cash investment in the entire four-building property upon completion of the redevelopment will approximate $580 per square foot. Our total expected cash investment for the four-building property of approximately $580 per square foot includes our expected total investment at completion related to the 75,056 rentable square foot redevelopment of approximately $1,075 per square foot.


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The following table summarizes the components of the square footage of our future value-added projects in North America as of June 30, 2013 (dollars in thousands, except per square foot amounts):
 
 
Land Undergoing Predevelopment Activities
(Additional CIP)
 
Land Held for Future Development
 
Total
Market: Property - Submarket
 
Book Value
 
Square 
Feet
 
Cost per
Square Foot
 
Book Value
 
Square 
Feet
 
Cost per
Square Foot
 
Book Value
 
Square 
Feet
 
Cost per
Square Foot
Greater Boston:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alexandria CenterTM at Kendall Square - Lab/Office - Cambridge/Inner Suburbs
 
$
258,442

 
974,264

 
$
265

 
$
—

 
—

 
$
—

 
$
258,442

 
974,264

 
$
265

Alexandria CenterTM at Kendall Square - Residential - Cambridge/Inner Suburbs
 
1,956

 
78,000

 
25

 
3,413

 
150,000

 
23

 
5,369

 
228,000

 
24

Subtotal - Alexandria CenterTM at Kendall Square
 
260,398

 
1,052,264

 
247

 
3,413

 
150,000

 
23

 
263,811

 
1,202,264

 
219

Technology Square - Cambridge/Inner Suburbs
 
—

 
—

 
—

 
7,721

 
100,000

 
77

 
7,721

 
100,000

 
77

Greater Boston
 
$
260,398

 
1,052,264

 
$
247

 
$
11,134

 
250,000

 
$
45

 
$
271,532

 
1,302,264

 
$
209

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
San Francisco Bay Area:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Grand Ave - South San Francisco
 
$
—

 
—

 
$
—

 
$
42,853

 
397,132

 
$
108

 
$
42,853

 
397,132

 
$
108

Rozzi/Eccles - South San Francisco
 
—

 
—

 
—

 
72,864

 
514,307

 
142

 
72,864

 
514,307

 
142

San Francisco Bay Area
 
$
—

 
—

 
$
—

 
$
115,717

 
911,439

 
$
127

 
$
115,717

 
911,439

 
$
127

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
San Diego:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Science Park Road - Torrey Pines
 
$
16,635

 
176,500

 
$
94

 
$
—

 
—

 
$
—

 
$
16,635

 
176,500

 
$
94

5200 Illumina Way - University Town Center
 
14,719

 
392,983

 
37

 
—

 
—

 
—

 
14,719

 
392,983

 
37

10300 Campus Point - University Town Center
 
3,992

 
140,000

 
29

 
—

 
—

 
—

 
3,992

 
140,000

 
29

Executive Drive - University Town Center
 
3,995

 
49,920

 
80

 
—

 
—

 
—

 
3,995

 
49,920

 
80

San Diego
 
$
39,341

 
759,403

 
$
52

 
$
—

 
—

 
$
—

 
$
39,341

 
759,403

 
$
52

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Suburban Washington D.C.:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Medical Center Drive - Rockville
 
$
—

 
—

 
$
—

 
$
7,548

 
321,721

 
$
23

 
$
7,548

 
321,721

 
$
23

Research Boulevard - Rockville
 
—

 
—

 
—

 
6,905

 
347,000

 
20

 
6,905

 
347,000

 
20

Firstfield Road - Gaithersburg
 
—

 
—

 
—

 
4,052

 
95,000

 
43

 
4,052

 
95,000

 
43

Suburban Washington D.C.
 
$
—

 
—

 
$
—

 
$
18,505

 
763,721

 
$
24

 
$
18,505

 
763,721

 
$
24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seattle:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dexter/Terry Ave - Lake Union
 
$
—

 
—

 
$
—

 
$
18,747

 
232,300

 
$
81

 
$
18,747

 
232,300

 
$
81

Eastlake Ave - Lake Union
 
13,759

 
106,000

 
130

 
15,248

 
160,266

 
95

 
29,007

 
266,266

 
109

Seattle
 
$
13,759

 
106,000

 
$
130

 
$
33,995

 
392,566

 
$
87

 
$
47,754

 
498,566

 
$
96

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Markets
 
$
—

 
—

 
$
—

 
$
31,941

 
1,214,117

 
$
26

 
$
31,941

 
1,214,117

 
$
26

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future value-added projects in North America
 
$
313,498

 
1,917,667

 
$
163

 
$
211,292

 
3,531,843

 
$
60

 
$
524,790

 
5,449,510

 
$
96


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Real Estate Investment in Asia

As of June 30, 2013, our rental properties, net, in Asia, consisted of five operating properties aggregating approximately 617,602 square feet, with occupancy of 68.1%.  Annualized base rent of our operating properties in Asia was approximately $4.7 million as of June 30, 2013.  Our primary sources of revenues are rental income and tenant recoveries from leases of our properties.

We also had active construction projects in Asia aggregating 704,704 and 734,444 RSF as of June 30, 2013, and December 31, 2012, respectively.

Our investments in real estate, net, in Asia, consisted of the following as of June 30, 2013 (dollars in thousands, except per square foot amounts):
 
 
June 30, 2013
 
 
Book Value
 
Square Feet
 
Cost per
Square Foot
Rental properties, net, in China
 
$
21,233

 
299,484

 
$
71

Rental properties, net, in India
 
34,077

 
318,118

 
107

 
 
 
 
 
 
 
CIP/current value-added projects:
 
 
 
 
 
 
Active development projects in China
 
59,584

 
309,476

 
193

Active development projects in India
 
28,875

 
309,500

 
93

Active redevelopment projects in India
 
10,490

 
85,728

 
122

 
 
98,949

 
704,704

 
140

 
 
 
 
 
 
 
Land held for future development/land undergoing predevelopment activities
    (additional CIP) – India
 
79,105

 
6,828,864

 
12

Total investments in real estate, net, in Asia
 
$
233,364

 
8,151,170

 
$
29


The following tables provides details on our development and redevelopment projects in Asia as of June 30, 2013 (dollars in thousands):
 
 

 
 
 
 
 
Leased Status RSF
 
 
Project RSF
 
Leased
 
Negotiating
 
Total Leased/Negotiating
Description
 
In Service
 
CIP
 
Total
 
RSF
 
%
 
RSF
 
%
 
RSF
 
%
China development project
 
—

 
309,476

 
309,476

 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
India development projects
 
—

 
309,500

 
309,500

 
203,000

 
66
%
 
—

 
—
%
 
203,000

 
66
%
India redevelopment projects
 
54,960

 
85,728

 
140,688

 
55,160

 
39
%
 
6,400

 
5
%
 
61,560

 
44
%
Total active development and redevelopment in Asia
 
54,960

 
704,704

 
759,664

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
To Complete
 
Total at Completion
Description
 
 
 
 
 
 
 
 
 
In Service
 
CIP
 
2013
 
2014 and Thereafter
 
China development project
 
 
 
 
 
 
 
 
 
$
—

 
$
59,584

 
$
1,776

 
$
20,940

 
$
82,300

India development projects
 
 
 
 
 
 
 
 
 
—

 
28,875

 
10,186

 
12,724

 
51,785

India redevelopment projects
 
 
 
 
 
 
 
 
 
5,862

 
10,490

 
2,223

 
4,134

 
22,709

Total active development and redevelopment in Asia
 
 
 
 
 
 
 
 
 
$
5,862

 
$
98,949

 
$
14,185

 
$
37,798

 
$
156,794




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Results of operations

Same Properties

As a result of changes within our total property portfolio, the financial data presented in the following tables shows significant changes in revenue and expenses when comparing the three and six months ended June 30, 2013 and 2012.  In order to supplement an evaluation of our results of operations over a given period, we analyze the operating performance for all properties were fully operating for the entire periods presented (herein referred to as “Same Properties”) separate from properties acquired subsequent to the first day of the first period presented, properties undergoing active development and active redevelopment, and corporate entities (legal entities performing general and administrative functions), which are excluded from same property results (herein referred to as “Non-Same Properties”). Additionally, rental revenues from lease termination fees, if any, are excluded from the results of the Same Properties.

The following table reconciles same properties to total properties for the six months ended June 30, 2013:

Development - active
Properties
 
Redevelopment - deliveries since January 1, 2012
Properties
 
225 Binney Street
1

 
10300 Campus Point Drive
1

 
499 Illinois Street
1

 
20 Walkup Drive
1

 
269 East Grand Avenue
1

 
11119 North Torrey Pines Road
1

 
430 East 29th Street
1

 
3530/3550 John Hopkins Court
2

 
75/125 Binney Street
1

 
620 Professional Drive
1

 
360 Longwood Avenue (joint venture)
1

 
6275 Nancy Ridge Drive
1

 
 
6

 
1551 Eastlake Avenue
1

 
 
 
 
400 Technology Square
1

 
Redevelopment - active
 
 
 
9

 
9800 Medical Center Drive
3

 
 
 
 
1616 Eastlake Avenue
1

 
Development - active
6

 
285 Bear Hill Road
1

 
Redevelopment - active
7

 
343 Oyster Point Boulevard
1

 
Development - deliveries
6

 
4757 Nexus Center Drive
1

 
Redevelopment - deliveries
9

 
 
7

 
 
 
 
 
 
 
Development/Redevelopment - Asia
7

(2) 
Development - deliveries since January 1, 2012
 
 
 
 
 
259 East Grand Avenue
1

 
Acquisitions in North America since January 1, 2012
 
400/450 East Jamie Court
2

 
6 Davis Drive
1

 
Canada
1

(1) 
 
 
 
4755 Nexus Center Drive
1

 
Properties held for sale
2

 
5200 Illumina Way
1

(1) 
Total properties excluded from same properties
38

 
 
6

 
 
 
 
 
 
 
Same properties
135

 
 
 
 
Total consolidated and unconsolidated properties as of June 30, 2013
173

 

(1)
These properties each represent multiple buildings, a portion of which are included in our same property results. As a result, 26,426 RSF and 127,373 RSF for Canada and 5200 Illumina Way, respectively, have been excluded from our same property results.
(2)
Property count in Asia includes one development delivery, one property acquired since January 1, 2012, and five active development and redevelopment properties.


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Comparison of the three months ended June 30, 2013, to the three months ended June 30, 2012

The following table presents a comparison of the components of NOI for our Same Properties and Non-Same Properties for the three months ended June 30, 2013, compared to the three months ended June 30, 2012, and a reconciliation of NOI to income from continuing operations, the most directly comparable financial measure (dollars in thousands):

 
Three Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
$ Change
 
% Change
Revenues:
 
 
 
 
 
 
 
Rental – Same Properties
$
96,605

 
$
92,794

 
$
3,811

 
4.1
 %
Rental – Non-Same Properties
18,138

 
11,535

 
6,603

 
57.2

Total rental
114,743

 
104,329

 
10,414

 
10.0

 
 
 
 
 
 
 
 
Tenant recoveries – Same Properties
29,830

 
29,282

 
548

 
1.9

Tenant recoveries – Non-Same Properties
6,093

 
2,599

 
3,494

 
134.4

Total tenant recoveries
35,923

 
31,881

 
4,042

 
12.7

 
 
 
 
 
 
 
 
Other income – Same Properties
203

 
24

 
179

 
745.8

Other income – Non-Same Properties
3,366

 
9,359

 
(5,993
)
 
(64.0
)
Total other income
3,569

 
9,383

 
(5,814
)
 
(62.0
)
 
 
 
 
 
 
 
 
Total revenues – Same Properties
126,638

 
122,100

 
4,538

 
3.7

Total revenues – Non-Same Properties
27,597

 
23,493

 
4,104

 
17.5

Total revenues
154,235

 
145,593

 
8,642

 
5.9

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental operations – Same Properties
39,143

 
37,291

 
1,852

 
5.0

Rental operations – Non-Same Properties
7,180

 
4,811

 
2,369

 
49.2

Total rental operations
46,323

 
42,102

 
4,221

 
10.0

 
 
 
 
 
 
 
 
NOI:
 
 
 
 
 
 
 
NOI – Same Properties – GAAP basis
87,495

 
84,809

 
2,686

 
3.2

NOI – Non-Same Properties
20,417

 
18,682

 
1,735

 
9.3

Total NOI
107,912

 
103,491

 
4,421

 
4.3

 
 
 
 
 
 
 
 
Other expenses:
 
 
 
 
 
 
 
General and administrative
12,472

 
12,298

 
174

 
1.4

Interest
15,978

 
17,922

 
(1,944
)
 
(10.8
)
Depreciation and amortization
46,580

 
50,741

 
(4,161
)
 
(8.2
)
Loss on early extinguishment of debt
560

 
1,602

 
(1,042
)
 
(65.0
)
Total other expenses
75,590

 
82,563

 
(6,973
)
 
(8.4
)
Income from continuing operations
$
32,322

 
$
20,928

 
$
11,394

 
54.4
 %
 
 
 
 
 
 
 
 
NOI – Same Properties – GAAP basis
$
87,495

 
$
84,809

 
$
2,686

 
3.2
 %
Less: straight-line rent adjustments
(1,807
)
 
(4,897
)
 
3,090

 
(63.1
)
NOI – Same Properties – cash basis
$
85,688

 
$
79,912

 
$
5,776

 
7.2
 %


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Rental revenues

Total rental revenues for the three months ended June 30, 2013, increased by $10.4 million, or 10%, to $114.7 million, compared to $104.3 million for the three months ended June 30, 2012. The increase was due to rental revenues from our Non-Same Properties, including 15 development and redevelopment projects that were completed and delivered after April 1, 2012, and one operating property that was acquired after April 1, 2012. Occupancy of Same Properties was 93.4% and 92.5% for the three months ended June 30, 2013 and 2012, respectively.

Tenant recoveries

Tenant recoveries for the three months ended June 30, 2013, compared to the three months ended June 30, 2012, increased by $4.0 million, or 13%, to $35.9 million, compared to an increase of $4.2 million, or 10%, of rental operating expenses. Same Properties tenant recoveries increased by $0.5 million, while Same Properties rental operating expenses increased by $1.9 million, primarily due to increases in property tax rates for our properties located in Massachusetts, as well as the timing of certain repairs and maintenance projects and certain non-recoverable costs in the three months ended June 30, 2013, compared to the three months ended June 30, 2012. Non-Same Properties tenant recoveries increased by $3.5 million as a result of a Non-Same Properties rental operating expense increase of $2.4 million. As of June 30, 2013, approximately 94% of our leases (on a rentable square footage basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses, and other operating expenses (including increases thereto) in addition to base rent.

Other income

Other income for the three months ended June 30, 2013 and 2012, of $3.6 million and $9.4 million, respectively, was as follows (in thousands):
 
 
Three Months Ended June 30,
 
 

 
2013
 
2012
 
Change
Management fee income
 
$
501

 
$
511

 
$
(10
)
Interest income
 
991

 
833

 
158

Investment income
 
2,077

 
8,039

 
(5,962
)
Total other income
 
$
3,569

 
$
9,383

 
$
(5,814
)

Rental operating expenses

Total rental operating expenses for the three months ended June 30, 2013, increased by $4.2 million, or 10%, to $46.3 million, compared to $42.1 million for the three months ended June 30, 2012. Approximately $2.4 million of the increase was due to an increase in rental operating expenses from our Non-Same Properties, primarily related to 15 development and redevelopment projects that were completed and delivered after April 1, 2012, and one operating property that was acquired after April 1, 2012.

General and administrative expenses

General and administrative expenses for the three months ended June 30, 2013, was $12.5 million, compared to $12.3 million for the three months ended June 30, 2012. The increase was primarily due to higher payroll and related benefits due to an increase in the number of our employees related to the growth in both the depth and breadth of our operations in multiple markets, partially offset by lower consulting fees during the three months ended June 30, 2013. In 2012, we implemented a new enterprise software which required temporary consulting services. As a percentage of total revenues, general and administrative expenses were 8.1% and 8.4%, respectively, for the three months ended June 30, 2013 and 2012.


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Interest expense

Interest expense for the three months ended June 30, 2013, decreased by $1.9 million, or 11%, to $16.0 million, compared to $17.9 million for the three months ended June 30, 2012, detailed as follows (in thousands):
 
 
Three Months Ended June 30,
 
 
 
 
2013
 
2012
 
Change
Secured notes payable
 
$
9,745

 
$
10,134

 
$
(389
)
Unsecured senior notes payable and convertible notes
 
7,649

 
6,343

 
1,306

Unsecured senior line of credit
 
1,867

 
2,687

 
(820
)
Unsecured senior bank term loans
 
6,076

 
6,406

 
(330
)
Interest rate swaps
 
3,834

 
5,896

 
(2,062
)
Amortization of loan fees and other interest
 
2,497

 
2,281

 
216

Subtotal
 
31,668

 
33,747

 
(2,079
)
Capitalized interest
 
(15,690
)
 
(15,825
)
 
135

Total interest expense
 
$
15,978

 
$
17,922

 
$
(1,944
)

Interest expense decreased primarily due to the repayment of the outstanding balance of our unsecured senior line of credit from our common stock offering proceeds and the decrease in expense related to the maturity at the end of March 2013, of certain interest rate swap agreements with rates ranging from 4.622% to 4.625%. As these interest rate swaps ended, we opted to leave the underlying debt unhedged at a lower floating rate in anticipation of a reduction of outstanding variable rate debt that occurred during the three months ended June 30, 2013, when we issued $500 million of unsecured notes payable at a fixed rate of 3.90%. We have entered into certain interest rate swap agreements to hedge a portion of our exposure primarily related to variable interest rates associated with our unsecured senior line of credit and unsecured senior bank term loans (see “Liquidity and Capital Resources – Contractual Obligations – Interest Rate Swap Agreements”).

Depreciation and amortization

Depreciation and amortization for the three months ended June 30, 2013, decreased by $4.2 million, or 8%, to $46.6 million, compared to $50.7 million for the three months ended June 30, 2012.  The decrease resulted primarily as a result of depreciation adjustments made in the three months ended June 30, 2012, which were necessary to reduce the carrying amount of certain buildings and improvements to zero in connection with planned redevelopments. These were partially offset by increased depreciation related to building improvements, including 15 development and redevelopment projects that were completed and delivered after April 1, 2012, and one operating property that was acquired after April 1, 2012.

Income from discontinued operations, net

Income from discontinued operations, net, of $243,000 for the three months ended June 30, 2013, includes the results of operations of two operating properties with a net book value of $4.2 million that were classified as “held for sale” and the results of operations of one property sold during the three months ended June 30, 2013.

Income from discontinued operations, net, for the three months ended June 30, 2012, includes the results of operations of two operating properties that were classified as “held for sale” as of June 30, 2013, and the results of operations of 10 properties sold since April 1, 2012.


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Comparison of the six months ended June 30, 2013, to the six months ended June 30, 2012

The following table presents a comparison of the components of NOI for our Same Properties and Non-Same Properties for the six months ended June 30, 2013, compared to the six months ended June 30, 2012, and a reconciliation of NOI to income from continuing operations, the most directly comparable financial measure (dollars in thousands):

 
Six Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
$ Change
 
% Change
Revenues:
 
 
 
 
 
 
 
Rental – Same Properties
$
190,681

 
$
185,022

 
$
5,659

 
3.1
 %
Rental – Non-Same Properties
35,838

 
20,508

 
15,330

 
74.8

Total rental
226,519

 
205,530

 
20,989

 
10.2

 
 
 
 
 
 
 
 
Tenant recoveries – Same Properties
60,087

 
58,034

 
2,053

 
3.5

Tenant recoveries – Non-Same Properties
11,447

 
5,729

 
5,718

 
99.8

Total tenant recoveries
71,534

 
63,763

 
7,771

 
12.2

 
 
 
 
 
 
 
 
Other income – Same Properties
323

 
82

 
241

 
293.9

Other income – Non-Same Properties
6,239

 
11,929

 
(5,690
)
 
(47.7
)
Total other income
6,562

 
12,011

 
(5,449
)
 
(45.4
)
 
 
 
 
 
 
 
 
Total revenues – Same Properties
251,091

 
243,138

 
7,953

 
3.3

Total revenues – Non-Same Properties
53,524

 
38,166

 
15,358

 
40.2

Total revenues
304,615

 
281,304

 
23,311

 
8.3

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental operations – Same Properties
78,234

 
73,672

 
4,562

 
6.2

Rental operations – Non-Same Properties
13,313

 
8,883

 
4,430

 
49.9

Total rental operations
91,547

 
82,555

 
8,992

 
10.9

 
 
 
 
 
 
 
 
NOI:
 
 
 
 
 
 
 
NOI – Same Properties – GAAP basis
172,857

 
169,466

 
3,391

 
2.0

NOI – Non-Same Properties
40,211

 
29,283

 
10,928

 
37.3

Total NOI
213,068

 
198,749

 
14,319

 
7.2

 
 
 
 
 
 
 
 
Other expenses:
 
 
 
 
 
 
 
General and administrative
24,120

 
22,655

 
1,465

 
6.5

Interest
33,998

 
34,148

 
(150
)
 
(0.4
)
Depreciation and amortization
92,645

 
92,527

 
118

 
0.1

Loss on early extinguishment of debt
560

 
2,225

 
(1,665
)
 
(74.8
)
Total other expenses
151,323

 
151,555

 
(232
)
 
(0.2
)
Income from continuing operations
$
61,745

 
$
47,194

 
$
14,551

 
30.8
 %
 
 
 
 
 
 
 
 
NOI – Same Properties – GAAP basis
$
172,857

 
$
169,466

 
$
3,391

 
2.0
 %
Less: straight-line rent adjustments
(2,306
)
 
(11,952
)
 
9,646

 
(80.7
)
NOI – Same Properties – cash basis
$
170,551

 
$
157,514

 
$
13,037

 
8.3
 %


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Rental revenues

Total rental revenues for the six months ended June 30, 2013, increased by $21.0 million, or 10%, to $226.5 million, compared to $205.5 million for the six months ended June 30, 2012. The increase was due to rental revenues from our Non-Same Properties, including 15 development and redevelopment projects that were completed and delivered after January 1, 2012, and one operating property that was acquired after January 1, 2012. Occupancy of Same Properties was 93.1% and 92.5% for the six months ended June 30, 2013 and 2012, respectively.

Tenant recoveries

Tenant recoveries for the six months ended June 30, 2013, compared to the six months ended June 30, 2012, increased by $7.8 million, or 12%, to $71.5 million, compared to an increase of $9.0 million, or 11%, of rental operating expenses. Same Properties tenant recoveries increased by $2.1 million, while Same Properties rental operating expenses increased by $4.6 million, primarily due to increased operating costs related to colder weather in 2013, higher property taxes due to increases in tax rates for our properties located in Massachusetts, and the timing of certain repairs and maintenance projects in the six months ended June 30, 2013, compared to the six months ended June 30, 2012. Non-Same Properties tenant recoveries increased by $5.7 million as a result of a Non-Same Properties rental operating expense increase of $4.4 million. As of June 30, 2013, approximately 94% of our leases (on a rentable square footage basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses, and other operating expenses (including increases thereto) in addition to base rent.

Other income

Other income for the six months ended June 30, 2013 and 2012, of $6.6 million and $12.0 million, respectively, was as follows (in thousands):
 
 
Six Months Ended June 30,
 
 
 
 
2013
 
2012
 
Change
Management fee income
 
$
2,107

 
$
560

 
$
1,547

Interest income
 
2,318

 
1,440

 
878

Investment income
 
2,137

 
10,011

 
(7,874
)
Total other income
 
$
6,562

 
$
12,011

 
$
(5,449
)

Rental operating expenses

Total rental operating expenses for the six months ended June 30, 2013, increased by $9.0 million, or 11%, to $91.5 million, compared to $82.6 million for the six months ended June 30, 2012. Approximately $4.4 million of the increase was due to an increase in rental operating expenses from our Non-Same Properties, primarily related to 15 development and redevelopment projects that were completed and delivered after January 1, 2012, and one operating property that was acquired after January 1, 2012.

General and administrative expenses

General and administrative expenses for the six months ended June 30, 2013, increased by $1.5 million, or 6.5%, to $24.1 million, compared to $22.7 million for the six months ended June 30, 2012. The increase in expense was related to higher professional fees and higher payroll and related benefits due to the increase in the number of employees related to the growth in both the depth and breadth of our operations in multiple markets, partially offset by lower consulting fees during the six months ended June 30, 2013. In 2012, we implemented a new enterprise software which required temporary consulting services. As a percentage of total revenues, general and administrative expenses were 7.9% and 8.1%, respectively, for the six months ended June 30, 2013 and 2012.


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Interest expense

Interest expense for the six months ended June 30, 2013, remained consistent, at $34.0 million, compared to $34.1 million for the six months ended June 30, 2012, detailed as follows (in thousands):
 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
Change
Secured notes payable
$
19,549

 
$
20,242

 
$
(693
)
Unsecured senior notes payable and senior convertible notes
13,990

 
8,749

 
5,241

Unsecured senior line of credit
4,761

 
6,664

 
(1,903
)
Unsecured senior bank term loans
12,301

 
12,943

 
(642
)
Interest rate swaps
8,142

 
11,670

 
(3,528
)
Amortization of loan fees and other interest
4,966

 
4,971

 
(5
)
Subtotal
63,709

 
65,239

 
(1,530
)
Capitalized interest
(29,711
)
 
(31,091
)
 
1,380

Total interest expense
$
33,998

 
$
34,148

 
$
(150
)

Interest expense decreased primarily due to the repayment of the outstanding balance of our unsecured senior line of credit using the proceeds of our common stock offering and the decrease in expense related to the maturity at the end of March 2013, of certain interest rate swap agreements with rates ranging from 4.622% to 4.625%. As these interest rate swaps ended, we opted to leave the underlying debt unhedged at a lower floating rate in anticipation of a reduction of outstanding variable rate debt that occurred during the three months ended June 30, 2013. This decrease was primarily offset by interest from our $1.05 billion of unsecured senior notes payable issued since the beginning of 2012 at a weighted averaged rate of 4.29%. We have entered into certain interest rate swap agreements to hedge a portion of our exposure primarily related to variable interest rates associated with our unsecured senior line of credit and unsecured senior bank term loans (see “Liquidity and Capital Resources – Contractual Obligations – Interest Rate Swap Agreements”).

Depreciation and amortization

Depreciation and amortization for the six months ended June 30, 2013, remained consistent, at $92.6 million, compared to $92.5 million for the six months ended June 30, 2012.  Depreciation increased due to building improvements, including 15 development and redevelopment projects that were completed and delivered after January 1, 2012, and one operating property that was acquired after January 1, 2012. This was partially offset by depreciation adjustments made in the six months ended June 30, 2012, which were necessary to reduce the carrying amount of certain buildings and improvements to zero in connection with planned redevelopments.

Income from discontinued operations, net

Income from discontinued operations, net, of $1.1 million for the six months ended June 30, 2013, includes the results of operations of two operating properties that were classified as “held for sale” and the results of operations of seven properties sold during the six months ended June 30, 2013.

Income from discontinued operations, net, for the six months ended June 30, 2012, includes the results of operations of two operating properties that were classified as “held for sale” as of June 30, 2013, the results of operations of seven properties sold during the six months ended June 30, 2013, and the results of operations of three properties sold during the year ended December 31, 2012.


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Projected results

Based on our current view of existing market conditions and certain current assumptions, we have updated guidance for earnings per share attributable to Alexandria’s common stockholders – diluted and FFO per share attributable to Alexandria’s common stockholders – diluted for the year ended December 31, 2013, as set forth in the table below.  The table below provides a reconciliation of FFO per share attributable to Alexandria’s common stockholders – diluted, a non-GAAP measure, to earnings per share, the most directly comparable GAAP measure and other key assumptions included in our guidance for the year ended December 31, 2013.

Guidance for the Year Ended December 31, 2013
 
Reported on July 29, 2013
 
Reported on May 13, 2013
Earnings per share attributable to Alexandria’s common stockholders – diluted
 
$1.53 to $1.63
 
$1.50 to $1.60
Depreciation and amortization
 
$2.76 to $2.86
 
$2.80 to $2.90
(Gain) loss on sale of real estate
 
$(0.01)
 
$0.01
Other
 
$(0.01)
 
$(0.01)
FFO per share attributable to Alexandria’s common stockholders – diluted
 
$4.32 to $4.42
 
$4.35 to $4.45
Add back: actual 2Q13 per share loss on early extinguishment of debt (1)
 
$0.01
 
N/A
Add back: projected 3Q13 per share loss on early extinguishment of debt
 
$0.02
 
N/A
FFO per share attributable to Alexandria’s common stockholders – diluted
 
$4.35 to $4.45
 
$4.35 to $4.45
 
 
 
 
 
Key projection assumptions:
 
 
 
 
Same property net operating income growth – cash basis
 
5% to 7%
 
5% to 7%
Same property net operating income growth – GAAP basis
 
1% to 3%
 
1% to 3%
Rental rate steps on lease renewals and re-leasing of space – cash basis
 
3% to 5%
 
1% to 3%
Rental rate steps on lease renewals and re-leasing of space – GAAP basis
 
11% to 13%
 
7% to 12%
Occupancy percentage for all operating properties at December 31, 2013
 
94.3% to 94.7%
 
94.3% to 94.7%
Straight-line rents
 
$24 to $26 million
 
$24 to $26 million
Amortization of above and below market leases
 
$3 to $4 million
 
$3 to $4 million
General and administrative expenses
 
$48 to $51 million
 
$48 to $51 million
Capitalization of interest
 
$51 to $57 million
 
$51 to $57 million
Interest expense, net
 
$71 to $81 million
 
$71 to $81 million
Net debt to adjusted EBITDA for the annualized three months ended December 31, 2013
 
6.5x
 
6.5x
Fixed charge coverage ratio for the annualized three months ended December 31, 2013
 
3.0x
 
3.0x
Non-income-producing land as a percentage of our gross real estate by December 31, 2013
 
15% to 17%
 
15% to 17%

(1)
Represents loss on early extinguishment of debt related to the write-off of unamortized loan fees of $0.01 per share as a result of the $150 million partial repayment of our 2016 Unsecured Senior Bank Term Loan during the three months ended June 30, 2013, and the estimated loss on early extinguishment of debt related to the write-off of unamortized loan fees of $0.02 per share as a result of amendments of our 2016 Unsecured Senior Bank Term Loan, 2017 Unsecured Senior Bank Term Loan, and $1.5 billion unsecured senior line of credit which we expect to complete during the three months ended September 30, 2013.

On a short-term basis, our unhedged variable rate debt as a percentage of total debt may range up to 30%. Our strategy is to have unhedged variable rate debt available for repayment as we issue unsecured senior notes payable, extend our maturity profile, transition variable rate debt to fixed rate debt, and enhance our long-term capital structure.

Liquidity and capital resources

Overview

We expect to meet certain long-term liquidity requirements, such as requirements for property acquisitions, development, redevelopment, other construction projects, capital improvements, tenant improvements, leasing costs, non-revenue-generating expenditures, and scheduled debt maturities, through net cash provided by operating activities, periodic asset sales, and long-term secured and unsecured indebtedness, including borrowings under our unsecured senior line of credit, unsecured senior bank term loans, and the issuance of additional debt and/or equity securities.

We expect to continue meeting our short-term liquidity and capital requirements, as further detailed in this section, generally through our working capital and net cash provided by operating activities.  We believe that the net cash provided by operating activities will continue to be sufficient to enable us to make the distributions necessary to continue qualifying as a REIT.


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Over the next several years, our balance sheet, capital structure, and liquidity objectives are as follows:

•
Reduce leverage as a percentage of debt to total gross assets and improve our ratio of debt to earnings before interest, taxes, depreciation, and amortization;
•
Maintain diverse sources of capital, including sources from net cash flows from operating activities, unsecured debt, secured debt, selective asset sales, joint ventures, preferred stock, and common stock;
•
Manage the amount of debt maturing in a single year;
•
Mitigate unhedged variable rate debt exposure by transitioning our balance sheet debt from short-term and medium-term variable rate bank debt to long-term unsecured fixed rate debt, and utilize interest rate swap agreements in the interim period during this transition of debt;
•
Maintain adequate liquidity from net cash provided by operating activities, cash and cash equivalents, and available borrowing capacity under our unsecured senior line of credit;
•
Maintain available borrowing capacity in excess of 50% under our $1.5 billion unsecured senior line of credit, except temporarily as necessary;
•
Fund preferred stock and common stock dividends from net cash provided by operating activities;
•
Retain positive cash flows from operating activities after payment of dividends for reinvestment in acquisitions and/or development and redevelopment projects; and
•
Reduce our non-income-producing assets as a percentage of our gross investment in real estate.

Investment-grade ratings and key credit metrics

In July 2011, we received investment-grade ratings from two major rating agencies.  Receipt of our investment-grade ratings was a significant milestone that we believe will provide long-term value to our debt and equity stakeholders.  Key strengths of our balance sheet and business that highlight our investment-grade credit profile include balance sheet liquidity, a diverse and creditworthy client tenant base, well-located properties proximate to leading research institutions, favorable lease terms, stable occupancy and cash flows, and demonstrated life science and real estate expertise.  This significant milestone broadens our access to another key source of debt capital and allows us to continue to pursue our long-term capital, investment, and operating strategies.  The issuance of investment-grade unsecured senior notes payable has allowed us to begin the transition from bank debt financing to unsecured senior notes payable, from variable rate debt to fixed rate debt, and from short-term debt to long-term debt.  While this transition of bank debt is in process, we will utilize interest rate swap agreements to reduce our interest rate risk.

 
 
Three Months Ended June 30,
Key Credit Metrics (1)
 
2013
 
2012
Net debt to Adjusted EBITDA (2)
 
6.6x

 
7.1x

Net debt to gross assets (excluding cash and restricted cash) (3)
 
33
%
 
38
%
Fixed charge coverage ratio (2)
 
2.8x

 
2.6x

Interest coverage ratio (2)
 
3.4x

 
3.2x

Unencumbered net operating income as a percentage of total net operating income (2)
 
70
%
 
72
%
Liquidity – unsecured senior line of credit availability and unrestricted cash (3)
 
$1.8 billion

 
$1.2 billion

Non-income-producing assets as a percentage of gross real estate (3)
 
21
%
 
25
%
Unhedged variable rate debt as a percentage of total debt (3)
 
11
%
 
12
%
Investment-grade client tenants as a percentage of total annualized base rent (3)
 
46
%
 
48
%

(1)
These metrics reflect certain non-GAAP financial measures.  See “Non-GAAP Measures” for more information, including definitions and reconciliations to the most directly comparable GAAP measures.
(2)
Periods represent annualized metrics.  We believe key credit metrics for the three months ended June 30, 2013 and 2012, annualized, reflect the completion of many development and redevelopment projects and are indicative of the Company’s current operating trends.
(3)
At the end of the period.


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Unsecured senior line of credit and unsecured senior bank term loans

The maturity date of the unsecured senior line of credit is April 2017, assuming we exercise our sole right to extend the stated maturity date twice by an additional six months after each exercise.  Borrowings under the unsecured senior line of credit will bear interest at LIBOR or the base rate specified in the amended unsecured senior line of credit agreement, plus in either case a specified margin (the “Applicable Margin”).  The Applicable Margin for LIBOR borrowings under the unsecured senior line of credit is based on our existing credit rating as set by certain rating agencies. As of June 30th, we did not have any borrowings outstanding. See Note 5 to our consolidated financial statements in Item 1 of this Report for the Applicable Margin in effect at June 30, 2013, had there been any borrowings outstanding.  In addition to the Applicable Margin, our unsecured senior line of credit is subject to an annual facility fee of 0.25%.

We are in the process of amending our $1.5 billion unsecured senior line of credit to reduce our interest rate on outstanding borrowings, extend the maturity dates and amend certain financial covenants. We expect to complete the amendment during the three months ended September 30, 2013. The requirements of, and our actual performance with respect to, the key financial covenants under our unsecured senior line of credit as of June 30, 2013, are as follows:
Covenant Ratios (1)
 
Requirement

Actual (2)
Total Debt to Total Assets
 
Less than or equal to 60%

33%
Secured Debt to Total Assets
 
Less than or equal to 40%

8%
Consolidated EBITDA to Interest Expense
 
Greater than or equal to 1.50x

2.5x
Unsecured Leverage Ratio
 
Less than or equal to 60%

37%
Unsecured Interest Coverage Ratio
 
Greater than or equal to 1.75x

7.2x

(1)
For a definition of the ratios used in the table above, refer to the amended unsecured senior line of credit and unsecured senior bank term loan agreements, each dated as of April 30, 2012, which were filed as exhibits to our Quarterly Report on Form 10-Q filed with the SEC on August 8, 2012.
(2)
Actual covenants are calculated pursuant to the specific terms to our unsecured senior line of credit and unsecured senior bank term loan agreements.

Unsecured senior notes payable

On July 26, 2013, we amended our $600 million 2016 Unsecured Senior Bank Term Loan to reduce our interest rate on outstanding borrowings. We are in the process of amending our $600 million 2017 Unsecured Senior Bank Term Loan to reduce our interest rate on outstanding borrowings, extend the maturity dates and amend certain financial covenants. We expect to complete the process during the three months ended September 30, 2013. The requirements of, and our actual performance with respect to, the key financial covenants under our 3.90% Unsecured Senior Notes and 4.60% Unsecured Senior Notes as of June 30, 2013, are as follows:

Covenant Ratios (1)
 
Requirement

Actual (2)
Total Debt to Total Assets
 
Less than or equal to 60%

36%
Secured Debt to Total Assets
 
Less than or equal to 40%

9%
Consolidated EBITDA to Interest Expense
 
Greater than or equal to 1.50x

5.28x
Unencumbered Total Asset Value to Unsecured Debt
 
Greater than or equal to 150%

284%

(1)
For a definition of the ratios used in the table above, refer to the most current indenture and related supplements, which were filed with the SEC as exhibits to our Current Report on Form 8-K on February 29, 2012 and June 7, 2013.
(2)
Actual covenants are calculated pursuant to the specific terms of the Indenture.

In addition, the terms of the Indenture, among other things, limit the ability of the Company, Alexandria Real Estate Equities, L.P., and the Company’s subsidiaries to i) consummate a merger, or consolidate or sell all or substantially all of the Company’s assets, and ii) incur certain secured or unsecured indebtedness.



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Sources and uses of capital

We expect that our principal liquidity needs for the year ended December 31, 2013, will be satisfied by the following multiple sources of capital as shown in the table below. There can be no assurance that our sources and uses of capital will not be materially higher or lower than these expectations.
 
 
Reported on
July 29, 2013
 
Reported on
May 13, 2013
Sources and Uses of Capital for the Year Ended December 31, 2013 (in millions)
 
Completed
 
Projected
 
Total
 
Total
Sources of capital:
 
 
 
 
 
 
 
 
Net cash provided by operating activities less dividends
 
$
66

 
$ 64 - 84

 
$ 130 - 150

 
$ 130 - 150

Non-income-producing land sales
 
18

 
131 - 171

 
149 - 189

 
149 - 189

Income-producing asset sales
 
129

 
0 - 5

 
129 - 134

 
125 - 138

Secured construction loan borrowings
 
26

 
19 - 39

 
45 - 65

 
45 - 55

Unsecured senior notes payable
 
500

 
—

 
500

 
350 - 450

Common stock offering
 
536

 
—

 
536

 
415 - 490

Available cash and borrowings on unsecured senior line of credit (1)
 
—

 
324 - 369

 
324 - 369

 
—

Total sources of capital
 
$
1,275

 
$ 538 - 668

 
$ 1,813 - 1,943

 
$ 1,214 - 1,472

 
 
 
 
 
 
 
 
 
Uses of capital:
 
 
 
 
 
 
 
 
Development, redevelopment, and construction
 
$
253

 
$ 346 - 376

 
$ 599 - 629

 
$ 617 - 667

Seller financing of asset sales
 
39

 
—

 
39

 
39

Acquisitions:
 
 
 
 
 
 
 
 
Completed/in-process acquisitions
 
13

 
64

 
77

 
—

Additional acquisitions
 
—

 
123 - 223

 
123 - 223

 
200 - 300

Secured notes payable repayments
 
32

 
5

 
37

 
37

Unsecured senior bank term loan repayment
 
150

 
—

 
150

 
125 - 175

Excess cash retained from issuance of unsecured senior notes payable/pay down of unsecured senior line of credit
 
788

 
—

 
788

 
196 - 254

Total uses of capital
 
$
1,275

 
$ 538 - 668

 
$ 1,813 - 1,943

 
$ 1,214 - 1,472


(1)
We had $302.2 million in cash and cash equivalents as of June 30, 2013.

The key assumptions behind the sources and uses of capital in the table above are a favorable capital market environment and performance of our core operations in areas such as delivery of current and future development and redevelopment projects, leasing activity, and renewals.  Our expected sources and uses of capital are subject to a number of variables and uncertainties, including those discussed under the “Forward-Looking Statements” section of Part I, the “Risk Factors” section of Item 1A, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section under Item 7, of our annual report on Form 10-K for the year ended December 31, 2012.  We expect to update our forecast of sources and uses of capital on a quarterly basis.

Sources of capital

Real estate asset sales

We continue the disciplined execution of our asset recycling program to monetize non-strategic income-producing and non-income-producing assets as a source of capital.  We completed all significant sales of non-strategic income-producing assets targeted for 2013 with an aggregate sales price totaling $128.6 million including one asset sold during the three months ended June 30, 2013, with an aggregate sales price totaling $4.4 million. See Note 3 to our consolidated financial statements in Item 1 of this Report.


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We also completed non-income-producing asset sales with an aggregate sales price of $18 million during the three months ended June 30, 2013, and expect to complete additional sales as follows (in thousands):
Description
 
Sales Price
Completed
 
 
Land sold during the three months ended June 30, 2013
 
$
18,050

 
 
 
Projected
 
 
Land subject to purchase and sale agreement
 
55,000

Land subject to sale negotiations
 
30,000

Additional land sales
 
46,000 - 86,000

Total projected non-income-producing land sales for the six months ended December 31, 2013
 
$ 131,000 - 171,000


3.90% unsecured senior notes payable offering

In June 2013, we completed the issuance of our 3.90% Unsecured Senior Notes due in June 2023. Net proceeds of approximately $495.3 million were used to prepay $150 million of the outstanding principal balance of $750 million on our 2016 Unsecured Senior Bank Term Loan, to reduce the outstanding borrowings on our unsecured senior line of credit to zero, and to hold the remaining proceeds in cash and cash equivalents to fund near-term opportunities related to development/redevelopment projects, to fund near-term property acquisitions, and for general corporate purposes. As a result of the $150 million prepayment, we recognized a loss on early extinguishment of debt related to the write-off of a portion of unamortized loan fees in June 2013, totaling $560 thousand. See Note 5 to our consolidated financial statements in Item 1 of this Report.

Common stock offering

In May 2013, we sold approximately 7.6 million shares of our common stock in a secondary offering. The shares were issued at a price of $73.50 per share, resulting in aggregate net proceeds of approximately $535.5 million (after deducting underwriting discounts and commissions). We have established an “at the market” common stock offering program under which we may sell, from time to time, up to an aggregate of $250 million of our common stock through our sales agents, with approximately $150 million of common stock available for issuance under the program as of June 30, 2013. See Note 10 to our consolidated financial statements in Item 1 of this Report.

Cash and cash equivalents

As of June 30, 2013, we had approximately $302.2 million of cash and cash equivalents.  We expect existing cash and cash equivalents, cash flows from operating activities, proceeds from asset sales, secured construction loan borrowings, issuances of unsecured notes payable, and issuances of common stock to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as regular quarterly dividends, scheduled debt repayments, and material capital expenditures, for at least the next 12 months, and thereafter for the foreseeable future.

Restricted cash

Restricted cash consisted of the following as of June 30, 2013, and December 31, 2012 (in thousands):
 
June 30, 2013
 
December 31, 2012
Funds held in trust under the terms of certain secured notes payable
$
12,891

 
$
29,526

Funds held in escrow related to construction projects
5,653

 
5,652

Other restricted funds
12,370

 
4,769

Total
$
30,914

 
$
39,947


The funds held in escrow related to construction projects will be used to pay for certain construction costs.


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Unsecured senior line of credit

We use our unsecured senior line of credit to fund working capital, construction activities, and, from time to time, acquisition of properties.  As of June 30, 2013, we had $1.5 billion available for borrowing under our $1.5 billion unsecured senior line of credit.

Other sources

Under our current shelf registration statement filed with the SEC, we may offer common stock, preferred stock, debt, and other securities. These securities may be issued from time to time at our discretion based on our needs and market conditions, including as necessary to balance our use of incremental debt capital.

We hold interests, together with certain third parties, in companies that we consolidate in our financial statements.  These third parties may contribute equity into these entities primarily related to their share of funds for construction and financing-related activities.

Uses of capital

Summary of capital expenditures

The primary use of our cash has historically been in the development, redevelopment and construction of properties. We currently have development projects underway for more than 1.8 million rentable square feet of laboratory space, including 1.4 million square feet of consolidated projects, as well as approximately 414,000 square feet for a project held by an unconsolidated joint venture. We incur not only hard costs spent directly on construction activity but also the additional cost (and use of cash) on project costs, including interest, property taxes, insurance, and other costs directly related and essential to the development or construction of a project during periods when activities necessary to prepare an asset for its intended use are in progress.

Capitalized interest for the six months ended June 30, 2013 and 2012, of approximately $29.7 million and $31.1 million, respectively, is classified in investments in real estate, net, as well as included in the table summarizing total capital expenditures.  In addition, we capitalized payroll and other indirect project costs related to development, redevelopment, and construction projects, including projects in Asia, aggregating approximately $7.4 million and $5.9 million for the six months ended June 30, 2013 and 2012, respectively.  Such costs are also included in the “Summary of Capital Expenditures” section under the “Development, Redevelopment, and Future Value-Added Projects” section above.

We capitalize interest cost as a cost of the project only during the period for which activities necessary to prepare an asset for its intended use are ongoing, provided that expenditures for the asset have been made and interest cost has been incurred.  Indirect project costs, including construction administration, legal fees, and office costs that clearly relate to projects under development or construction, are capitalized as incurred during the period an asset is undergoing activities to prepare it for its intended use.  Additionally, should activities necessary to prepare an asset for its intended use cease, interest, taxes, insurance, and certain other direct project costs related to this asset would be expensed as incurred.  When construction activities cease and the asset is ready for its intended use, the asset is transferred out of construction in progress and classified as rental properties, net.  Additionally, if vertical aboveground construction is not initiated at completion of predevelopment activities, the land parcel will be classified as land held for future development.  Expenditures for repairs and maintenance are expensed as incurred.  Fluctuations in our development, redevelopment, and construction activities could result in significant changes to total expenses and net income.  For example, had we experienced a 10% reduction in development, redevelopment, and construction activities without a corresponding decrease in indirect project costs, including interest and payroll, total expenses would have increased by approximately $3.6 million for the three months ended June 30, 2013.

We also capitalize and defer initial direct costs to originate leases with independent third parties related to evaluating a prospective lessee’s financial condition, negotiating lease terms, preparing the lease agreement, and closing the lease transaction.  Costs that we have capitalized and deferred relate to successful leasing transactions, result directly from and are essential to the lease transaction, and would not have been incurred had that leasing transaction not occurred.  The initial direct costs capitalized and deferred also include the portion of our employees’ total compensation and payroll-related fringe benefits directly related to time spent performing activities previously described and related to the respective lease that would not have been performed but for that lease. Total initial direct leasing costs capitalized during the six months ended June 30, 2013 and 2012, were approximately $21.1 million and $18.7 million, respectively, of which approximately $5.4 million and $4.9 million, respectively, represented capitalized and deferred payroll costs directly related and essential to our leasing activities during such periods.


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Acquisitions

On July 5, 2013, we agreed to make a $13.1 million investment in 10121/10151 Barnes Canyon Road, two office properties located in the Sorrento Mesa submarket of San Diego.  Our investment will be funded in two installments:  i) $5.4 million to be funded in August,2013 (which will earn a 7% return until the next payment is made), and ii) $7.7 million to be funded no later than October 2014.  We intend to convert the existing office space into laboratory space through redevelopment when the space becomes available. Additional acquisitions are anticipated in the latter half of the year as shown on the summary table of sources and uses of cash above.

2016 Unsecured Senior Bank Term Loan repayment

In June 2013, we repaid $150 million of the 2016 Unsecured Senior Bank Term Loan by utilizing a portion of the proceeds generated by the issuance of our $500 million 3.90% Unsecured Senior Notes, as described under “Sources of Capital” above. As a result of the $150 million prepayment, we recognized a loss on early extinguishment of debt related to the write-off of a portion of unamortized loan fees in June 2013, totaling $560 thousand. See Note 5 to our consolidated financial statements in Item 1 of this Report.

Dividends

We are required to distribute at least 90% of our REIT taxable income on an annual basis in order to continue to qualify as a REIT for federal income tax purposes.  Accordingly, we intend to make, but are not contractually bound to make, regular quarterly distributions to preferred and common stockholders from cash flow from operating activities.  All such distributions are at the discretion of our Board of Directors.  We may be required to use borrowings under our unsecured senior line of credit, if necessary, to meet REIT distribution requirements and maintain our REIT status.  We consider market factors and our performance in addition to REIT requirements in determining distribution levels.  Our forecasts of taxable income and distributions do not require significant increases in our annual common stock dividends on a per share basis in order to distribute at least 90% of our REIT taxable income for the period from January 1, 2013, through December 31, 2013.

Cash flows

We report and analyze our cash flows based on operating activities, investing activities, and financing activities.  The following table summarizes changes in the Company’s cash flows for the six months ended June 30, 2013 and 2012 (in thousands):
 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
Change
Net cash provided by operating activities
$
143,074

 
$
143,527

 
$
(453
)
Net cash used in investing activities
$
(216,472
)
 
$
(292,731
)
 
$
76,259

Net cash provided by financing activities
$
236,592

 
$
148,568

 
$
88,024


Operating activities

Cash flows provided by operating activities consisted of the following amounts (in thousands):
 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
Change
Net cash provided by operating activities
$
143,074

 
$
143,527

 
$
(453
)
Changes in assets and liabilities
8,612

 
(2,859
)
 
11,471

Net cash provided by operating activities before changes in assets and liabilities
$
151,686

 
$
140,668

 
$
11,018



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Cash flows provided by operating activities are primarily dependent on the occupancy level of our asset base, the rental rates of our leases, the collectability of rent and recovery of operating expenses from our tenants, the delivery of development projects and the timing and delivery of redevelopment projects. Net cash provided by operating activities for the six months ended June 30, 2013, was essentially flat at $143.1 million, compared to $143.5 million for the six months ended June 30, 2012.   Excluding the changes in assets and liabilities, net cash provided by operating activities for the six months ended June 30, 2013, increased by approximately $11.0 million, or 7.8%, to $151.7 million, compared to $140.7 million for the six months ended June 30, 2012.  This increase was primarily attributable to an increase in our Same Property cash net operating income of approximately $13.0 million, or 8.3%, to $170.6 million for the six months ended June 30, 2013, compared to $157.5 million for the six months ended June 30, 2012. As of June 30, 2013, approximately 94% of our leases (on a rentable square footage basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses, and other operating expenses (including increases thereto) in addition to base rent.

Investing activities

Net cash used in investing activities for the six months ended June 30, 2013, was $216.5 million, compared to $292.7 million for the six months ended June 30, 2012.  This change consisted of the following amounts (in thousands):
 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
Change
Proceeds from sales of properties
$
101,815

 
$
1,905

 
$
99,910

Additions to properties
(298,927
)
 
(259,480
)
 
(39,447
)
Purchase of properties
—

 
(42,171
)
 
42,171

Other
(19,360
)
 
7,015

 
(26,375
)
Net cash used in investing activities
$
(216,472
)
 
$
(292,731
)
 
$
76,259


The change in net cash used in investing activities for the six months ended June 30, 2013, is primarily due to proceeds from sales of properties, a lower investment amount in property acquisitions in the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, offset by an increase in capital expenditures related to our development and redevelopment projects during the six months ended June 30, 2013. For additional information on the sales of real estate assets, see Note 3 to our consolidated financial statements in Item 1 of this Report.

Value-added opportunities and external growth
 
As of June 30, 2013, we had six ground-up development projects in process, including an unconsolidated joint venture development project, aggregating 1,854,859 RSF.  We also had five projects undergoing conversion into laboratory space through redevelopment, aggregating 224,241 RSF.  These projects, along with recently delivered projects, certain future projects, and contribution from same properties, are expected to contribute significant increases in rental income, NOI, and cash flows. For further discussion, see “Sources and Uses of Capital – Uses of Capital – Summary of Capital Expenditures” above.

Our Initial Stabilized Yield on a cash basis reflects cash rents at date of stabilization and does not reflect contractual rent escalations beyond the stabilization date.  We expect, on average, our cash rents related to our value-added projects to increase over time pursuant to contractual rent escalations.  As of June 30, 2013, 95% of our leases contained annual rent escalations that were either fixed or based on a consumer price index or another index.

During the three and six months ended June 30, 2013, we executed leases aggregating approximately 270,000 and 727,000 RSF related to our development and redevelopment projects, respectively.


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The following table summarizes the commencement of key development projects for the six months ended June 30, 2013 (dollars in thousands, except per rentable square foot amounts):
Address/Market
 
Commencement Date
 
 
 
Pre-Leased/Negotiating Percentage
 
Investment
at Completion
 
Cost Per RSF
 
Initial
Stabilized Yield
 
Average Cash Yield
 
Key Client Tenant
 
RSF
 
 
 
 
Cash
 
GAAP
 
 
Development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
75/125 Binney Street/ Greater Boston
 
January 2013
 
386,275
 
99
%
 
$
351,439

 
$
910

 
8.0
%
 
8.2
%
 
9.1
%
 
ARIAD Pharmaceuticals, Inc.
269 East Grand Avenue/ San Francisco Bay Area
 
March 2013
 
107,250
 
100
%
 
$
51,300

 
$
478

 
8.1
%
 
9.3
%
 
9.3
%
 
Onyx Pharmaceuticals, Inc.

Financing activities

Net cash flows provided by financing activities for the six months ended June 30, 2013, increased by $88.0 million, to $236.6 million, compared to $148.6 million for the six months ended June 30, 2012.  This increase consisted of the following amounts (in thousands):
 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
Change
Borrowings from secured notes payable
$
26,114

 
$
—

 
$
26,114

Repayments of borrowings from secured notes payable
(31,436
)
 
(4,525
)
 
(26,911
)
Proceeds from issuance of unsecured senior notes payable
495,310

 
544,649

 
(49,339
)
Principal borrowings from unsecured senior line of credit
305,000

 
529,147

 
(224,147
)
Repayment of unsecured senior line of credit
(871,000
)
 
(520,147
)
 
(350,853
)
Repayment of unsecured senior bank term loan
(150,000
)
 
(250,000
)
 
100,000

Repurchase of unsecured senior convertible notes
—

 
(84,801
)
 
84,801

Total changes related to debt
(226,012
)
 
214,323

 
(440,335
)
 
 
 
 
 
 
Redemption of Series C Cumulative Redeemable Preferred Stock
—

 
(129,638
)
 
129,638

Proceeds from issuance of Series E Cumulative Redeemable Preferred Stock
—

 
124,868

 
(124,868
)
Total changes related to preferred stock
—

 
(4,770
)
 
4,770

 
 
 
 
 
 
Net proceeds from common stock offering
535,536

 
37,385

 
498,151

Dividend payments
(86,874
)
 
(74,969
)
 
(11,905
)
Other
13,942

 
(23,401
)
 
37,343

Net cash provided by financing activities
$
236,592

 
$
148,568

 
$
88,024


The increase in net cash provided by financing activities reflect the proceeds received from the issuance of common stock in May 2013, and the issuance of unsecured senior notes payable in June 2013, for combined proceeds of $1.0 billion, partially offset by the use of these proceeds in the repayment of a portion of the outstanding principal balance of our 2016 Unsecured Senior Bank Term Loan and to reduce the outstanding borrowings on our unsecured senior line of credit to zero. See Note 5 to our consolidated financial statements in Item 1 of this Report.


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Dividends

During the six months ended June 30, 2013 and 2012, we paid the following dividends (in thousands):

 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
Change
Common stock dividends
$
73,932

 
$
60,791

 
$
13,141

Series C Cumulative Redeemable Preferred Stock dividends
—

 
5,428

 
(5,428
)
Series D Cumulative Convertible Preferred Stock dividends
8,750

 
8,750

 
—

Series E Cumulative Redeemable Preferred Stock dividends
4,192

 
—

 
4,192

 
$
86,874

 
$
74,969

 
$
11,905


The increase in dividends paid on our common stock is primarily due to an increase in the related dividends to $1.25 per common share for the six months ended June 30, 2013, from $1.00 per common share for the six months ended June 30, 2012.  The increase was also due to an increase in common stock outstanding.  Total common stock outstanding as of June 30, 2013, was 71.0 million shares, compared to 62.2 million shares as of June 30, 2012. See Note 10 to our consolidated financial statements in Item 1 of this Report.

Inflation

As of June 30, 2013, approximately 94% of our leases (on a rentable square footage basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses, and other operating expenses (including increases thereto) in addition to base rent.  Approximately 95% of our leases (on a rentable square footage basis) contained effective annual rent escalations that were either fixed (generally ranging from 3.0% to 3.5%) or indexed based on a consumer price index or another index.  Accordingly, we do not believe that our cash flow or earnings from real estate operations are subject to any significant risk from inflation.  An increase in inflation, however, could result in an increase in the cost of our variable rate borrowings, including borrowings related to our unsecured senior line of credit and unsecured senior bank term loans.

Contractual obligations and commitments

Contractual obligations as of June 30, 2013, consisted of the following (in thousands):

 
 
 
Payments by Period
 
Total
 
2013
 
2014-2015
 
2016-2017
 
Thereafter
Secured and unsecured debt (1) (2) (3)
$
2,961,495

 
$
5,338

 
$
361,743

 
$
1,435,172

 
$
1,159,242

Estimated interest payments on fixed rate and hedged variable rate debt (4)
161,738

 
32,454

 
72,885

 
31,416

 
24,983

Estimated interest payments on variable rate debt (5)
59,053

 
3,095

 
37,246

 
18,712

 
—

Ground lease obligations
646,709

 
6,761

 
19,043

 
20,212

 
600,693

Other obligations
5,859

 
442

 
1,688

 
1,851

 
1,878

Total
$
3,834,854

 
$
48,090

 
$
492,605

 
$
1,507,363

 
$
1,786,796


(1)
Amounts represent principal amounts due and exclude unamortized premiums/discounts reflected on the consolidated balance sheets.
(2)
Amounts include noncontrolling interests’ share of scheduled principal maturities of approximately $21.2 million, of which approximately $20.9 million matures in 2014. See discussion under Note 5, Secured and Unsecured Senior Debt, for additional information.
(3)
Payment dates include any extension options that we control.
(4)
Estimated interest payments on our fixed rate debt and hedged variable rate debt were based upon contractual interest rates, including the impact of interest rate swap agreements, interest payment dates, and scheduled maturity dates.
(5)
The interest payments on variable rate debt were based on the interest rates in effect as of June 30, 2013.


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Estimated interest payments

Estimated interest payments on our fixed rate debt and hedged variable rate debt were calculated based upon contractual interest rates, including the impact of interest rate swap agreements, interest payment dates, and scheduled maturity dates.  As of June 30, 2013, approximately 89% of our debt was fixed rate debt or variable rate debt subject to interest rate swap agreements.  See additional information regarding our interest rate swap agreements under “Liquidity and Capital Resources – Contractual Obligations and Commitments – Interest Rate Swap Agreements.”  The remaining 11% of our debt is unhedged variable rate debt based primarily on LIBOR.  Interest payments on our unhedged variable rate debt have been calculated based on interest rates in effect as of June 30, 2013.  See additional information regarding our debt under Note 5, Secured and Unsecured Senior Debt, to our consolidated financial statements appearing in our annual report on Form 10-K for the year ended December 31, 2012.

Interest rate swap agreements

We utilize interest rate swap agreements to hedge a portion of our exposure to variable interest rates primarily associated with our unsecured senior line of credit and unsecured senior bank term loans.  These agreements involve an exchange of fixed and variable rate interest payments without the exchange of the underlying principal amount (the “notional amount”).  Interest received under all of our interest rate swap agreements is based on the one-month LIBOR.  The net difference between the interest paid and the interest received is reflected as an adjustment to interest expense.

The following table summarizes our interest rate swap agreements as of June 30, 2013 (in thousands):

 
 
 
 
 
Interest Pay
 
Fair Value as of
 
Notional Amount in Effect as of
Transaction Date
 
Effective Date
 
Termination Date
 
Rate (1)
 
June 30, 2013
 
June 30, 2013
 
December 31, 2013
December 2006
 
December 29, 2006
 
March 31, 2014
 
4.990
%
 
$
(1,804
)
 
$
50,000

 
$
50,000

October 2007
 
October 31, 2007
 
September 30, 2013
 
4.642
%
 
(563
)
 
50,000

 
—

December 2006
 
November 30, 2009
 
March 31, 2014
 
5.015
%
 
(2,721
)
 
75,000

 
75,000

December 2006
 
November 30, 2009
 
March 31, 2014
 
5.023
%
 
(2,725
)
 
75,000

 
75,000

December 2011
 
December 31, 2012
 
December 31, 2013
 
0.640
%
 
(553
)
 
250,000

 
—

December 2011
 
December 31, 2012
 
December 31, 2013
 
0.640
%
 
(553
)
 
250,000

 
—

December 2011
 
December 31, 2012
 
December 31, 2013
 
0.644
%
 
(279
)
 
125,000

 
—

December 2011
 
December 31, 2012
 
December 31, 2013
 
0.644
%
 
(279
)
 
125,000

 
—

December 2011
 
December 31, 2013
 
December 31, 2014
 
0.977
%
 
(1,536
)
 
—

 
250,000

December 2011
 
December 31, 2013
 
December 31, 2014
 
0.976
%
 
(1,534
)
 
—

 
250,000

Total
 
 
 
 
 
 
 
$
(12,547
)
 
$
1,000,000

 
$
700,000


(1)
In addition to the interest pay rate, borrowings outstanding under our unsecured senior bank term loans include an applicable margin ranging from 1.50% to 1.75% as of June 30, 2013.

We have entered into master derivative agreements with each counterparty.  These master derivative agreements (all of which are adapted from the standard International Swaps and Derivatives Association, Inc. form) define certain terms between the Company and each counterparty to address and minimize certain risks associated with our interest rate swap agreements.  In order to limit our risk of non-performance by an individual counterparty under our interest rate swap agreements, our interest rate swap agreements are spread among various counterparties.  As of June 30, 2013 and 2012, the largest aggregate notional amount of the interest rate swap agreements in effect at any single point in time with an individual counterparty was $375 million.  If one or more of our counterparties fail to perform under our interest rate swap agreements, we may incur higher costs associated with our variable rate LIBOR-based debt than the interest costs we originally anticipated.

As of June 30, 2013, the fair values of our interest rate swap agreements were classified in accounts payable, accrued expenses, and tenant security deposits based upon their respective fair values, aggregating a liability balance of approximately $12.5 million, with the offsetting adjustment reflected as unrealized losses in accumulated other comprehensive loss in total equity.  Balances in accumulated other comprehensive loss are recognized in the period during which the hedged transactions affect earnings.  We have not posted any collateral related to our interest rate swap agreements.  For the six months ended June 30, 2013 and 2012, approximately $8.1 and $11.7 million, respectively, was reclassified from accumulated other comprehensive income to interest expense as an increase to interest expense.  During the next 12 months, we expect to reclassify approximately $11.2 million from accumulated other comprehensive loss to interest expense as an increase to interest expense.


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Ground lease obligations

Ground lease obligations as of June 30, 2013, included leases for 25 of our properties and four land development parcels.  Excluding one ground lease related to one operating property that expires in 2036 with a net book value of approximately $7.9 million at June 30, 2013, our ground lease obligations have remaining lease terms ranging from 41 to 196 years, including extension options.

Commitments

In addition to the above, as of June 30, 2013, remaining aggregate costs under contract for the construction of properties undergoing development, redevelopment, and generic life science infrastructure improvements under the terms of leases approximated $281.0 million.  We expect payments for these obligations to occur over one to three years, subject to capital planning adjustments from time to time.  We are also committed to funding approximately $54.0 million for certain investments over the next six years.

A 100% owned subsidiary of the Company previously executed a ground lease, as ground lessee, for certain property in New York City.  The West Tower of the Alexandria Center™ for Life Science – New York City will be constructed on such ground-leased property.  In November 2012, we commenced vertical construction of the West Tower.  The ground lease provides that substantial completion of the West Tower occur by October 31, 2015, and requires satisfying conditions that include substantially completed construction in accordance with the plans.  The ground lease also provides that by October 31, 2016, the ground lessee shall obtain a temporary or permanent certificate of occupancy for the core and shell of both the East Tower of the Alexandria Center™ for Life Science – New York City (which has occurred) and the West Tower.  In each case, the target dates above are subject to force majeure, to contractual cure rights, to other legal remedies available to ground lessees generally, and to change for any reason by agreement between both parties under the ground lease.  If the above dates are not met, the ground lease provides contractual cure rights and the ground lease does not provide for the payment of additional rent, a late fee, or other monetary penalty.

Exposure to environmental liabilities

In connection with the acquisition of all of our properties, we have obtained Phase I environmental assessments to ascertain the existence of any environmental liabilities or other issues.  The Phase I environmental assessments of our properties have not revealed any environmental liabilities that we believe would have a material adverse effect on our financial condition or results of operations taken as a whole, nor are we aware of any material environmental liabilities that have occurred since the Phase I environmental assessments were completed.  In addition, we carry a policy of pollution legal liability insurance covering exposure to certain environmental losses at substantially all of our properties.

Off-balance sheet arrangements

Our off-balance sheet arrangements consist of our investment in a real estate entity that is a variable interest entity for which we are not the primary beneficiary.  We account for the real estate entity under the equity method.  The debt held by the unconsolidated real estate entity is secured by the land parcel owned by the entity, and is non-recourse to us.  See Notes 2 and 3 to our consolidated financial statements appearing elsewhere in our annual report on Form 10-K for the year ended December 31, 2012.

Critical Accounting Policies

Refer to our annual report on Form 10-K for the year ended December 31, 2012, for a discussion of our critical accounting policies, which include rental properties, net, land held for future development, construction in progress, discontinued operations, impairment of long-lived assets, capitalization of costs, accounting for investments, interest rate hedge agreements, and recognition of rental income and tenant recoveries.  There have been no significant changes to these policies during the three months ended June 30, 2013.


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Non-GAAP measures

Funds from operations and funds from operations, as adjusted

GAAP basis accounting for real estate assets utilizes historical cost accounting and assumes that real estate values diminish over time.  In an effort to overcome the difference between real estate values and historical cost accounting for real estate assets, the Board of Governors of NAREIT established the measurement tool of FFO.  Since its introduction, FFO has become a widely used non-GAAP financial measure among equity REITs.  We believe that FFO is helpful to investors as an additional measure of the performance of an equity REIT.  Moreover, we believe that FFO, as adjusted, is also helpful because it allows investors to compare our performance to the performance of other real estate companies between periods, and on a consistent basis, without having to account for differences caused by investment and disposition decisions, financing decisions, terms of securities, capital structures, and capital market transactions.  We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its NAREIT White Paper.  The NAREIT White Paper defines FFO as net income (computed in accordance with GAAP), excluding gains (losses) from sales of depreciable real estate and land parcels and impairments of depreciable real estate (excluding land parcels), plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.  Impairments of real estate relate to decreases in the estimated fair value of real estate due to changes in general market conditions and do not necessarily reflect the operating performance of the properties during the corresponding period.  Impairments of real estate represent the non-cash write-down of assets when fair value over the recoverability period is less than the carrying value.  We compute FFO, as adjusted, as FFO calculated in accordance with the NAREIT White Paper, plus losses on early extinguishment of debt, preferred stock redemption charges, and impairments of land parcels, less realized gain on equity investment primarily related to one non-tenant life science entity, and the amount of such items that is allocable to our unvested restricted stock awards.  Our calculations of both FFO and FFO, as adjusted, and the related amounts per share using the basic and diluted shares calculated in accordance with GAAP, may differ from those methodologies utilized by other equity REITs for similar performance measurements, and, accordingly, may not be comparable to those of other equity REITs.  Neither FFO nor FFO, as adjusted, should be considered as an alternative to net income (determined in accordance with GAAP) as an indication of financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of liquidity, nor are they indicative of the availability of funds for our cash needs, including funds available to make distributions.

Adjusted funds from operations

AFFO is a non-GAAP financial measure that we use as a supplemental measure of our performance.  We compute AFFO by adding to or deducting from FFO, as adjusted: (1) non-revenue-enhancing capital expenditures, tenant improvements, and leasing commissions (excludes development and redevelopment expenditures); (2) effects of straight-line rent and straight-line rent on ground leases; (3) capitalized income from development projects; (4) amortization of acquired above and below market leases, loan fees, and debt premiums/discounts; (5) non-cash compensation expense; and (6) allocation of AFFO attributable to unvested restricted stock awards.

We believe that AFFO is a useful supplemental performance measure because it further adjusts to: (1) deduct certain expenditures that, although capitalized and classified in depreciation expense, do not enhance the revenue or cash flows of our properties; (2) eliminate the effect of straight-lining our rental income and capitalizing income from development projects in order to reflect the actual amount of contractual rents due in the period presented; and (3) eliminate the effect of non-cash items that are not indicative of our core operations and do not actually reduce the amount of cash generated by our operations.  We believe that eliminating the effect of non-cash charges related to share-based compensation facilitates a comparison of our operations across periods and among other equity REITs without the variances caused by different valuation methodologies, the volatility of the expense (which depends on market forces outside our control), and the assumptions and the variety of award types that a company can use.  We believe that AFFO provides useful information by excluding certain items that are not representative of our core operating results because such items are dependent upon historical costs or subject to judgmental valuation inputs and the timing of our decisions.

AFFO is not intended to represent cash flow for the period, and is intended only to provide an additional measure of performance.  We believe that net income attributable to Alexandria’s common stockholders is the most directly comparable GAAP financial measure to AFFO.  We believe that AFFO is a widely recognized measure of the operations of equity REITs, and presenting AFFO will enable investors to assess our performance in comparison to other equity REITs.  However, other equity REITs may use different methodologies for calculating AFFO and, accordingly, our AFFO may not be comparable to AFFO calculated by other equity REITs.  AFFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.


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Table of Contents


The following table presents a reconciliation of net income attributable to Alexandria’s common stockholders – basic, the most directly comparable financial measure calculated and presented in accordance with GAAP, to FFO attributable to Alexandria’s common stockholders – basic, FFO attributable to Alexandria’s common stockholders – diluted, as adjusted, and AFFO attributable to Alexandria’s common stockholders – diluted, for the periods below (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Net income attributable to Alexandria’s common stockholders – basic
$
25,483

 
$
17,616

 
$
47,925

 
$
35,984

Depreciation and amortization
46,580

 
52,355

 
93,575

 
95,760

Loss (gain) on sale of real estate
(219
)
 
(2
)
 
121

 
(2
)
Gain on sale of land parcel
(772
)
 
—

 
(772
)
 
(1,864
)
Amount attributable to noncontrolling interests/unvested restricted stock awards:
 
 
 
 
 
 
 
Net income
1,383

 
1,122

 
2,707

 
2,068

FFO
(1,437
)
 
(1,133
)
 
(2,501
)
 
(2,305
)
FFO attributable to Alexandria’s common stockholders – basic
71,018

 
69,958

 
141,055

 
129,641

Assumed conversion of 8.00% Unsecured Senior Convertible Notes
5

 
6

 
10

 
11

FFO attributable to Alexandria’s common stockholders – diluted
71,023

 
69,964

 
141,065

 
129,652

Realized gain on equity investment primarily related to one non-tenant life science entity
—

 
(5,811
)
 
—

 
(5,811
)
Loss on early extinguishment of debt
560

 
1,602

 
560

 
2,225

Preferred stock redemption charge
—

 
—

 
—

 
5,978

Allocation to unvested restricted stock awards
(12
)
 
35

 
(12
)
 
(20
)
FFO attributable to Alexandria’s common stockholders – diluted, as adjusted
71,571

 
65,790

 
141,613

 
132,024

 
 
 
 
 
 
 
 
Non-revenue-enhancing capital expenditures:
 
 
 
 
 
 
 
Maintenance building improvements
(337
)
 
(594
)
 
(933
)
 
(804
)
Tenant improvements and leasing commissions
(2,990
)
 
(2,148
)
 
(3,872
)
 
(4,167
)
Straight-line rent revenue
(8,239
)
 
(5,195
)
 
(14,437
)
 
(13,991
)
Straight-line rent expense on ground leases
539

 
1,207

 
1,077

 
2,613

Capitalized income from development projects
9

 
72

 
31

 
550

Amortization of acquired above and below market leases
(830
)
 
(778
)
 
(1,660
)
 
(1,578
)
Amortization of loan fees
2,427

 
2,214

 
4,813

 
4,857

Amortization of debt premiums/discounts
115

 
110

 
230

 
289

Stock compensation
4,463

 
3,274

 
7,812

 
6,567

Allocation to unvested restricted stock awards
50

 
15

 
69

 
48

AFFO attributable to Alexandria’s common stockholders – diluted
$
66,778

 
$
63,967

 
$
134,743

 
$
126,408



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The following table presents a reconciliation of net income per share attributable to Alexandria’s common stockholders – basic, to FFO per share attributable to Alexandria’s common stockholders – diluted, FFO per share attributable to Alexandria’s common stockholders – diluted, as adjusted, and AFFO per share attributable to Alexandria’s common stockholders – diluted, for the periods below. For the computation of the weighted average shares used to compute the per share information, refer to the “Definitions and Other Information” section in our supplemental information.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Net income per share attributable to Alexandria’s common stockholders – basic
$
0.38

 
$
0.29

 
$
0.74

 
$
0.58

Depreciation and amortization
0.69

 
0.84

 
1.43

 
1.56

Loss on sale of real estate
—

 
—

 
0.01

 
—

Gain on sale of land parcel
(0.01
)
 
—

 
(0.01
)
 
(0.03
)
Amount attributable to noncontrolling interests/unvested restricted stock awards:
 
 
 
 
 
 
 
Net income
0.02

 
0.02

 
0.04

 
0.03

FFO
(0.02
)
 
(0.02
)
 
(0.04
)
 
(0.04
)
FFO per share attributable to Alexandria’s common stockholders – basic
1.06

 
1.13

 
2.17

 
2.11

FFO per share attributable to Alexandria’s common stockholders – diluted
1.06

 
1.13

 
2.17

 
2.11

Realized gain on equity investment primarily related to one non-tenant life science entity
—

 
(0.09
)
 
−

 
(0.09
)
Loss on early extinguishment of debt
0.01

 
0.03

 
0.01

 
0.03

Preferred stock redemption charge
—

 
—

 
—

 
0.10

FFO per share attributable to Alexandria’s common stockholders – diluted, as adjusted
1.07

 
1.07

 
2.18

 
2.14

 
 
 
 
 
 
 
 
Non-revenue-enhancing capital expenditures:
 
 
 
 
 
 
 
Maintenance building improvements
(0.01
)
 
(0.01
)
 
(0.01
)
 
(0.01
)
Tenant improvements and leasing commissions
(0.04
)
 
(0.03
)
 
(0.06
)
 
(0.07
)
Straight-line rent revenue
(0.12
)
 
(0.08
)
 
(0.22
)
 
(0.23
)
Straight-line rent expense on ground leases
0.01

 
0.02

 
0.02

 
0.04

Amortization of acquired above and below market leases
(0.01
)
 
(0.01
)
 
(0.03
)
 
(0.03
)
Amortization of loan fees
0.03

 
0.03

 
0.07

 
0.09

Stock compensation
0.07

 
0.05

 
0.12

 
0.11

Other
—

 
—

 
—

 
0.01

AFFO per share attributable to Alexandria’s common stockholders – diluted
$
1.00

 
$
1.04

 
$
2.07

 
$
2.05



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Adjusted EBITDA and Adjusted EBITDA margins

EBITDA represents earnings before interest, taxes, depreciation, and amortization (“EBITDA”), a non-GAAP financial measure, and is used by us and others as a supplemental measure of performance.  We use Adjusted EBITDA and Adjusted EBITDA margins to assess the performance of our core operations, for financial and operational decision making, and as a supplemental or additional means of evaluating period-to-period comparisons on a consistent basis.  Adjusted EBITDA also serves as a proxy for a component of a financial covenant under certain of our debt obligations.  Adjusted EBITDA is calculated as EBITDA excluding net stock compensation expense, gains or losses on early extinguishment of debt, gains or losses on sales of real estate, gains or losses on sales of land parcels, impairments of real estate, and impairments of land parcels.  We believe Adjusted EBITDA and Adjusted EBITDA margins provide investors relevant and useful information because they permit investors to view income from our operations on an unleveraged basis before the effects of taxes, non-cash depreciation and amortization, net stock compensation expense, gains or losses on early extinguishment of debt, gains or losses on sales of real estate, gains or losses on sales of land parcels, impairments of real estate, and impairments of land parcels.  By excluding interest expense and gains or losses on early extinguishment of debt, EBITDA, Adjusted EBITDA, and Adjusted EBITDA margins allow investors to measure our performance independent of our capital structure and indebtedness and, therefore, allow for a more meaningful comparison of our performance to that of other companies, both in the real estate industry and in other industries.  We believe that excluding non-cash charges related to share-based compensation facilitates a comparison of our operations across periods and among other equity REITs without the variances caused by different valuation methodologies, the volatility of the expense (which depends on market forces outside our control), and the assumptions and the variety of award types that a company can use.  We believe that adjusting for the effects of gains or losses on sales of real estate, gains or losses on sales of land parcels, impairments of real estate, and impairments of land parcels provides useful information by excluding certain items that are not representative of our core operating results.  These items are dependent upon historical costs, and are subject to judgmental inputs and the timing of our decisions.  EBITDA, Adjusted EBITDA, and Adjusted EBITDA margins have limitations as measures of our performance.  EBITDA, Adjusted EBITDA, and Adjusted EBITDA margins do not reflect our historical cash expenditures or future cash requirements for capital expenditures or contractual commitments.  While EBITDA, Adjusted EBITDA, and Adjusted EBITDA margins are relevant and widely used measures of performance, they do not represent net income or cash flows from operations as defined by GAAP, and they should not be considered as alternatives to those indicators in evaluating performance or liquidity.  Further, our computation of EBITDA, Adjusted EBITDA, and Adjusted EBITDA margins may not be comparable to similar measures reported by other companies.

The following table reconciles net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, to EBITDA, Adjusted EBITDA, and Adjusted EBITDA margins, for the three and six months ended June 30, 2013 and 2012 (dollars in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
33,337

 
$
25,641

 
$
63,574

 
$
58,416

Interest expense – continuing operations
15,978

 
17,922

 
33,998

 
34,148

Depreciation and amortization – continuing operations
46,580

 
50,741

 
92,645

 
92,527

Depreciation and amortization – discontinued operations
—

 
1,614

 
930

 
3,233

EBITDA
95,895

 
95,918

 
191,147

 
188,324

Stock compensation expense
4,463

 
3,274

 
7,812

 
6,567

Loss on early extinguishment of debt
560

 
1,602

 
560

 
2,225

(Gain) loss on sale of real estate
(219
)
 
(2
)
 
121

 
(2
)
Gain on sale of land parcel
(772
)
 
—

 
(772
)
 
(1,864
)
Adjusted EBITDA
$
99,927

 
$
100,792

 
$
198,868

 
$
195,250

 
 
 
 
 
 
 
 
Total revenues
$
154,235

 
$
145,593

 
$
304,615

 
$
281,304

Adjusted EBITDA margins
65
%
 
69
%
 
65
%
 
69
%


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Fixed charge coverage ratio

The fixed charge coverage ratio is useful to investors as a supplemental measure of the Company’s ability to satisfy fixed financing obligations and preferred stock dividends.  Cash interest is equal to interest expense calculated in accordance with GAAP, plus capitalized interest, less amortization of loan fees, and amortization of debt premiums/discounts.  The fixed charge coverage ratio calculation below is not directly comparable to the computation of “Consolidated Ratio of Earnings to Fixed Charges and Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends” included in Exhibit 12.1 to our annual report on Form 10-K, as of December 31, 2012.

The following table presents a reconciliation of interest expense, the most directly comparable GAAP financial measure to cash interest and fixed charges, for the three and six months ended June 30, 2013 and 2012 (dollars in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Adjusted EBITDA
$
99,927

 
$
100,792

 
$
198,868

 
$
195,250

 
 
 
 
 
 
 
 
Interest expense – continuing operations
$
15,978

 
$
17,922

 
$
33,998

 
$
34,148

Add: capitalized interest
15,690

 
15,825

 
29,711

 
31,091

Less: amortization of loan fees
(2,427
)
 
(2,214
)
 
(4,813
)
 
(4,857
)
Less: amortization of debt premium/discounts
(123
)
 
(110
)
 
(238
)
 
(289
)
Cash interest
29,118

 
31,423

 
58,658

 
60,093

Dividends on preferred stock
6,471

 
6,903

 
12,942

 
14,386

Fixed charges
$
35,589

 
$
38,326

 
$
71,600

 
$
74,479

 
 
 
 
 
 
 
 
Fixed charge coverage ratio - period annualized
2.8x

 
2.6x

 
2.8x

 
2.6x

Fixed charge coverage ratio - trailing 12 months
2.7x

 
2.7x

 
2.7x

 
2.7x


Interest coverage ratio

The interest coverage ratio is the ratio of Adjusted EBITDA to cash interest.  This ratio is useful to investors as an indicator of our ability to service our cash interest obligations.

The following table summarizes the calculation of the interest coverage ratio for the three and six months ended June 30, 2013 and 2012  (dollars in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Adjusted EBITDA
$
99,927

 
$
100,792

 
$
198,868

 
$
195,250

 
 
 
 
 
 
 
 
Interest expense – continuing operations
$
15,978

 
$
17,922

 
$
33,998

 
$
34,148

Add: capitalized interest
15,690

 
15,825

 
29,711

 
31,091

Less: amortization of loan fees
(2,427
)
 
(2,214
)
 
(4,813
)
 
(4,857
)
Less: amortization of debt premium/discounts
(123
)
 
(110
)
 
(238
)
 
(289
)
Cash interest
$
29,118

 
$
31,423

 
$
58,658

 
$
60,093

 
 
 
 
 
 
 
 
Interest coverage ratio
3.4x

 
3.2x

 
3.4x

 
3.2x



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Net debt to Adjusted EBITDA

Net debt to Adjusted EBITDA is a non-GAAP financial measure that we believe is useful to investors as a supplemental measure in evaluating our leverage.  Net debt is equal to the sum of total debt less cash, cash equivalents, and restricted cash.  See “Adjusted EBITDA” for further information on the calculation of Adjusted EBITDA.

The following table summarizes the calculation of net debt to Adjusted EBITDA as of June 30, 2013, and December 31, 2012 (dollars in thousands):

 
June 30, 2013
 
December 31, 2012
Secured notes payable
$
711,029

 
$
716,144

Unsecured senior notes payable
1,048,395

 
549,805

Unsecured senior line of credit
—

 
566,000

Unsecured senior bank term loans
1,200,000

 
1,350,000

Less: cash and cash equivalents
(302,205
)
 
(140,971
)
Less: restricted cash
(30,914
)
 
(39,947
)
Net debt
$
2,626,305

 
$
3,001,031

 
 
 
 
Adjusted EBITDA (quarter annualized)(1)
$
399,708

 
$
408,876

 
 
 
 
Net debt to Adjusted EBITDA (quarter annualized)(1)
6.6x

 
7.3x

 
 
 
 
Adjusted EBITDA (trailing 12 months)
$
396,739

 
$
393,124

 
 
 
 
Net debt to Adjusted EBITDA (trailing 12 months)
6.6x

 
7.6x


(1)
We believe the Adjusted EBITDA and net debt to Adjusted EBITDA for the three and six months ended June 30, 2013, and December 31, 2012, annualized, reflect the completion of many development and redevelopment projects and are indicative of the Company’s current operating trends.

Net debt to gross assets (excluding cash and restricted cash)

Net debt to gross assets (excluding cash and restricted cash) is a non-GAAP financial measure that we believe is useful to investors as a supplemental measure in evaluating our leverage.  Net debt is calculated as described in “Net Debt to Adjusted EBITDA.”  Gross assets (excluding cash and restricted cash) are equal to total assets plus accumulated depreciation less cash, cash equivalents, and restricted cash.

The following table summarizes the calculation of net debt to gross assets (excluding cash and restricted cash) as of June 30, 2013, and December 31, 2012 (dollars in thousands):

 
June 30, 2013
 
December 31, 2012
Net debt
$
2,626,305

 
$
3,001,031

 
 
 
 
Total assets
$
7,379,289

 
$
7,150,116

Add: accumulated depreciation
878,199

 
875,035

Less: cash and cash equivalents
(302,205
)
 
(140,971
)
Less: restricted cash
(30,914
)
 
(39,947
)
Gross assets (excluding cash and restricted cash)
$
7,924,369

 
$
7,844,233

 
 
 
 
Net debt to gross assets (excluding cash and restricted cash)
33
%
 
38
%


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NOI

NOI is a non-GAAP financial measure equal to income from continuing operations, the most directly comparable GAAP financial measure, plus loss (gain) on early extinguishment of debt, impairment of land parcel, depreciation and amortization, interest expense, and general and administrative expense.  We believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects primarily those income and expense items that are incurred at the property level.  Therefore, we believe NOI is a useful measure for evaluating the operating performance of our real estate assets.  NOI on a cash basis is NOI on a GAAP basis, adjusted to exclude the effect of straight-line rent adjustments required by GAAP.  We believe that NOI on a cash basis is helpful to investors as an additional measure of operating performance because it eliminates straight-line rent adjustments to rental revenue.

Further, we believe NOI is useful to investors as a performance measure, because when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, and operating costs, providing perspective not immediately apparent from income from continuing operations.  NOI excludes certain components from income from continuing operations in order to provide results that are more closely related to the results of operations of our properties.  For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level rather than at the property level.  In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level.  Real estate impairments have been excluded in deriving NOI because we do not consider impairment losses to be property-level operating expenses.  Real estate impairment losses relate to changes in the values of our assets and do not reflect the current operating performance with respect to related revenues or expenses.  Our real estate impairments represent the write-down in the value of the assets to the estimated fair value less cost to sell.  These impairments result from investing decisions and the deterioration in market conditions that adversely impact underlying real estate values.  Our calculation of NOI also excludes charges incurred from changes in certain financing decisions, such as losses on early extinguishment of debt, as these charges often relate to the timing of corporate strategy.  Property operating expenses that are included in determining NOI consist of costs that are related to our operating properties, such as utilities; repairs and maintenance; rental expense related to ground leases; contracted services, such as janitorial, engineering, and landscaping; property taxes and insurance; and property-level salaries.  General and administrative expenses consist primarily of accounting and corporate compensation, corporate insurance, professional fees, office rent, and office supplies that are incurred as part of corporate office management.  NOI presented by us may not be comparable to NOI reported by other equity REITs that define NOI differently.  We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with income from continuing operations as presented in our consolidated statements of income.  NOI should not be considered as an alternative to income from continuing operations as an indication of our performance, or as an alternative to cash flows as a measure of liquidity or a measure of our ability to make distributions.

The following table is a reconciliation of NOI from continuing operations to income from continuing operations and NOI from discontinued operations to income from discontinued operations, the most directly comparable financial measure calculated and presented in accordance with GAAP (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
Continuing operations
2013
 
2012
 
2013
 
2012
Total revenues
$
154,235

 
$
145,593

 
$
304,615

 
$
281,304

Operating expenses
46,323

 
42,102

 
91,547

 
82,555

NOI from continuing operations
107,912

 
103,491

 
213,068

 
198,749

General and administrative
12,472

 
12,298

 
24,120

 
22,655

Interest expense
15,978

 
17,922

 
33,998

 
34,148

Depreciation expense
46,580

 
50,741

 
92,645

 
92,527

Loss on early extinguishment of debt
560

 
1,602

 
560

 
2,225

Income from continuing operations, net
$
32,322

 
$
20,928

 
$
61,745

 
$
47,194


Same property NOI

See discussion of Same Properties and reconciliation of NOI to income from continuing operations in “Results of Operations.”

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Unencumbered NOI as a percentage of total NOI
 
Unencumbered NOI as a percentage of total NOI is a non-GAAP financial measure that we believe is useful to investors as a performance measure of our results of operations of our unencumbered real estate assets, as it reflects primarily those income and expense items that are incurred at the unencumbered property level.  We use unencumbered NOI as a percentage of total NOI in order to assess our compliance with our financial covenants under our debt obligations because the measure serves as a proxy for a financial measure under such debt obligations.  Unencumbered NOI is derived from assets classified in continuing operations that are not subject to any mortgage, deed of trust, lien, or other security interest as of the period for which income is presented.  Unencumbered NOI for periods prior to the three months ended June 30, 2013, has been reclassified to conform to current period presentation related to discontinued operations.  See the reconciliation of NOI to income from continuing operations in “Results of Operations.”

The following table summarizes unencumbered NOI as a percentage of total NOI for the three and six months ended June 30, 2013 and 2012 (dollars in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Unencumbered NOI
$
75,225

 
$
74,823

 
$
146,627

 
$
141,022

Encumbered NOI
32,687

 
28,668

 
66,441

 
57,727

Total NOI from continuing operations
$
107,912

 
$
103,491

 
$
213,068

 
$
198,749

 
 
 
 
 
 
 
 
Unencumbered net operating income as a percentage of total net operating income
70
%
 
72
%
 
69
%
 
71
%




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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk

The primary market risk to which we believe we are exposed is interest rate risk, which may result from many factors, including government monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control.

In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swap agreements, caps, floors, and other interest rate exchange contracts.  The use of these types of instruments to hedge a portion of our exposure to changes in interest rates carries additional risks, such as counterparty credit risk and the legal enforceability of hedging contracts.

Our future earnings and fair values relating to financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBOR.  However, our interest rate swap agreements are intended to reduce the effects of interest rate changes.  The following table illustrates the effect of a 1% increase/decrease in interest rates, assuming a LIBOR floor of 0%, on our variable rate debt, including our unsecured senior line of credit and unsecured senior bank term loans, after considering the effect of our interest rate swap agreements, secured debt, unsecured senior notes payable, and unsecured senior convertible notes (in thousands):

 
As of June 30, 2013
 
As of December 31, 2012
Annualized impact to future earnings due to variable rate debt:
 
 
 
Rate increase of 1%
$
(5,828
)
 
$
(5,870
)
Rate decrease of 1%
$
5,235

 
$
1,101

Effect on fair value of secured debt:
 
 
 
Rate increase of 1%
$
(30,171
)
 
$
(37,146
)
Rate decrease of 1%
$
23,347

 
$
27,260


These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate swap agreements in effect on June 30, 2013.  These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment.  Further, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change.  However, because of the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analyses assume no changes in our capital structure.

Equity price risk

We have exposure to equity price market risk because of our equity investments in certain publicly traded companies and privately held entities.  We classify investments in publicly traded companies as “available for sale” and, consequently, recognize them in the accompanying consolidated balance sheets at fair value, with unrealized gains or losses reported as a component of accumulated other comprehensive income or loss.  Investments in privately held entities are generally accounted for under the cost method because we do not influence any of the operating or financial policies of the entities in which we invest.  For all investments, we recognize other-than-temporary declines in value against earnings in the same period during which the decline in value was deemed to have occurred.  There is no assurance that future declines in value will not have a material adverse impact on our future results of operations.  The following table illustrates the effect that a 10% change in the fair value of our equity investments would have on earnings (in thousands):

 
As of June 30, 2013
 
As of December 31, 2012
Equity price risk:
 
 
 
Increase in fair value of 10%
$
12,261

 
$
11,505

Decrease in fair value of 10%
$
(12,261
)
 
$
(11,505
)


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Foreign currency exchange rate risk

We have exposure to foreign currency exchange rate risk related to our subsidiaries operating in Canada and Asia.  The functional currencies of our foreign subsidiaries are the respective local currencies.  Gains or losses resulting from the translation of our foreign subsidiaries’ balance sheets and statements of income are classified in accumulated other comprehensive income as a separate component of total equity.  Gains or losses will be reflected in our statements of income when there is a sale or partial sale of our investment in these operations or upon a complete or substantially complete liquidation of the investment.  The following table illustrates the effect that a 10% increase or decrease in foreign currency rates relative to the U.S. dollar would have on our earnings, based on our current operating assets outside the U.S. (in thousands):
 
As of June 30, 2013
 
As of December 31, 2012
Foreign currency exchange rate risk:
 
 
 
Increase in foreign currency exchange rate of 10%
$
(123
)
 
$
(29
)
Decrease in foreign currency exchange rate of 10%
$
123

 
$
29


This sensitivity analysis assumes a parallel shift of all foreign currency exchange rates with respect to the U.S. dollar; however, foreign currency exchange rates do not typically move in such a manner and actual results may differ materially.

Item 4.
CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

As of June 30, 2013, we had performed an evaluation, under the supervision of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures.  These controls and procedures have been designed to ensure that information required for disclosure is recorded, processed, summarized, and reported within the requisite time periods.  Based on our evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2013.

Changes in internal control over financial reporting

There has not been any change in our internal control over financial reporting during the three months ended June 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II – OTHER INFORMATION

Item 1A.
RISK FACTORS

Monetary policy actions by the Federal Reserve could adversely impact our financial condition and our ability to make distributions to our stockholders.

In recent years, various monetary policies undertaken by the Federal Reserve have involved quantitative easing, which involves open market transactions by monetary authorities to stimulate economic activity through the purchase of assets with longer maturities than short-term government bonds. Among other things, quantitative easing is intended to create or maintain a low interest rate environment and to stimulate economic activity.

In May 2013, the securities markets began interpreting comments by members of the Federal Reserve, including its chairman, that its quantitative easing would begin to be reduced sometime in 2013. The Federal Reserve has since articulated that the so-called “tapering” of quantitative easing could begin in September 2013 and may cease entirely by mid-2014, depending upon the Federal Reserve's assessment of the performance of the U.S. economy. Because of expectations for near-term tapering of quantitative easing, the markets experienced an abrupt transition to higher long-term interest rates in May and June 2013, and market interest rates may continue to rise if the Federal Reserve follows through with its current tapering policy. Increases in market interest rates would increase our interest expense under our unhedged variable-rate borrowings and would increase the costs of refinancing existing indebtedness or obtaining new debt. In addition, increases in market interest rates may result in a decrease in the value of our real estate and a decrease in the market price of our common stock. Increases in market interest rates may also adversely affect the securities markets generally, which could reduce the market price of our common stock without regard to our operating performance. Accordingly, unfavorable changes to our borrowing costs and stock price could significantly impact our ability to raise new debt and equity capital going forward.

In addition to the information set forth in this quarterly report on Form 10-Q, one should also carefully review and consider the information contained in our other reports and periodic filings that we make with the SEC, including, without limitation, the information contained under the caption “Item 1A.  Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2012.  Those risk factors could materially affect our business, financial condition, and results of operations.  The risks that we describe in our public filings are not the only risks that we face.  Additional risks and uncertainties not currently known to us, or that we presently deem to be immaterial, also may materially adversely affect our business, financial condition, and results of operations.

Item 6.
EXHIBITS
3.1*
Articles of Amendment and Restatement of the Company, filed as an exhibit to the Company’s quarterly report on Form 10-Q filed with the SEC on August 14, 1997.
3.2*
Certificate of Correction of the Company, filed as an exhibit to the Company’s quarterly report on Form 10-Q filed with the SEC on August 14, 1997.
3.3*
Bylaws of the Company (as amended December 15, 2011), filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on December 19, 2011.
3.4*
Articles Supplementary, dated June 9, 1999, relating to the 9.50% Series A Cumulative Redeemable Preferred Stock, filed as an exhibit to the Company’s quarterly report on Form 10-Q filed with the SEC on August 13, 1999.
3.5*
Articles Supplementary, dated February 10, 2000, relating to the election to be subject to Subtitle 8 of Title 3 of the Maryland General Corporation Law, filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on February 10, 2000.
3.6*
Articles Supplementary, dated February 10, 2000, relating to the Series A Junior Participating Preferred Stock, filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on February 10, 2000.
3.7*
Articles Supplementary, dated January 18, 2002, relating to the 9.10% Series B Cumulative Redeemable Preferred Stock, filed as an exhibit to the Company’s Form 8-A for registration of certain classes of securities filed with the SEC on January 18, 2002.
3.8*
Articles Supplementary, dated June 22, 2004, relating to the 8.375% Series C Cumulative Redeemable Preferred Stock, filed as an exhibit to the Company’s Form 8-A for registration of certain classes of securities filed with the SEC on June 28, 2004.
3.9*
Articles Supplementary, dated March 25, 2008, relating to the 7.00% Series D Cumulative Convertible Preferred Stock, filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on March 25, 2008.
3.10*
Articles Supplementary, dated March 12, 2012, relating to the 6.45% Series E Cumulative Redeemable Preferred Stock, filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on March 14, 2012.

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4.1*
Specimen certificate representing shares of common stock, filed as an exhibit to the Company’s quarterly report on Form 10-Q filed with the SEC on May 5, 2011.
4.2*
Specimen certificate representing shares of 7.00% Series D Cumulative Convertible Preferred Stock, filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on March 25, 2008.
4.3*
Indenture, dated as of April 27, 2009, among the Company, as Issuer, Alexandria Real Estate Equities, L.P., as Guarantor, and Wilmington Trust Company, as Trustee, filed as an exhibit to the Company’s quarterly report on Form 10-Q filed with the SEC on August 10, 2009.
4.4*
Indenture, dated as of February 29, 2012, among the Company, as Issuer, Alexandria Real Estate Equities, L.P., as Guarantor, and the Bank of New York Mellon Trust Company, N.A., as Trustee, filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on February 29, 2012.
4.5*
Supplemental Indenture No. 1, dated as of February 29, 2012, among the Company, as Issuer, Alexandria Real Estate Equities, L.P., as Guarantor, and the Bank of New York Mellon Trust Company, N.A., as Trustee, filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on February 29, 2012.
4.6*
Form of 4.60% Senior Note due 2022 (included in Exhibit 4.5 above).
4.7*
Specimen certificate representing shares of 6.45% Series E Cumulative Redeemable Preferred Stock, filed as an exhibit to the Company’s Form 8-A for registration of certain classes of securities filed with the SEC on March 12, 2012.
4.8*
Supplemental Indenture No. 2, dated as of June 7, 2013, among the Company, as Issuer, Alexandria Real Estate Equities, L.P., as Guarantor, and the Bank of New York Mellon Trust Company, N.A., as Trustee, filed as an exhibit to the Company's current report on Form 8-K filed with the SEC on June 7, 2013.
4.9*
Form of 3.90% Senior Note due 2023 (included in Exhibit 4.8 above).
11.1
Statement of Computation of Per Share Earnings (included in Note 8 to the Consolidated Financial Statements).
12.1
Computation of Consolidated Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends.
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.0
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following materials from the Company’s quarterly report on Form 10-Q for the six months ended June 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2013, and December 31, 2012 (unaudited), (ii) Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012 (unaudited), (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012 (unaudited), (iv) Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests for the six months ended June 30, 2013 (unaudited), (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited).
 (*)         Incorporated by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 7, 2013.

 
ALEXANDRIA REAL ESTATE EQUITIES, INC.

 
 
 
 
/s/ Joel S. Marcus
 
Joel S. Marcus
Chairman/Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
/s/ Dean A. Shigenaga
 
Dean A. Shigenaga
Chief Financial Officer
(Principal Financial Officer)

91