ARE-2013.09.30-10Q
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 September 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 October 31, 2013, 71,627,655 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)

 
September 30, 2013
 
December 31, 2012
Assets
 
 
 
Investments in real estate, net
$
6,613,761

 
$
6,424,578

Cash and cash equivalents
53,839

 
140,971

Restricted cash
30,654

 
39,947

Tenant receivables
8,671

 
8,449

Deferred rent
182,909

 
170,396

Deferred leasing and financing costs, net
179,805

 
160,048

Investments
129,163

 
115,048

Other assets
159,567

 
90,679

Total assets
$
7,358,369

 
$
7,150,116

 
 
 
 
Liabilities, Noncontrolling Interests, and Equity
 
 
 
Secured notes payable
$
708,653

 
$
716,144

Unsecured senior notes payable
1,048,190

 
549,805

Unsecured senior line of credit
14,000

 
566,000

Unsecured senior bank term loans
1,100,000

 
1,350,000

Accounts payable, accrued expenses, and tenant security deposits
452,139

 
423,708

Dividends payable
54,413

 
41,401

Total liabilities
3,377,395

 
3,647,058

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Redeemable noncontrolling interests
14,475

 
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
711

 
632

Additional paid-in capital
3,578,343

 
3,086,052

Accumulated other comprehensive loss
(40,026
)
 
(24,833
)
Alexandria’s stockholders’ equity
3,919,028

 
3,441,851

Noncontrolling interests
47,471

 
46,643

Total equity
3,966,499

 
3,488,494

Total liabilities, noncontrolling interests, and equity
$
7,358,369

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Rental
$
116,302

 
$
106,216

 
$
342,821

 
$
311,746

Tenant recoveries
38,757

 
34,006

 
110,291

 
97,769

Other income
3,571

 
2,628

 
10,133

 
14,639

Total revenues
158,630

 
142,850

 
463,245

 
424,154

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental operations
47,742

 
44,203

 
139,289

 
126,758

General and administrative
11,666

 
12,470

 
35,786

 
35,125

Interest
16,171

 
17,092

 
50,169

 
51,240

Depreciation and amortization
49,102

 
46,584

 
141,747

 
139,111

Loss on early extinguishment of debt
1,432

 
—

 
1,992

 
2,225

Total expenses
126,113

 
120,349

 
368,983

 
354,459

 
 
 
 
 
 
 
 
Income from continuing operations
32,517

 
22,501

 
94,262

 
69,695

 
 
 
 
 
 
 
 
(Loss) income from discontinued operations:
 
 
 
 
 
 
 
(Loss) income from discontinued operations before impairment of real estate
(64
)
 
5,603

 
993

 
14,961

Impairment of real estate
—

 
(9,799
)
 
—

 
(9,799
)
(Loss) income from discontinued operations, net
(64
)
 
(4,196
)
 
993

 
5,162

 
 
 
 
 
 
 
 
Gains on sales of land parcels
—

 
—

 
772

 
1,864

Net income
32,453

 
18,305

 
96,027

 
76,721

 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
960

 
828

 
2,922

 
2,390

Dividends on preferred stock
6,472

 
6,471

 
19,414

 
20,857

Preferred stock redemption charge
—

 
—

 
—

 
5,978

Net income attributable to unvested restricted stock awards
442

 
360

 
1,187

 
866

Net income attributable to Alexandria’s common stockholders
$
24,579

 
$
10,646

 
$
72,504

 
$
46,630

Earnings per share attributable to Alexandria’s common stockholders – basic and diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.35

 
$
0.24

 
$
1.07

 
$
0.67

Discontinued operations, net
—

 
(0.07
)
 
0.01

 
0.08

Earnings per share – basic and diluted
$
0.35

 
$
0.17

 
$
1.08

 
$
0.75


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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
32,453

 
$
18,305

 
$
96,027

 
$
76,721

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gains (losses) on marketable securities:
 
 
 
 
 
 
 
Unrealized holding (losses) gains arising during the period
(37
)
 
796

 
323

 
1,363

Reclassification adjustment for gains included in net income
(250
)
 
(1,421
)
 
(480
)
 
(2,107
)
Unrealized losses on marketable securities, net
(287
)
 
(625
)
 
(157
)
 
(744
)
 
 
 
 
 
 
 
 
Unrealized gains (losses) on interest rate swaps:
 
 
 
 
 
 
 
Unrealized interest rate swap losses arising during the period
(676
)
 
(2,818
)
 
(704
)
 
(9,982
)
Reclassification adjustment for amortization of interest expense included in net income
3,904

 
5,956

 
12,046

 
17,626

Unrealized gains on interest rate swap agreements, net
3,228

 
3,138

 
11,342

 
7,644

 
 
 
 
 
 
 
 
Foreign currency translation (losses) gains
(3,404
)
 
15,104

 
(26,461
)
 
7,871

 
 
 
 
 
 
 
 
Total other comprehensive (loss) income
(463
)
 
17,617

 
(15,276
)
 
14,771

Comprehensive income
31,990

 
35,922

 
80,751

 
91,492

Less: comprehensive income attributable to noncontrolling interests
(933
)
 
(805
)
 
(2,839
)
 
(2,379
)
Comprehensive income attributable to Alexandria’s common stockholders
$
31,057

 
$
35,117

 
$
77,912

 
$
89,113



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
—

 
—

 
—

 
—

 
—

 
93,105

 
—

 
2,118

 
95,223

 
804

Total other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
(15,193
)
 
(83
)
 
(15,276
)
 
—

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,207
)
 
(1,207
)
 
(893
)
Issuance of common stock
—

 
—

 
7,590,000

 
76

 
534,601

 
—

 
—

 
—

 
534,677

 
—

Issuances pursuant to stock plan
—

 
—

 
246,283

 
3

 
17,387

 
—

 
—

 
—

 
17,390

 
—

Dividends declared on common stock
—

 
—

 
—

 
—

 
—

 
(133,388
)
 
—

 
—

 
(133,388
)
 
—

Dividends declared on preferred stock
—

 
—

 
—

 
—

 
—

 
(19,414
)
 
—

 
—

 
(19,414
)
 
—

Distributions in excess of earnings
—

 
—

 
—

 
—

 
(59,697
)
 
59,697

 
—

 
—

 
—

 
—

Balance as of September 30, 2013
$
250,000

 
$
130,000

 
71,080,928

 
$
711

 
$
3,578,343

 
$
—

 
$
(40,026
)
 
$
47,471

 
$
3,966,499

 
$
14,475



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

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

 
Nine Months Ended
September 30,
 
2013
 
2012
Operating Activities
 
 
 
Net income
$
96,027

 
$
76,721

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
142,677

 
143,933

Loss on early extinguishment of debt
1,992

 
2,225

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

 
(1,564
)
Non-cash impairment of real estate
—

 
9,799

Amortization of loan fees and costs
7,300

 
7,327

Amortization of debt premiums/discounts
383

 
401

Amortization of acquired above and below market leases
(2,490
)
 
(2,356
)
Deferred rent
(20,007
)
 
(19,216
)
Stock compensation expense
11,541

 
10,412

Equity in loss related to investments
—

 
26

Gain on sales of investments
(4,716
)
 
(12,316
)
Loss on sales of investments
529

 
1,607

Changes in operating assets and liabilities:
 
 
 
Restricted cash
1,243

 
441

Tenant receivables
(271
)
 
(2,637
)
Deferred leasing costs
(37,190
)
 
(23,597
)
Other assets
(11,428
)
 
(3,230
)
Accounts payable, accrued expenses, and tenant security deposits
51,437

 
41,378

Net cash provided by operating activities
236,376

 
227,490

 
 
 
 
Investing Activities
 
 
 
Proceeds from sale of properties
101,815

 
36,179

Additions to properties
(450,140
)
 
(406,066
)
Purchase of properties
(24,537
)
 
(42,171
)
Change in restricted cash related to construction projects
5,711

 
(11,453
)
Distributions from unconsolidated real estate entity
—

 
22,250

Contributions to unconsolidated real estate entity
(13,881
)
 
(5,042
)
Additions to investments
(22,835
)
 
(21,997
)
Proceeds from investments
12,750

 
19,905

Net cash used in investing activities
$
(391,117
)
 
$
(408,395
)


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

 
Nine Months Ended
September 30,
 
2013
 
2012
Financing Activities
 
 
 
Borrowings from secured notes payable
$
26,319

 
$
2,874

Repayments of borrowings from secured notes payable
(34,120
)
 
(8,125
)
Proceeds from issuance of unsecured senior notes payable
498,561

 
549,533

Principal borrowings from unsecured senior line of credit and unsecured senior bank term loans
319,000

 
623,147

Repayments of borrowings from unsecured senior line of credit
(871,000
)
 
(580,147
)
Repayment of unsecured senior bank term loan
(250,000
)
 
(250,000
)
Repurchase of unsecured senior convertible notes
(384
)
 
(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
923

 
(10,476
)
Deferred financing costs paid
(16,247
)
 
(25,301
)
Proceeds from common stock offerings
535,686

 
98,443

Proceeds from exercise of stock options
—

 
155

Dividends paid on common stock
(120,367
)
 
(92,743
)
Dividends paid on preferred stock
(19,414
)
 
(21,348
)
Distributions to redeemable noncontrolling interests
—

 
(943
)
Redemption of redeemable noncontrolling interests
—

 
(150
)
Contributions by noncontrolling interests
—

 
1,626

Distributions to noncontrolling interests
(2,100
)
 
(770
)
Net cash provided by financing activities
66,857

 
196,204

 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
752

 
1,066

 
 
 
 
Net (decrease) increase in cash and cash equivalents
(87,132
)
 
16,365

Cash and cash equivalents at beginning of period
140,971

 
78,539

Cash and cash equivalents at end of period
$
53,839

 
$
94,904

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest, net of interest capitalized
$
34,281

 
$
30,485

 
 
 
 
Non-Cash Investing Activities
 
 
 
Note receivable from sale of real estate
$
38,820

 
$
6,125


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 September 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.


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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 September 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 tax related interest expense or penalties for the three and nine months ended September 30, 2013.

Interest income

Interest income was approximately $1.2 million and $1.0 million during the three months ended September 30, 2013 and 2012, respectively.  Interest income was approximately $3.5 million and $2.5 million during the nine months ended September 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 September 30, 2013, and December 31, 2012, we had no allowance for estimated losses.

As of September 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.


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3.
Investments in real estate

Our investments in real estate, net, consisted of the following as of September 30, 2013, and December 31, 2012 (in thousands):
 
September 30, 2013
 
December 31, 2012
Rental properties:
 
 
 
Land (related to rental properties)
$
542,511

 
$
522,664

Buildings and building improvements
5,315,447

 
4,933,314

Other improvements
170,078

 
189,793

Rental properties
6,028,036

 
5,645,771

Less: accumulated depreciation
(915,494
)
 
(875,035
)
Rental properties, net
5,112,542

 
4,770,736

 
 
 
 
Construction in progress (“CIP”)/current value-creation projects:
 
 
 
Active development in North America
594,973

 
431,578

Investment in unconsolidated joint venture
42,537

(1) 
28,656

Active redevelopment in North America
24,960

 
199,744

Active development and redevelopment in Asia
97,319

 
101,602

Generic infrastructure/building improvement projects in North America
46,227

 
80,599

 
806,016

 
842,179

Subtotal
5,918,558

 
5,612,915

 
 
 
 
Land/future value-creation projects:
 
 
 
Land undergoing predevelopment activities (CIP) in North America
351,062

 
433,310

Land held for future development in North America
190,427

 
296,039

Land held for future development/undergoing predevelopment activities (CIP) in Asia
77,274

 
82,314

Land subject to sale negotiations
76,440

 
—

 
695,203

 
811,663

Investments in real estate, net
$
6,613,761

 
$
6,424,578


(1)
The book value for this unconsolidated joint venture represents our equity investment in the project.

Investment in unconsolidated real estate entity

We have a 27.5% interest in an unconsolidated joint venture that is currently developing a building totaling 413,536 RSF in the Longwood Medical Area of the Greater Boston market. The project is 37% pre-leased to Dana-Farber Cancer Institute, Inc. Our total investment into this project is approximately$42.5 million as of September 30, 2013. The total project costs are being funded primarily from a $213.2 million non-recourse secured construction loan, of which $75.0 million was drawn and outstanding at September 30, 2013. The loan bears interest at a rate of LIBOR+3.75%, with a floor of 5.25%. This loan has 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.

We do not qualify as the primary beneficiary of the unconsolidated joint venture since we do not have the power to direct the activities of the entity that most significantly impacts its economic performance. The decisions that most significantly impact the entity’s economic performance require both our consent and that of our partners, including all major operating, investing, and financing decisions, as well as decisions involving major expenditures. Consequently, we do not consolidate this joint venture and we account for our investment under the equity method of accounting.


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3.
Investments in real estate (continued)

Land undergoing predevelopment activities (additional CIP)
    
Land undergoing predevelopment activities is classified as construction in progress and is undergoing activities prior to commencement of vertical construction of above-ground building improvements.  We generally will not commence ground-up development of any parcels undergoing predevelopment activities without first securing pre-leasing for such space, except when there is significant market demand for high-quality laboratory facilities.  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.  Additionally, during predevelopment, we focus on the design of cost effective buildings with generic laboratory and office infrastructure to accommodate single and multi-tenancy. The largest project included in land undergoing predevelopment consists of our 1.2 million developable square feet at the Alexandria Center™ at Kendall Square in East Cambridge, Massachusetts.

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:

Ÿ
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.

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

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. In such cases, all predevelopment efforts have been advanced to appropriate stages and no further predevelopment activities are ongoing; therefore, interest, property taxes, insurance, and other costs are expensed as incurred.

Real estate asset sales

During the nine months ended September 30, 2013, we sold seven properties for aggregate consideration of $128.6 million, including four properties sold at a total gain of $271 thousand and three properties sold at a total loss of $392 thousand. The net loss on sales is classified in (loss) income from discontinued operations before impairment of real estate in the accompanying consolidated statements of income.

During the nine months ended September 30, 2013, we sold three parcels of land for aggregate consideration of $18.1 million and recognized gains 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. These gains are classified in gains on sales of land parcels in the accompanying consolidated statements of income.



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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 September 30, 2013, have each 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 impairment charges related to “available for sale” securities as of September 30, 2013.  As of September 30, 2013, and December 31, 2012, there were no unrealized losses in our investments in privately held entities accounted for under the cost method.

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

 
September 30, 2013
 
December 31, 2012
“Available-for-sale” securities, cost basis
$
1,940

 
$
1,236

Gross unrealized gains
1,708

 
1,561

Gross unrealized losses
(392
)
 
(88
)
“Available-for-sale” securities, at fair value
3,256

 
2,709

Investments accounted for under cost method
125,901

 
112,333

Investments accounted for under equity method
6

 
6

Total investments
$
129,163

 
$
115,048


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

 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Gross realized gains
$
2,050

 
$
1,190

 
$
4,716

 
$
12,316

Gross realized losses
—

 
(518
)
 
(529
)
 
(1,607
)
Equity in loss related to equity method investments
—

 
—

 
—

 
(26
)
Investment income
$
2,050

 
$
672

 
$
4,187

 
$
10,683

 
 
 
 
 
 
 
 
Amount of gains reclassified from accumulated other comprehensive income to realized gains, net
$
250

 
$
1,421

 
$
480

 
$
2,107




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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 September 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
(in years)
Secured notes payable, net
$
589,126

 
$
119,527

 
$
708,653

 
24.7
%
 
5.47
%
 
2.5
Unsecured senior notes payable, net
1,048,190

 
—

 
1,048,190

 
36.5

 
4.29

 
9.1
$1.5 billion unsecured senior line of credit
—

 
14,000

 
14,000

 
0.5

 
1.28

 
5.3
2016 Unsecured Senior Bank Term Loan
350,000

 
150,000

 
500,000

 
17.4

 
1.70

 
2.8
2019 Unsecured Senior Bank Term Loan
600,000

 
—

 
600,000

 
20.9

 
3.30

 
5.3
Total debt / weighted average
$
2,587,316

 
$
283,527

 
$
2,870,843

 
100.0
%
 
3.91
%
 
5.5
Percentage of total debt
90
%
 
10
%
 
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
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5.
Secured and unsecured senior debt (continued)

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

%
 
04/01/14
  
$
979

 
$
208,683

 
$
—

 
$
—

 
$
—

 
$
—

 
$
209,662

Suburban Washington, D.C.
 
2.17
 
 
2.17

 
 
04/20/14
(3) 
—

 
76,000

 
—

 
—

 
—

 
—

 
76,000

San Diego
 
6.05
 
 
4.88

 
 
07/01/14
  
24

 
6,458

 
—

 
—

 
—

 
—

 
6,482

San Diego
 
5.39
 
 
4.00

 
 
11/01/14
  
30

 
7,495

 
—

 
—

 
—

 
—

 
7,525

Seattle
 
6.00
 
 
6.00

 
 
11/18/14
  
60

 
240

 
—

 
—

 
—

 
—

 
300

Suburban Washington, D.C.
 
5.64
 
 
4.50

 
 
06/01/15
  
22

 
138

 
5,788

 
—

 
—

 
—

 
5,948

Greater Boston, San Diego, and Greater New York City
 
5.73
 
 
5.73

 
 
01/01/16
  
416

 
1,713

 
1,816

 
75,501

 
—

 
—

 
79,446

Greater Boston, San Diego, and Greater NYC
 
5.82
 
 
5.82

 
 
04/01/16
  
221

 
931

 
988

 
29,389

 
—

 
—

 
31,529

San Francisco Bay Area
 
6.35
 
 
6.35

 
 
08/01/16
  
580

 
2,487

 
2,652

 
126,715

 
—

 
—

 
132,434

San Francisco Bay Area
 
L+1.50
 
 
1.69

 
 
07/01/15
(4) 
—

 
—

 
43,227

 
—

 
—

 
—

 
43,227

San Francisco Bay Area
 
L+1.40
 
 
1.59

 
 
06/01/16
(5) 
—

 
—

 
—

 
—

 
—

 
—

 
—

Greater Boston
 
L+1.35
 
 
1.54

 
 
08/23/17
(6) 
—

 
—

 
—

 
—

 
—

 
—

 
—

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

 
 
04/01/20
  
345

 
1,453

 
1,570

 
1,696

 
1,832

 
108,469

 
115,365

San Francisco Bay Area
 
6.50
 
 
6.50

 
 
06/01/37
  
—

 
17

 
18

 
19

 
20

 
773

 
847

Average/Total
 
5.41
%
 
5.47

 
 
 
  
2,677

 
305,615

 
56,059

 
233,320

 
1,852

 
109,242

 
708,765

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$1.5 billion unsecured senior line of credit
 
L+1.10
%
(7) 
1.28

 
 
01/03/19
  
—

 
—

 
—

 
—

 
—

 
14,000

 
14,000

2016 Unsecured Senior Bank Term Loan
 
L+1.20
%
 
1.70

 
 
07/31/16
 
—

 
—

 
—

 
500,000

 
—

 
—

 
500,000

2019 Unsecured Senior Bank Term Loan
 
L+1.20
%
 
3.30

 
 
01/03/19
 
—

 
—

 
—

 
—

 
—

 
600,000

 
600,000

Unsecured senior notes payable
 
4.60
%
 
4.61

 
 
04/01/22
  
—

 
—

 
—

 
—

 
—

 
550,000

 
550,000

Unsecured senior notes payable
 
3.90
%
 
3.94

 
 
06/15/23
  
—

 
—

 
—

 
—

 
—

 
500,000

 
500,000

Average/Subtotal
 
 
 
 
3.91

 
 
 
  
2,677

 
305,615

 
56,059

 
733,320

 
1,852

 
1,773,242

 
2,872,765

Unamortized discounts
 
 
 
 
—

 
 
 
  
(146
)
 
(199
)
 
(139
)
 
(177
)
 
(184
)
 
(1,077
)
 
(1,922
)
Average/Total
 
 
 
 
3.91

%
 
 
  
$
2,531

 
$
305,416

 
$
55,920

 
$
733,143

 
$
1,668

 
$
1,772,165

 
$
2,870,843

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balloon payments
 
 
 
 
 

 
 
 
  
$
—

 
$
297,080

 
$
48,955

 
$
730,029

 
$
—

 
$
1,768,352

 
$
2,844,416

Principal amortization
 
 
 
 
 

 
 
 
  
2,531

 
8,336

 
6,965

 
3,114

 
1,668

 
3,813

 
26,427

Total consolidated debt
 
 
 
 
 

 
 
 
  
$
2,531

 
$
305,416

 
$
55,920

 
$
733,143

 
$
1,668

 
$
1,772,165

 
$
2,870,843

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate/hedged variable rate debt
 
 
 
 
 

 
 
 
  
$
2,471

 
$
229,176

 
$
12,693

 
$
583,143

 
$
1,668

 
$
1,758,165

 
$
2,587,316

Unhedged variable rate debt
 
 
 
 
 

 
 
 
  
60

 
76,240

 
43,227

 
150,000

 
—

 
14,000

 
283,527

Total consolidated debt
 
 
 
 
 

 
 
 
  
$
2,531

 
$
305,416

 
$
55,920

 
$
733,143

 
$
1,668

 
$
1,772,165

 
$
2,870,843


(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)
We are having discussions with the lender on an extension of the maturity date.
(4)
Secured construction loan with aggregate commitments of $55.0 million. We have two, one-year options to extend the stated maturity date to July 1, 2017, subject to certain conditions.
(5)
Secured construction loan with aggregate commitments of $33.0 million. We have two, one-year options to extend the stated maturity date to June 1, 2018, subject to certain conditions. As of September 30, 2013, we had not drawn on the loan.
(6)
Secured construction loan with aggregate commitments of $245.4 million. We have a one-year option to extend the stated maturity date to August 23, 2018, subject to certain conditions. As of September 30, 2013, we had not drawn on the loan.
(7)
In addition to the stated rate, the line of credit is subject to an annual facility fee of 0.20%.

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5.
Secured and unsecured senior debt (continued)

3.90% Unsecured senior notes payable

In June 2013, we completed a $500.0 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 initially to prepay $150.0 million of the outstanding principal balance 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 held the remaining proceeds in cash and cash equivalents. As a result of the $150.0 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

On July 26, 2013, we amended our 2016 Unsecured Senior Bank Term Loan to reduce the applicable interest rate margins in respect of the loan thereunder on outstanding borrowings. We extended the maturity of this loan by one month and we expect to repay the loan over the next one to three years.  In addition, on August 30, 2013, we amended our $1.5 billion unsecured senior line of credit and our unsecured senior bank term loan due in 2019 (“2019 Unsecured Senior Bank Term Loan”) to reduce the interest rate on outstanding borrowings, extend the maturity dates, and amend certain financial covenants. Also, on August 30, 2013, we amended our 2016 Unsecured Senior Bank Term Loan to conform certain financial covenants to those contained in the amended credit agreement related to our $1.5 billion unsecured senior line of credit and our 2019 Unsecured Senior Bank Term Loan. The maturity dates below reflect any available extension options that we control.
 
 
 
Balance at 9/30/13
 
Maturity Date
 
Applicable Rate
 
Facility Fee
Facility
 
 
Prior
 
Amended
 
Prior
 
Amended
 
Prior
 
Amended
2016 Unsecured Senior Bank Term Loan
 
$
500
 million
 
June 2016
 
July 2016
 
L +1.75%
 
L +1.20%
 
N/A

 
N/A

2019 Unsecured Senior Bank Term Loan
 
$
600
 million
 
January 2017
 
January 2019
 
L +1.50%
 
L +1.20%
 
N/A

 
N/A

$1.5 billion unsecured senior line of credit
 
$
14
 million
 
April 2017
 
January 2019
 
L +1.20%
 
L +1.10%
 
0.25
%
 
0.20
%

On September 30, 2013, we paid down $100 million on our 2016 Unsecured Senior Bank Term Loan to a total outstanding balance of $500 million. During the three months ended September 30, 2013, in conjunction with the refinancing of our unsecured senior bank term loans and the partial repayment of $100 million of our 2016 Unsecured Senior Bank Term Loan, we recognized a loss on early extinguishment of debt totaling $1.4 million, due to the write-off of unamortized loan fees.

Borrowings under the unsecured senior line of credit will bear interest at a “Eurocurrency Rate” or a “Base Rate” specified in the amended unsecured line of credit agreement, plus, in either case, a specified margin (the “Applicable Margin”). The “Eurocurrency Rate” specified in the amended unsecured line of credit agreement is, as applicable, the rate per annum equal to (i) the London interbank offered rate (“LIBOR”) or a successor rate thereto as approved by the administrative agent for loans denominated in a LIBOR quoted currency (i.e., US Dollars, Euro, Sterling, or Yen), (ii) the average annual yield rates applicable to Canadian dollar banker's acceptances for loans denominated in Canadian dollars, (iii) the Bank Bill Swap Reference Bid rate for loans denominated in Australian dollars, or (iv) the rate designated with respect to the applicable alternative currency for loans denominated in a non-LIBOR quoted currency (other than Canadian or Australian dollars). The “Base Rate” specified in the amended unsecured line of credit agreement means for any day a fluctuating rate per annum equal to the highest of (a) the federal funds rate plus 1/2 of 1%, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” and (c) the Eurocurrency Rate plus 1.00%. The Applicable Margin for LIBOR borrowings under the unsecured senior line of credit as of September 30, 2013, was 1.10%, which is based on our existing credit rating as set by certain rating agencies. As of September 30, 2013, we had $14 million in borrowings outstanding on our $1.5 billion unsecured senior line of credit. Our unsecured senior line of credit is subject to an annual facility fee of 0.20% based on the aggregate commitments outstanding.


18
Table of Contents

5.
Secured and unsecured senior debt (continued)

In addition, the terms of the unsecured senior line of credit and unsecured senior bank term loan agreements, among other things, limit the ability of the Company, Alexandria Real Estate Equities, L.P., and the Company’s subsidiaries to (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 September 30, 2013, we were in compliance with all such covenants and there were no limitations pursuant to such covenants.

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Gross interest
$
32,959

 
$
33,855

 
$
96,668

 
$
99,094

Capitalized interest
(16,788
)
 
(16,763
)
 
(46,499
)
 
(47,854
)
Interest expense
$
16,171

 
$
17,092

 
$
50,169

 
$
51,240


Construction loan of unconsolidated joint venture

We have a 27.5% interest in an unconsolidated joint venture that is currently developing a building in the Longwood Medical Area of the Greater Boston market, with the construction costs funded primarily from a non-recourse secured construction loan with aggregate commitments of $213.2 million and an outstanding balance of $75.0 million as of September 30, 2013. See Note 3 for further information.


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6.
Interest rate swap agreements

During the nine months ended September 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 nine months ended September 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 $8.5 million in accumulated other comprehensive loss to interest expense as an increase to interest expense.

As of September 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 $9.3 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 September 30, 2013 (dollars in thousands):

 
 
 
 
Interest Pay Rate (1)
 
Fair Value as of September 30, 2013
 
Notional Amount in Effect as of
Effective Date
 
Termination Date
 
 
 
September 30, 2013
 
December 31, 2013
December 29, 2006
 
March 31, 2014
 
4.990
%
 
$
(1,205
)
 
$
50,000

 
$
50,000

November 30, 2009
 
March 31, 2014
 
5.015
%
 
(1,817
)
 
75,000

 
75,000

November 30, 2009
 
March 31, 2014
 
5.023
%
 
(1,820
)
 
75,000

 
75,000

December 31, 2012
 
December 31, 2013
 
0.640
%
 
(291
)
 
250,000

 
—

December 31, 2012
 
December 31, 2013
 
0.640
%
 
(291
)
 
250,000

 
—

December 31, 2012
 
December 31, 2013
 
0.644
%
 
(147
)
 
125,000

 
—

December 31, 2012
 
December 31, 2013
 
0.644
%
 
(147
)
 
125,000

 
—

December 31, 2013
 
December 31, 2014
 
0.977
%
 
(1,802
)
 
—

 
250,000

December 31, 2013
 
December 31, 2014
 
0.976
%
 
(1,799
)
 
—

 
250,000

Total
 
 
 
 
 
$
(9,319
)
 
$
950,000

 
$
700,000


(1)
In addition to the interest pay rate, borrowings outstanding under our unsecured senior bank term loans include an applicable margin of 1.20% as of September 30, 2013.


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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 nine months ended September 30, 2013 and 2012.

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 September 30, 2013, and December 31, 2012 (in thousands):

 
 
 
 
September 30, 2013
Description
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Assets:
 
 
 
 
 
 
 
 
Marketable securities
 
$
3,256

 
$
3,256

 
$
—

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
9,319

 
$
—

 
$
9,319

 
$
—


 
 
 
 
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.


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7.
Fair value measurements (continued)

As of September 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):

 
September 30, 2013
 
December 31, 2012
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Marketable securities
$
3,256

 
$
3,256

 
$
2,709

 
$
2,709

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate swap agreements
$
9,319

 
$
9,319

 
$
20,661

 
$
20,661

Secured notes payable
$
708,653

 
$
761,047

 
$
716,144

 
$
788,455

Unsecured senior notes payable
$
1,048,190

 
$
1,028,750

 
$
549,805

 
$
593,350

Unsecured senior line of credit
$
14,000

 
$
13,738

 
$
566,000

 
$
567,196

Unsecured senior bank term loans
$
1,100,000

 
$
1,088,322

 
$
1,350,000

 
$
1,405,124



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8.
Earnings per share

We use income from continuing operations attributable to Alexandria’s common stockholders as the “control number” in determining whether potential common shares are dilutive or antidilutive to earnings per share.  Pursuant to the presentation and disclosure literature on gains or losses on sales or disposals by REITs and earnings per share required by the SEC and the 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 nine months ended September 30, 2013 and 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 nine months ended September 30, 2013 and 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”) is not a participating security, and is not included in the computation of earnings per share using the two-class method.  Under the two-class method, we allocate net income after preferred stock dividends, preferred stock redemption charge, and amounts attributable to noncontrolling interests to common stockholders and unvested restricted stock awards based on their respective participation rights to dividends declared (or accumulated) and undistributed earnings.  Diluted earnings per share is computed using the weighted average shares of common stock outstanding determined for the basic earnings per share computation plus the effect of any dilutive securities, including the dilutive effect of stock options using the treasury stock method and potential common shares issuable upon conversion of our 8.00% unsecured senior convertible notes (“8.00% Unsecured Senior Convertible Notes”), during the period the notes were outstanding.


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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 nine months ended September 30, 2013 and 2012 (in thousands, except per share amounts):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Income from continuing operations
$
32,517

 
$
22,501

 
$
94,262

 
$
69,695

Gain on sale of land parcel
—

 
—

 
772

 
1,864

Net income attributable to noncontrolling interests
(960
)
 
(828
)
 
(2,922
)
 
(2,390
)
Dividends on preferred stock
(6,472
)
 
(6,471
)
 
(19,414
)
 
(20,857
)
Preferred stock redemption charge
—

 
—

 
—

 
(5,978
)
Net income attributable to unvested restricted stock awards
(442
)
 
(360
)
 
(1,187
)
 
(866
)
Income from continuing operations attributable to Alexandria’s common stockholders – basic and diluted
24,643

 
14,842

 
71,511

 
41,468

(Loss) income from discontinued operations, net
(64
)
 
(4,196
)
 
993

 
5,162

Net income attributable to Alexandria’s common stockholders – basic and diluted
$
24,579

 
$
10,646

 
$
72,504

 
$
46,630

 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding – basic and diluted
70,900

 
62,364

 
67,040

 
61,847

 
 
 
 
 
 
 
 
Earnings per share attributable to Alexandria’s common stockholders – basic and diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.35

 
$
0.24

 
$
1.07

 
$
0.67

Discontinued operations, net
—

 
(0.07
)
 
0.01

 
0.08

Earnings per share – basic and diluted
$
0.35

 
$
0.17

 
$
1.08

 
$
0.75



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 nine months ended September 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 nine months ended September 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.


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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 nine months ended September 30, 2013 and 2012 (in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Income from continuing operations
$
32,517

 
$
22,501

 
$
94,262

 
$
69,695

Gain on sale of land parcels
—

 
—

 
772

 
1,864

Less: net income attributable to noncontrolling interests
(960
)
 
(828
)
 
(2,922
)
 
(2,390
)
Income from continuing operations attributable to Alexandria
31,557

 
21,673

 
92,112

 
69,169

 
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net
(64
)
 
(4,196
)
 
993

 
5,162

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

 
—

 
—

 
—

Net income attributable to Alexandria
$
31,493

 
$
17,477

 
$
93,105

 
$
74,331


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 $535.7 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 September 30, 2013, approximately $150.0 million of our common stock remained available for issuance under the “at the market” common stock offering program.

Dividends

In September 2013, we declared cash dividends for the third quarter of 2013, on our common stock aggregating approximately $48.7 million, or $0.68 per share.  In September 2013, we also declared cash dividends for the third quarter of 2013, on our Series D Convertible Preferred Stock aggregating approximately $4.4 million, or $0.4375 per share.  Additionally, we declared cash dividends for the third quarter of 2013, on our Series E cumulative redeemable preferred stock (“Series E Cumulative Redeemable Preferred Stock”) aggregating approximately $2.1 million, or $0.403125 per share.  In October 2013, we paid the cash dividends for the third quarter of 2013, on our common stock, Series D Convertible Preferred Stock, and Series E Cumulative Redeemable Preferred Stock.


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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
323

 
(704
)
 
(26,378
)
 
(26,759
)
Amounts reclassified from other comprehensive income
(480
)
 
12,046

 
—

 
11,566

Net other comprehensive (loss) income
(157
)
 
11,342

 
(26,378
)
 
(15,193
)
Balance as of September 30, 2013
$
1,316

 
$
(9,319
)
 
$
(32,023
)
 
$
(40,026
)

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 September 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 September 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 September 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 September 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 $47.5 million and $46.6 million as of September 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.


26
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12.
Discontinued operations

The following is a summary of net assets of discontinued operations and income from discontinued operations, net (in thousands):
 
September 30, 2013
 
December 31, 2012
Properties “held for sale,” net
$
4,510

 
$
76,440

Other assets
14

 
4,546

Total assets
4,524

 
80,986

 
 

 
 
Total liabilities
(32
)
 
(3,233
)
Net assets of discontinued operations
$
4,492

 
$
77,753



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Total revenues
 
$
4

 
$
8,418

 
$
3,741

 
$
26,556

Operating expenses
 
68

 
2,788

 
1,697

 
8,337

Total revenues less operating expenses from discontinued operations
 
(64
)
 
5,630

 
2,044

 
18,219

Depreciation expense
 
—

 
1,589

 
930

 
4,822

(Gain) loss on sale of real estate
 
—

 
(1,562
)
 
121

 
(1,564
)
Impairment of real estate
 
—

 
9,799

 
—

 
9,799

(Loss) income from discontinued operations, net (1)
 
$
(64
)
 
$
(4,196
)
 
$
993

 
$
5,162


(1)
(Loss) income from discontinued operations, net, includes the results of operations for two operating properties that were classified as “held for sale” as of September 30, 2013, as well as the results of operations (prior to disposition) and (gain) loss on sale of real estate attributable to 10 properties sold during the period from January 1, 2012, to September 30, 2013.


27
Table of Contents



13. Subsequent events

Update on our ground-up development at 499 Illinois Street

In October 2013, we executed a 10-year lease with a high-quality biopharmaceutical company for 43,625 RSF at 499 Illinois Street in the Mission Bay submarket of the San Francisco Bay Area which is now 77% pre-leased.


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 September 30, 2013, and December 31, 2012, the condensed consolidating statements of income and comprehensive income for the three and nine months ended September 30, 2013 and 2012, and the condensed consolidating statements of cash flow for the nine months ended September 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.

28
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Balance Sheet
as of September 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
$
—

 
$
—

 
$
6,613,761

 
$
—

 
$
6,613,761

Cash and cash equivalents
14,667

 
—

 
39,172

 
—

 
53,839

Restricted cash
61

 
—

 
30,593

 
—

 
30,654

Tenant receivables
—

 
—

 
8,671

 
—

 
8,671

Deferred rent
—

 
—

 
182,909

 
—

 
182,909

Deferred leasing and financing costs, net
38,462

 
—

 
141,343

 
—

 
179,805

Investments
—

 
11,828

 
117,335

 
—

 
129,163

Investments in and advances to affiliates
6,119,819

 
5,655,063

 
116,004

 
(11,890,886
)
 
—

Other assets
17,801

 
—

 
141,766

 
—

 
159,567

Total assets
$
6,190,810

 
$
5,666,891

 
$
7,391,554

 
$
(11,890,886
)
 
$
7,358,369

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

 
$
—

 
$
708,653

 
$
—

 
$
708,653

Unsecured senior notes payable
1,048,190

 
—

 
—

 
—

 
1,048,190

Unsecured senior line of credit
14,000

 
—

 
—

 
—

 
14,000

Unsecured senior bank term loans
1,100,000

 
—

 
—

 
—

 
1,100,000

Accounts payable, accrued expenses, and tenant security deposits
55,467

 
—

 
396,672

 
—

 
452,139

Dividends payable
54,125

 
—

 
288

 
—

 
54,413

Total liabilities
2,271,782

 
—

 
1,105,613

 
—

 
3,377,395

Redeemable noncontrolling interests
—

 
—

 
14,475

 
—

 
14,475

Alexandria’s stockholders’ equity
3,919,028

 
5,666,891

 
6,223,995

 
(11,890,886
)
 
3,919,028

Noncontrolling interests
—

 
—

 
47,471

 
—

 
47,471

Total equity
3,919,028

 
5,666,891

 
6,271,466

 
(11,890,886
)
 
3,966,499

Total liabilities, noncontrolling interests, and equity
$
6,190,810

 
$
5,666,891

 
$
7,391,554

 
$
(11,890,886
)
 
$
7,358,369



29
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





30
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Income
for the Three Months Ended September 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
$
—

 
$
—

 
$
116,302

 
$
—

 
$
116,302

Tenant recoveries
—

 
—

 
38,757

 
—

 
38,757

Other income
2,802

 
(1
)
 
3,965

 
(3,195
)
 
3,571

Total revenues
2,802

 
(1
)
 
159,024

 
(3,195
)
 
158,630

 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Rental operations
—

 
—

 
47,742

 
—

 
47,742

General and administrative
10,141

 
—

 
4,720

 
(3,195
)
 
11,666

Interest
10,238

 
—

 
5,933

 
—

 
16,171

Depreciation and amortization
1,472

 
—

 
47,630

 
—

 
49,102

Loss on early extinguishment of debt
1,432

 
—

 
—

 
—

 
1,432

Total expenses
23,283

 
—

 
106,025

 
(3,195
)
 
126,113

Income (loss) from continuing operations before equity in earnings of affiliates
(20,481
)
 
(1
)
 
52,999

 
—

 
32,517

Equity in earnings of affiliates
51,975

 
48,477

 
959

 
(101,411
)
 
—

Income from continuing operations
31,494

 
48,476

 
53,958

 
(101,411
)
 
32,517

(Loss) income from discontinued operations, net
(1
)
 
—

 
(63
)
 
—

 
(64
)
Net income
31,493

 
48,476

 
53,895

 
(101,411
)
 
32,453

 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
—

 
—

 
960

 
—

 
960

Dividends on preferred stock
6,472

 
—

 
—

 
—

 
6,472

Net income attributable to unvested restricted stock awards
442

 
—

 
—

 
—

 
442

Net income attributable to Alexandria’s common stockholders
$
24,579

 
$
48,476

 
$
52,935

 
$
(101,411
)
 
$
24,579



31
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Income
for the Three Months Ended September 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
$
—

 
$
—

 
$
106,216

 
$
—

 
$
106,216

Tenant recoveries
—

 
—

 
34,006

 
—

 
34,006

Other income
2,785

 
51

 
3,209

 
(3,417
)
 
2,628

Total revenues
2,785

 
51

 
143,431

 
(3,417
)
 
142,850


 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Rental operations
—

 
—

 
44,203

 
—

 
44,203

General and administrative
9,587

 
—

 
6,300

 
(3,417
)
 
12,470

Interest
11,785

 
—

 
5,307

 
—

 
17,092

Depreciation and amortization
1,725

 
—

 
44,859

 
—

 
46,584

Total expenses
23,097

 
—

 
100,669

 
(3,417
)
 
120,349

Income (loss) from continuing operations before equity in earnings of affiliates
(20,312
)
 
51

 
42,762

 
—

 
22,501

Equity in earnings of affiliates
41,380

 
42,064

 
804

 
(84,248
)
 
—

Income from continuing operations
21,068

 
42,115

 
43,566

 
(84,248
)
 
22,501

(Loss) income from discontinued operations, net
(3,591
)
 
—

 
(605
)
 
—

 
(4,196
)
Net income
17,477

 
42,115

 
42,961

 
(84,248
)
 
18,305


 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
—

 
—

 
828

 
—

 
828

Dividends on preferred stock
6,471

 
—

 
—

 
—

 
6,471

Net income attributable to unvested restricted stock awards
360

 
—

 
—

 
—

 
360

Net income attributable to Alexandria’s common stockholders
$
10,646

 
$
42,115

 
$
42,133

 
$
(84,248
)
 
$
10,646




32
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Income
for the Nine Months Ended September 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
$
—

 
$
—

 
$
342,821

 
$
—

 
$
342,821

Tenant recoveries
—

 
—

 
110,291

 
—

 
110,291

Other income
8,071

 
(142
)
 
11,636

 
(9,432
)
 
10,133

Total revenues
8,071

 
(142
)
 
464,748

 
(9,432
)
 
463,245

 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Rental operations
—

 
—

 
139,289

 
—

 
139,289

General and administrative
32,574

 
—

 
12,644

 
(9,432
)
 
35,786

Interest
32,048

 
—

 
18,121

 
—

 
50,169

Depreciation and amortization
4,393

 
—

 
137,354

 
—

 
141,747

Loss on early extinguishment of debt
1,992

 
—

 
—

 
—

 
1,992

Total expenses
71,007

 
—

 
307,408

 
(9,432
)
 
368,983

Income (loss) from continuing operations before equity in earnings of affiliates
(62,936
)
 
(142
)
 
157,340

 
—

 
94,262

Equity in earnings of affiliates
155,694

 
144,660

 
2,858

 
(303,212
)
 
—

Income from continuing operations
92,758

 
144,518

 
160,198

 
(303,212
)
 
94,262

Income from discontinued operations, net
347

 
—

 
646

 
—

 
993

Gain on sale of land parcel
—

 
—

 
772

 
—

 
772

Net income
93,105

 
144,518

 
161,616

 
(303,212
)
 
96,027

 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
—

 
—

 
2,922

 
—

 
2,922

Dividends on preferred stock
19,414

 
—

 
—

 
—

 
19,414

Net income attributable to unvested restricted stock awards
1,187

 
—

 
—

 
—

 
1,187

Net income attributable to Alexandria’s common stockholders
$
72,504

 
$
144,518

 
$
158,694

 
$
(303,212
)
 
$
72,504




33
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Income
for the Nine Months Ended September 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
$
—

 
$
—

 
$
311,746

 
$
—

 
$
311,746

Tenant recoveries
—

 
—

 
97,769

 
—

 
97,769

Other income
7,593

 
891

 
16,095

 
(9,940
)
 
14,639

Total revenues
7,593

 
891

 
425,610

 
(9,940
)
 
424,154

 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Rental operations
—

 
—

 
126,758

 
—

 
126,758

General and administrative
32,030

 
1

 
13,034

 
(9,940
)
 
35,125

Interest
34,460

 
—

 
16,780

 
—

 
51,240

Depreciation and amortization
3,781

 
—

 
135,330

 
—

 
139,111

Loss on early extinguishment of debt
2,225

 
—

 
—

 
—

 
2,225

Total expenses
72,496

 
1

 
291,902

 
(9,940
)
 
354,459

Income (loss) from continuing operations before equity in earnings of affiliates
(64,903
)
 
890

 
133,708

 
—

 
69,695

Equity in earnings of affiliates
140,267

 
134,346

 
2,662

 
(277,275
)
 
—

Income from continuing operations
75,364

 
135,236

 
136,370

 
(277,275
)
 
69,695

Income (loss) from discontinued operations, net
(1,033
)
 
—

 
6,195

 
—

 
5,162

Gain on sale of land parcel
—

 
—

 
1,864

 
—

 
1,864

Net income
74,331

 
135,236

 
144,429

 
(277,275
)
 
76,721

 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
—

 
—

 
2,390

 
—

 
2,390

Dividends on preferred stock
20,857

 
—

 
—

 
—

 
20,857

Preferred stock redemption charge
5,978

 
—

 
—

 
—

 
5,978

Net income attributable to unvested restricted stock awards
866

 
—

 
—

 
—

 
866

Net income attributable to Alexandria’s common stockholders
$
46,630

 
$
135,236

 
$
142,039

 
$
(277,275
)
 
$
46,630




34
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Comprehensive Income
for the Three Months Ended September 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
$
31,493

 
$
48,476

 
$
53,895

 
$
(101,411
)
 
$
32,453

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

 
(796
)
 
759

 
—

 
(37
)
Reclassification adjustment for (gains) losses included in net income
—

 
519

 
(769
)
 
—

 
(250
)
Unrealized gains (losses) on marketable securities, net
—

 
(277
)
 
(10
)
 
—

 
(287
)
 
 
 
 
 
 
 
 
 
 
Unrealized gains on interest rate swaps:
 
 
 
 
 
 
 
 
 
Unrealized interest rate swap gains arising during the period
(676
)
 
—

 
—

 
—

 
(676
)
Reclassification adjustment for amortization of interest expense included in net income
3,904

 
—

 
—

 
—

 
3,904

Unrealized gains on interest rate swaps, net
3,228

 
—

 
—

 
—

 
3,228

 
 
 
 
 
 
 
 
 
 
Foreign currency translation losses
—

 
—

 
(3,404
)
 
—

 
(3,404
)
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
3,228

 
(277
)
 
(3,414
)
 
—

 
(463
)
Comprehensive income
34,721

 
48,199

 
50,481

 
(101,411
)
 
31,990

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(933
)
 
—

 
(933
)
Comprehensive income attributable to Alexandria’s common stockholders
$
34,721

 
$
48,199

 
$
49,548

 
$
(101,411
)
 
$
31,057




35
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Comprehensive Income
for the Three Months Ended September 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
$
17,477

 
$
42,115

 
$
42,961

 
$
(84,248
)
 
$
18,305

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

 
23

 
773

 
—

 
796

Reclassification adjustment for losses included in net income
—

 
(11
)
 
(1,410
)
 
—

 
(1,421
)
Unrealized gains (losses) on marketable securities, net
—

 
12

 
(637
)
 
—

 
(625
)
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on interest rate swaps:
 
 
 
 
 
 
 
 
 
Unrealized interest rate swap gains (losses) arising during the period
(2,818
)
 
—

 
—

 
—

 
(2,818
)
Reclassification adjustment for amortization of interest expense included in net income
5,956

 
—

 
—

 
—

 
5,956

Unrealized gains (losses) on interest rate swaps, net
3,138

 
—

 
—

 
—

 
3,138

 
 
 
 
 
 
 
 
 
 
Foreign currency translation losses
—

 
—

 
15,104

 
—

 
15,104

 
 
 
 
 
 
 
 
 
 
Total other comprehensive income
3,138

 
12

 
14,467

 
—

 
17,617

Comprehensive income
20,615

 
42,127

 
57,428

 
(84,248
)
 
35,922

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(805
)
 
—

 
(805
)
Comprehensive income attributable to Alexandria’s common stockholders
$
20,615

 
$
42,127

 
$
56,623

 
$
(84,248
)
 
$
35,117





36
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Comprehensive Income
for the Nine Months Ended September 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
$
93,105

 
$
144,518

 
$
161,616

 
$
(303,212
)
 
$
96,027

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

 
(391
)
 
714

 
—

 
323

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

 
144

 
(624
)
 
—

 
(480
)
Unrealized gains on marketable securities, net
—

 
(247
)
 
90

 
—

 
(157
)
 
 
 
 
 
 
 
 
 
 
Unrealized gains on interest rate swaps:
 
 
 
 
 
 
 
 
 
Unrealized interest rate swap losses arising during the period
(704
)
 
—

 
—

 
—

 
(704
)
Reclassification adjustment for amortization of interest expense included in net income
12,046

 
—

 
—

 
—

 
12,046

Unrealized gains on interest rate swaps, net
11,342

 
—

 
—

 
—

 
11,342

 
 
 
 
 
 
 
 
 
 
Foreign currency translation losses
—

 
—

 
(26,461
)
 
—

 
(26,461
)
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income
11,342

 
(247
)
 
(26,371
)
 
—

 
(15,276
)
Comprehensive income
104,447

 
144,271

 
135,245

 
(303,212
)
 
80,751

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(2,839
)
 
—

 
(2,839
)
Comprehensive income attributable to Alexandria's common stockholders
$
104,447

 
$
144,271

 
$
132,406

 
$
(303,212
)
 
$
77,912





37
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Comprehensive Income
for the Nine Months Ended September 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
$
74,331

 
$
135,236

 
$
144,429

 
$
(277,275
)
 
$
76,721

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

 
10

 
1,353

 
—

 
1,363

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

 
172

 
(2,279
)
 
—

 
(2,107
)
Unrealized gains (losses) on marketable securities, net
—

 
182

 
(926
)
 
—

 
(744
)
 
 
 
 
 
 
 
 
 
 
Unrealized gains on interest rate swaps:
 
 
 
 
 
 
 
 
 
Unrealized interest rate swap losses arising during the period
(9,982
)
 
—

 
—

 
—

 
(9,982
)
Reclassification adjustment for amortization of interest expense included in net income
17,626

 
—

 
—

 
—

 
17,626

Unrealized gains on interest rate swaps, net
7,644

 
—

 
—

 
—

 
7,644

 
 
 
 
 
 
 
 
 
 
Foreign currency translation losses
—

 
—

 
7,871

 
—

 
7,871

 
 
 
 
 
 
 
 
 
 
Total other comprehensive income
7,644

 
182

 
6,945

 
—

 
14,771

Comprehensive income
81,975

 
135,418

 
151,374

 
(277,275
)
 
91,492

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(2,379
)
 
—

 
(2,379
)
Comprehensive income attributable to Alexandria’s common stockholders
$
81,975

 
$
135,418

 
$
148,995

 
$
(277,275
)
 
$
89,113






38
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Cash Flows
for the Nine Months Ended September 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
$
93,105

 
$
144,518

 
$
161,616

 
$
(303,212
)
 
$
96,027

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
4,393

 
—

 
138,284

 
—

 
142,677

Loss on early extinguishment of debt
1,992

 
—

 
—

 
—

 
1,992

Gain on sale of land parcel
—

 
—

 
(772
)
 
—

 
(772
)
Loss on sale of real estate
—

 
—

 
121

 
—

 
121

Amortization of loan fees and costs
5,148

 
—

 
2,152

 
—

 
7,300

Amortization of debt premiums/discounts
75

 
—

 
308

 
—

 
383

Amortization of acquired above and below market leases
—

 
—

 
(2,490
)
 
—

 
(2,490
)
Deferred rent
—

 
—

 
(20,007
)
 
—

 
(20,007
)
Stock compensation expense
11,541

 
—

 
—

 
—

 
11,541

Equity in (income) loss related to subsidiaries
(155,694
)
 
(144,660
)
 
(2,858
)
 
303,212

 
—

Gain on sales of investments
—

 
(152
)
 
(4,564
)
 
—

 
(4,716
)
Loss on sales of investments
—

 
298

 
231

 
—

 
529

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Restricted cash
(8
)
 
—

 
1,251

 
—

 
1,243

Tenant receivables
1

 
—

 
(272
)
 
—

 
(271
)
Deferred leasing costs
2,421

 
—

 
(39,611
)
 
—

 
(37,190
)
Other assets
(5,570
)
 
—

 
(5,858
)
 
—

 
(11,428
)
Intercompany receivables and payables
3,021

 
—

 
(3,021
)
 
—

 
—

Accounts payable, accrued expenses, and tenant security deposits
(9,599
)
 
—

 
61,036

 
—

 
51,437

Net cash provided by (used in) operating activities
(49,174
)
 
4

 
285,546

 
—

 
236,376

 
 
 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
 
 
Proceeds from sale of properties
10,796

 
—

 
91,019

 
—

 
101,815

Additions to properties
3,539

 
—

 
(453,679
)
 
—

 
(450,140
)
Purchase of properties
—

 
—

 
(24,537
)
 
—

 
(24,537
)
Change in restricted cash related to construction projects
—

 
—

 
5,711

 
—

 
5,711

Contributions to unconsolidated real estate entity
—

 
—

 
(13,881
)
 
—

 
(13,881
)
Investments in subsidiaries
(126,967
)
 
(170,033
)
 
(3,045
)
 
300,045

 
—

Additions to investments
—

 
—

 
(22,835
)
 
—

 
(22,835
)
Proceeds from investments
—

 
1,594

 
11,156

 
—

 
12,750

Net cash provided by (used in) investing activities
$
(112,632
)
 
$
(168,439
)
 
$
(410,091
)
 
$
300,045

 
$
(391,117
)








39
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Cash Flows (continued)
for the Nine Months Ended September 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
$
—

 
$
—

 
$
26,319

 
$
—

 
$
26,319

Repayments of borrowings from secured notes payable
—

 
—

 
(34,120
)
 
—

 
(34,120
)
Proceeds from issuance of senior notes payable
498,561

 
—

 
—

 
—

 
498,561

Principal borrowings from unsecured senior line of credit
319,000

 
—

 
—

 
—

 
319,000

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

 
—

 
—

 
(871,000
)
Repayments of unsecured senior bank term loans
(250,000
)
 
—

 
—

 
—

 
(250,000
)
Repurchase of unsecured senior convertible notes
(384
)
 
—

 
—

 
—

 
(384
)
Transfer to/from parent company
—

 
166,522

 
133,523

 
(300,045
)
 
—

Change in restricted cash related to financings
(1
)
 
—

 
924

 
—

 
923

Deferred financing costs paid
(14,175
)
 
—

 
(2,072
)
 
—

 
(16,247
)
Proceeds from common stock offerings
535,686

 
—

 
—

 
—

 
535,686

Dividends paid on common stock
(120,367
)
 
—

 
—

 
—

 
(120,367
)
Dividends paid on preferred stock
(19,414
)
 
—

 
—

 
—

 
(19,414
)
Distributions to noncontrolling interests
—

 
—

 
(2,100
)
 
—

 
(2,100
)
Net cash provided by (used in) financing activities
77,906

 
166,522

 
122,474

 
(300,045
)
 
66,857

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

 
—

 
752

 
—

 
752

 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(83,900
)
 
(1,913
)
 
(1,319
)
 
—

 
(87,132
)
Cash and cash equivalents at beginning of period
98,567

 
1,913

 
40,491

 
—

 
140,971

Cash and cash equivalents at end of period
$
14,667

 
$
—

 
$
39,172

 
$
—

 
$
53,839

 
 
 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
 
 
 
 
Cash paid during the period for interest, net of interest capitalized
$
16,569

 
$
—

 
$
17,712

 
$
—

 
$
34,281

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

 
$
—

 
$
9,000

 
$
—

 
$
38,820





40
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Cash Flows
for the Nine Months Ended September 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
$
74,331

 
$
135,236

 
$
144,429

 
$
(277,275
)
 
$
76,721

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
3,781

 
—

 
140,152

 
—

 
143,933

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
—

 
—

 
(1,564
)
 
—

 
(1,564
)
Non-cash impairment of real estate
4,799

 
 
 
5,000

 
 
 
9,799

Amortization of loan fees and costs
5,307

 
—

 
2,020

 
—

 
7,327

Amortization of debt premiums/discounts
104

 
—

 
297

 
—

 
401

Amortization of acquired above and below market leases
—

 
—

 
(2,356
)
 
—

 
(2,356
)
Deferred rent
164

 
—

 
(19,380
)
 
—

 
(19,216
)
Stock compensation expense
10,412

 
—

 
—

 
—

 
10,412

Equity in loss related to investments
—

 
26

 
—

 
—

 
26

Equity in (income) loss related to subsidiaries
(140,267
)
 
(134,346
)
 
(2,662
)
 
277,275

 
—

Gain on sales of investments
—

 
(1,109
)
 
(11,207
)
 
—

 
(12,316
)
Loss on sales of investments
—

 
195

 
1,412

 
—

 
1,607

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Restricted cash
(8
)
 
—

 
449

 
—

 
441

Tenant receivables
11

 
—

 
(2,648
)
 
—

 
(2,637
)
Deferred leasing costs
4,232

 
—

 
(27,829
)
 
—

 
(23,597
)
Other assets
2,603

 
—

 
(5,833
)
 
—

 
(3,230
)
Intercompany receivables and payables
(49
)
 
—

 
49

 
—

 
—

Accounts payable, accrued expenses, and tenant security deposits
3,592

 
—

 
37,786

 
—

 
41,378

Net cash provided by (used in) operating activities
(28,763
)
 
2

 
256,251

 
—

 
227,490

 
 
 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
 
 
Proceeds from sale of properties
—

 
—

 
36,179

 
—

 
36,179

Additions to properties
(1,192
)
 
—

 
(404,874
)
 
—

 
(406,066
)
Purchase of properties
—

 
—

 
(42,171
)
 
—

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

 
—

 
(11,453
)
 
—

 
(11,453
)
Distribution from unconsolidated real estate entity
—

 
—

 
22,250

 
—

 
22,250

Contributions to unconsolidated real estate entity
—

 
—

 
(5,042
)
 
—

 
(5,042
)
Investments in subsidiaries
(147,782
)
 
(112,504
)
 
(389
)
 
260,675

 
—

Additions to investments
—

 
(160
)
 
(21,837
)
 
—

 
(21,997
)
Proceeds from investments
—

 
1,944

 
17,961

 
—

 
19,905

Net cash provided by (used in) investing activities
$
(148,974
)
 
$
(110,720
)
 
$
(409,376
)
 
$
260,675

 
$
(408,395
)





41
Table of Contents

14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Cash Flows (continued)
for the Nine Months Ended September 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
 
 
 
 
 
 
 
 
 
Borrowings from secured notes payable
$
—

 
$
—

 
$
2,874

 
$
—

 
$
2,874

Repayments of borrowings from secured notes payable
—

 
—

 
(8,125
)
 
—

 
(8,125
)
Proceeds from issuance of unsecured senior notes payable
549,533

 
—

 
—

 
—

 
549,533

Principal borrowings from unsecured senior line of credit and unsecured senior bank term loan
623,147

 
—

 
—

 
—

 
623,147

Repayments of borrowings from unsecured senior line of credit
(580,147
)
 
—

 
—

 
—

 
(580,147
)
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

Transfer to/from parent company
—

 
110,718

 
149,957

 
(260,675
)
 
—

Change in restricted cash related to financings
—

 
—

 
(10,476
)
 
—

 
(10,476
)
Deferred financing costs paid
(19,949
)
 
—

 
(5,352
)
 
—

 
(25,301
)
Proceeds from common stock offering
98,443

 
—

 
—

 
—

 
98,443

Proceeds from exercise of stock options
155

 
—

 
—

 
—

 
155

Dividends paid on common stock
(92,743
)
 
—

 
—

 
—

 
(92,743
)
Dividends paid on preferred stock
(21,348
)
 
—

 
—

 
—

 
(21,348
)
Distributions to redeemable noncontrolling interests
—

 
—

 
(943
)
 
—

 
(943
)
Redemption of redeemable noncontrolling interests
4

 
—

 
(154
)
 
—

 
(150
)
Contributions by noncontrolling interests
—

 
—

 
1,626

 
—

 
1,626

Distributions to noncontrolling interests
—

 
—

 
(770
)
 
—

 
(770
)
Net cash provided by (used in) financing activities
217,524

 
110,718

 
128,637

 
(260,675
)
 
196,204

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

 
—

 
1,066

 
—

 
1,066

 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
39,787

 
—

 
(23,422
)
 
—

 
16,365

Cash and cash equivalents at beginning of period
10,608

 
—

 
67,931

 
—

 
78,539

Cash and cash equivalents at end of period
$
50,395

 
$
—

 
$
44,509

 
$
—

 
$
94,904

 
 
 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
 
 
 
 
Cash paid during the period for interest, net of interest capitalized
$
23,226

 
$
—

 
$
7,259

 
$
—

 
$
30,485

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

 
$
—

 
$
6,125

 
$
—

 
$
6,125






42
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,” “intends,” “plans,” “estimates,” “anticipates,” or “projects,” 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;
•
Adverse developments concerning the life science industry and/or our life science client tenants;
•
Client tenant base concentration within the 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 and its negative impact on our client tenants, including changes that may reduce pricing of drugs, negatively impact healthcare coverage, or negatively impact reimbursement of healthcare services and products;
•
Our life science industry client tenants are subject to a number of risks unique to the life science industry, including (i) high levels of regulation, (ii) safety and efficacy of their products, (iii) significant funding requirements for product research and development, and (iv) changes in technology, patent expiration and intellectual property protection. These risks may adversely affect their ability to make rental payments to us or satisfy their other lease obligations, and consequently, may materially adversely affect our business, results of operations, financial condition, and stock price;
•
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;

43
Table of Contents



•
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;
•
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 Class A laboratory/office assets and operations in AAA 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-creation real estate.  We executed our initial public offering in 1997 and received our investment-grade ratings in 2011.

As of September 30, 2013, Alexandria's asset base consisted of 30.9 million square feet, including 17.3 million RSF of operating assets and active value-creation projects and 13.6 million additional RSF through future ground-up development projects. Our operating properties were approximately 93.5% leased as of September 30, 2013.   Investment-grade client tenants represented 50% of our total annualized base rent as of September 30, 2013.  The comparability of financial data from period to period is affected by the timing of our property acquisition, development, and redevelopment activities.

Third quarter ended September 30, 2013, highlights

•
Net income attributable to Alexandria’s common stockholders – diluted:
•
$24.6 million, or $0.35 per share, for the three months ended September 30, 2013 (“3Q13”) compared to
$10.6 million, or $0.17 per share, for the three months ended September 30, 2012 (“3Q12”)
•
$72.5 million, or $1.08 per share, for the nine months ended September 30, 2013 (“YTD 3Q13”) compared to
$46.6 million, or $0.75 per share, for the nine months ended September 30, 2012 (“YTD 3Q12”)
•
Funds from operations (“FFO”) attributable to Alexandria’s common stockholders – diluted, as adjusted:
•
$75.0 million, or $1.06 per share, for 3Q13 compared to $67.1 million, or $1.08 per share, for 3Q12
•
$216.6 million, or $3.23 per share, for YTD 3Q13 compared to $199.1 million, or $3.22 per share, for YTD 3Q12
•
Adjusted funds from operations (“AFFO”) attributable to Alexandria’s common stockholders – diluted:
•
$70.2 million, or $0.99 per share, for 3Q13 compared to $65.0 million, or $1.04 per share, for 3Q12

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•
$205.0 million, or $3.06 per share, for YTD 3Q13 compared to $191.4 million, or $3.09 per share, for YTD 3Q12

Core operating metrics

Total revenues from continuing operations:
•
$158.6 million for 3Q13, up 11.0%, compared to $142.9 million for 3Q12
•
$463.2 million YTD 3Q13, up 9.2%, compared to $424.2 million for YTD 3Q12
•
Net operating income (“NOI”) from continuing operations:
•
$110.9 million for 3Q13, up 12.4%, compared to $98.6 million for 3Q12
•
$324.0 million for YTD 3Q13, up 8.9%, compared to $297.4 million for YTD 3Q12
•
Same property NOI performance:
•
4.7% and 1.9% increases on a cash and GAAP basis, respectively, for 3Q13 compared to 3Q12
•
6.5% and 2.0% increases on a cash and GAAP basis, respectively, for YTD 3Q13 compared to YTD 3Q12
•
Leasing activity strong during the three months ended September 30, 2013:
•
57 leases executed for 829,533 RSF, including 228,311 RSF of development and redevelopment space
•
Rental rate increase of 4.1% and 16.5% on a cash and GAAP basis, respectively, on renewed/re-leased space
•
Occupancy for North American properties, as of September 30, 2013:
•
95.0% for operating properties and 94.5% for operating and redevelopment properties, up 40 basis points (“bps”) and 160 bps, respectively, compared to June 30, 2013
•
Operating margins steady at 70% for 3Q13 and YTD 3Q13
•
Investment-grade client tenants represent 50% of total annualized base rent (“ABR”)

Value-creation projects and external growth

Value-creation development and redevelopment projects delivered in 3Q13

•
On September 30, 2013, we delivered a build-to-suit development project located at 225 Binney Street in the Greater Boston market:
•
305,212 RSF, 100% leased to Biogen Idec, Inc. for 15 years
•
Initial stabilized yields of 7.7% and 8.2% for cash and GAAP, respectively; average cash yield of 8.2%

•
During the quarter ended September 30, 2013, we delivered an aggregate of 155,818 RSF at four redevelopment projects in North America:
•
Total redevelopment spaces aggregating 222,082 RSF with occupancy of 83%, including 155,818 RSF delivered in 3Q13 at an average occupancy of 76% and 66,264 RSF placed in service prior to 3Q13 with occupancy of 100%.
•
Average initial stabilized yields for the 222,082 RSF of 7.0% and 7.1% for cash and GAAP, respectively; average cash yield of 7.3%

Acquisitions
On September 16, 2013, we acquired 407 Davis Drive, a Class A laboratory/office property in our Research Triangle Park market for a total purchase price of $19.4 million. The building consists of 81,956 RSF and is 100% leased to Bayer AG, an existing client tenant of the Company. The initial stabilized cash and GAAP yields are 7.8% and 8.7%, respectively. The average cash yield for the project is 8.7%.
On July 5, 2013, we acquired 10121/10151 Barnes Canyon Road, a 115,895 RSF office property located in the Sorrento Mesa submarket of San Diego, for a total purchase price of $13.1 million. The property is currently 100% occupied with leases that expire in 2014 and 2015. We intend to convert the existing office space through redevelopment when the spaces become available. Initial stabilized yields and average cash yield will be provided upon commencement of the redevelopment.
Dispositions
On July 2, 2013, we executed a purchase and sale agreement to sell 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. Ownership of the parcel was strategically important to the buyer and we will earn a fee to manage the building construction. This sale is expected to close in December 2013.


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Table of Contents



Balance sheet
•
Reduced outstanding debt under our unsecured senior line of credit and unsecured senior bank term loans by $802.0 million since December 31, 2012
•
Closed a secured construction loan with aggregate commitments of $245.4 million at a rate of LIBOR + 1.35%, for our development project at 75/125 Binney Street in the Greater Boston market
•
Liquidity of $1.54 billion, consisting of $1.49 billion available under our unsecured senior line of credit and $53.8 million in cash and cash equivalents as of September 30, 2013
•
Net debt to adjusted EBITDA of 6.8x for the three months ended September 30, 2013 (annualized)
•
Fixed charge coverage ratio of 2.8x for the three months ended September 30, 2013 (annualized)
•
Unhedged variable rate debt at 10% of total consolidated debt as of September 30, 2013
•
Non-income-producing assets (CIP and land) at 19% of gross investments in real estate as of September 30, 2013, down from 23% as of December 31, 2012, due to deliveries of development and redevelopment projects noted above

Update on our ground-up development at 75/125 Binney Street
During the third quarter of 2013, ARIAD Pharmaceuticals, Inc. ("ARIAD") executed an amendment to their lease at 75/125 Binney Street and increased their RSF by 141,988 to a total of 386,111 RSF, or 99.4% of the entire property. This project represents a ground-up development of two buildings consisting of 167,909 RSF at 75 Binney Street and 220,361 RSF at 125 Binney Street. Each building may accommodate flexible laboratory/office multi-tenancy with relatively minor modifications. During the third quarter of 2013, we updated the design and budget for the expansion requirements for ARIAD. Based upon the preliminary design and budget for ARIAD's interior improvements, we expect an increase in both estimated net operating income and estimated cost at completion, with no significant change in our initial cash and GAAP yields and average cash yields. We expect to finalize the design and budget for the interior improvements in the future and will provide an update on our estimated cost at completion and targeted yields.

On October 9, 2013, ARIAD announced changes in the clinical development program of Iclusig. On October 11, 2013, the U.S. Food and Drug Administration (“FDA”) communicated it is investigating an increasing frequency of reports of serious and life-threatening blood clots and severe narrowing of blood vessels of patients taking the leukemia chemotherapy drug Iclusig. On October 18, 2013, ARIAD announced the discontinuation of the Phase 3 Evaluation of Ponatinib versus Imatinib in Chronic Myeloid Leukemia (“EPIC”) trial of Iclusig in patients with newly diagnosed chronic myeloid leukemia (“CML”). In the October 18, 2013 press release, ARIAD's Chief Scientific Officer stated that its decision to stop the EPIC trial was based on its current evaluation of safety data in the trial. ARIAD also stated that Iclusig is commercially available in the U.S. and EU for patients with resistant or intolerant CML and Philadelphia-chromosome positive acute lymphoblastic leukemia. On October 31, 2013, ARIAD announced, in response to a request by the FDA, the temporary suspension of marketing and commercial distribution of Iclusig in the U.S. while ARIAD continues to negotiate updates to the U.S. prescribing information for Iclusig and implementation of a risk mitigation strategy. ARIAD also indicated that it is working on a plan to provide updated financial guidance and financial information on its upcoming third quarter 2013 financial results conference call. Subsequently on October 31, 2013, the FDA issued a statement, which included clarification that patients currently receiving Iclusig should discuss with their health care professionals the risks and benefits of continuing treatment with the drug. On November 5, 2013, the FDA provided instructions to health care professionals whose patients have been taking Iclusig and are benefitting from the drug on how to continue those patients on the drug. The FDA provided that Iclusig treatment may be continued under an emergency Investigational New Drug application for patients who are responding to the drug and for whom the potential benefits outweigh the risks. Due to the recent nature of these events, it is too early to predict the impact of these events, and Alexandria will continue to intensively monitor ARIAD's business and financing plans, including plans to address safety concerns with Iclusig.

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 their 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.

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

Rentable square feet
September 30, 2013
 
December 31, 2012
Operating properties
14,950,417

 
14,500,845

Development properties
2,192,712

 
2,473,835

Redevelopment properties
113,083

 
547,092

Total rentable square feet
17,256,212

 
17,521,772

Number of properties
176

 
179

Occupancy of operating properties
93.5
%
 
93.4
%
Occupancy of operating and redevelopment properties
92.8
%
 
89.8
%
Annualized base rent per leased rentable square foot
$
35.20

 
$
34.59


Leasing

Our leasing activity continued its strong velocity during three months ended September 30, 2013, with a total of 57 leases executed totaling 829,533 RSF. Rental rates increased for the third consecutive quarter both on a cash and GAAP basis. The following table summarizes our leasing activity since 2012:
 
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
Year Ended
December 31, 2012
Leasing activity:
 
Cash
 
GAAP
 
Cash
 
GAAP
 
Cash
 
GAAP
Renewed/re-leased space
 
 

 
 

 
 

 
 

 
 

 
 

Rental rate changes
 
4.1%

 
16.5%

 
5.2%

 
14.6%

 
(2.0)%

 
5.2%

New rates
 
$
31.19

 
$
32.64

 
$
31.91

 
$
32.83

 
$
29.86

 
$
30.36

Expiring rates
 
$
29.96

 
$
28.01

 
$
30.32

 
$
28.65

 
$
30.47

 
$
28.87

Rentable square footage
 
498,143

 
 
 
985,067

 
 
 
1,475,403

 
 

Number of leases
 
37

 
 
 
83

 
 
 
102

 
 

TI’s/lease commissions per square foot
 
$
7.50

 
 
 
$
7.73

 
 
 
$
6.22

 
 

Average lease terms
 
4.4 years

 
 
 
4.3 years

 
 
 
4.7 years

 
 

Developed/redeveloped/previously vacant space leased
 
 
 
 
 
 
 
 
 
 

 
 

New rates
 
$
47.06

 
$
47.39

 
$
48.54

 
$
51.76

 
$
30.66

 
$
32.56

Rentable square footage
 
331,390

 
 
 
1,315,302

 
 
 
1,805,693

 
 

Number of leases
 
20

 
 
 
77

 
 
 
85

 
 

TI’s/lease commissions per square foot
 
$
25.08

 
 
 
$
22.69

 
 
 
$
11.02

 
 

Average lease terms
 
11.0 years

 
 
 
10.8 years

 
 
 
9.0 years

 
 

Leasing activity summary:
 
 
 
 
 
 
 
 
 
 

 
 

Totals (1)
 
 
 
 
 
 
 
 
 
 

 
 

New rates
 
$
37.53

 
$
38.53

 
$
41.42

 
$
43.66

 
$
30.30

 
$
31.57

Rentable square footage
 
829,533

 
 
 
2,300,369

 
 
 
3,281,096

 
 

Number of leases
 
57

 
 
 
160

 
 
 
187

 
 

TI’s/lease commissions per square foot
 
$
14.52

 
 
 
$
16.28

 
 
 
$
8.87

 
 

Average lease terms
 
7.0 years

 
 
 
8.0 years

 
 
 
7.1 years

 
 

Lease expirations
 
 
 
 
 
 
 
 
 
 

 
 

Expiring rates
 
$
30.35

 
$
28.53

 
$
30.83

 
$
28.93

 
$
30.03

 
$
27.65

Rentable square footage
 
575,429

 
 
 
1,251,867

 
 
 
2,350,348

 
 

Number of leases
 
56

 
 
 
119

 
 
 
162

 
 


(1)
Excludes 11 month-to-month leases for 21,254 RSF at September 30, 2013.

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During the nine months ended September 30, 2013, we granted tenant concessions/free rent averaging approximately 2.4 months with respect to the 2,300,369 RSF leased.

Lease Structure
 
September 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%
    
The following chart presents our total RSF leased by renewed/re-leased space and development/redevelopment/previously vacant space:


Summary of Lease Expirations

The following table summarizes information with respect to the lease expirations at our properties as of September 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
 
 
23
(1) 
 
 
297,336

(1) 
 
2.1%
 
 
$
32.98

 
2014
 
 
97
 
 
 
1,052,398

 
 
7.4%
 
 
$
30.01

 
2015
 
 
77
 
 
 
1,383,686

 
 
9.7%
 
 
$
31.86

 
2016
 
 
77
 
 
 
1,199,576

 
 
8.4%
 
 
$
32.44

 
2017
 
 
68
 
 
 
1,758,948

 
 
12.4%
 
 
$
26.32

 
2018
 
 
45
 
 
 
1,412,524

 
 
9.9%
 
 
$
40.11

 
2019
 
 
26
 
 
 
909,270

 
 
6.4%
 
 
$
35.79

 
2020
 
 
21
 
 
 
875,332

 
 
6.2%
 
 
$
38.40

 
2021
 
 
18
 
 
 
714,240

 
 
5.0%
 
 
$
34.61

 
2022
 
 
16
 
 
 
606,839

 
 
4.3%
 
 
$
29.16

 
Thereafter
 
 
39
 
 
 
2,974,099

 
 
20.9%
 
 
$
40.58

 

(1)
Excludes 11 month-to-month leases for approximately 21,254 RSF.


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The following tables present information by market with respect to our lease expirations as of September 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)
 
 
 
Leased
 
Negotiating/
Anticipating
 
Targeted for
Redevelopment
 
Remaining
Expiring Leases
 
Total
 
 
Market
 
 
 
 
 
 
 
Greater Boston
 
37,394

 
—

 
—

 
19,958

 
57,352

 
$
37.59

 
San Francisco Bay Area
 
3,941

 
17,702

 
—

 
3,657

 
25,300

 
16.50

 
San Diego
 
—

 
—

 
—

 
34,013

 
34,013

 
29.51

 
Greater New York City
 
—

 
—

 
—

 
1,191

 
1,191

 
123.48

 
Suburban Washington, D.C.
 
64,606

 
54,906

(1) 
—

 
49,437

 
168,949

 
33.91

 
Seattle
 
—

 
2,636

 
—

 
—

 
2,636

 
61.92

 
Research Triangle Park
 
—

 
4,575

 
—

 
—

 
4,575

 
29.10

 
Canada
 
—

 
—

 
—

 
—

 
—

 
—

 
Non-cluster markets
 
—

 
1,000

 
—

 
—

 
1,000

 
25.20

 
Asia
 
—

 
—

 
—

 
2,320

 
2,320

 
12.95

(2) 
Total
 
105,941

 
80,819

 
—

 
110,576

 
297,336

(3) 
$
32.98

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 RSF of Expiring Leases
 
Annualized
Base Rent of
Expiring Leases
(per RSF)
 
 
 
Leased
 
Negotiating/
Anticipating
 
Targeted for
Redevelopment
 
Remaining
Expiring Leases
 
Total
 
 
Market
 
 
 
 
 
 
 
Greater Boston
 
7,087

 
105,195

 
—

 
170,823

 
283,105

 
$
42.07

 
San Francisco Bay Area
 
50,904

 
120,171

 
—

 
158,895

 
329,970

 
27.41

 
San Diego
 
—

 
—

 
67,015

(4) 
17,412

 
84,427

 
16.87

 
Greater New York City
 
—

 
48,281

 
—

 
42,487

 
90,768

 
38.65

 
Suburban Washington, D.C.
 
—

 
3,073

 
—

 
65,579

 
68,652

 
20.39

 
Seattle
 
—

 
9,020

 
—

 
15,116

 
24,136

 
38.89

 
Research Triangle Park
 
6,498

 
10,527

 
—

 
29,050

 
46,075

 
21.11

 
Canada
 
—

 
—

 
—

 
81,870

 
81,870

 
21.35

 
Non-cluster markets
 
—

 
—

 
—

 
15,817

 
15,817

 
19.99

 
Asia
 
—

 
18,800

 
—

 
8,778

 
27,578

 
11.55

(2) 
Total
 
64,489

 
315,067

 
67,015

 
605,827

 
1,052,398

 
$
30.01

 
Percentage of expiring leases
 
6
%
 
30
%
 
6
%
 
58
%
 
100
%
 
 
 

(1)
Represents the square footage of 5 Research Court. We expect the tenant of this property to extend its lease of 54,906 RSF beyond the 2013 lease expiration date. This property consists of non-laboratory space and upon rollover will likely undergo conversion into laboratory space through redevelopment.
(2)
Expirations relate to two properties with an average investment of $101 per RSF.
(3)
Excludes 11 month-to-month leases for approximately 21,254 RSF.
(4)
Represents the square footage of 10121 Barnes Canyon Road, which was acquired in 3Q13 and will undergo redevelopment upon rollover in the first quarter of 2014.


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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 September 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 Properties
 
Annualized Base Rent (dollars in thousands)
Market
 
Operating
 
Development
 
Redevelopment
 
Total
 
% Total
 
 
Greater Boston
 
3,424,500

 
801,806

 
—

 
4,226,306

 
25
%
 
37

 
$
135,515

 
29
%
San Francisco Bay Area
 
2,540,731

 
330,030

 
—

 
2,870,761

 
17
%
 
26

 
96,793

 
21
%
San Diego
 
2,691,277

 
—

 
68,423

 
2,759,700

 
16
%
 
35

 
86,664

 
19
%
Greater New York City
 
494,656

 
418,638

 
—

 
913,294

 
5
%
 
6

 
32,047

 
7
%
Suburban Washington, D.C.
 
2,155,346

 
—

 
—

 
2,155,346

 
13
%
 
29

 
49,151

 
11
%
Seattle
 
746,516

 
—

 
—

 
746,516

 
4
%
 
10

 
29,398

 
6
%
Research Triangle Park
 
1,023,763

 
—

 
—

 
1,023,763

 
6
%
 
15

 
20,360

 
4
%
Canada
 
1,103,507

 
—

 
—

 
1,103,507

 
6
%
 
5

 
9,327

 
2
%
Non-cluster markets
 
60,178

 
—

 
—

 
60,178

 
—
%
 
2

 
854

 
—%

North America
 
14,240,474

 
1,550,474

 
68,423

 
15,859,371

 
92
%
 
165

 
460,109

 
99
%
Asia
 
658,670

 
642,238

 
44,660

 
1,345,568

 
8
%
 
9

 
4,669

 
1
%
Continuing operations
 
14,899,144

 
2,192,712

 
113,083

 
17,204,939

 
100
%
 
174

 
$
464,778

 
100
%
Properties “held for sale”
 
51,273

 
—

 
—

 
51,273

 
—
%
 
2

 
 
 
 
Total
 
14,950,417

 
2,192,712

 
113,083

 
17,256,212

 
100
%
 
176

 
 
 
 

Summary of occupancy percentages

The following table sets forth the occupancy percentage for our operating assets and our assets under redevelopment in each of our existing markets as of September 30, 2013; June 30, 2013; and September 30, 2012:

 
 
Operating Properties
 
Operating and Redevelopment Properties
Market
 
9/30/13
 
6/30/13
 
9/30/12
 
9/30/13
 
6/30/13
 
9/30/12
Greater Boston
 
96.3
%
 
95.5
%
 
94.3
%
 
96.3
%
 
94.7
%
 
84.3
%
San Francisco Bay Area
 
96.1

 
97.3

 
98.0

 
96.1

 
95.9

 
95.7

San Diego
 
95.0

 
94.2

 
95.2

 
92.7

 
91.7

 
93.3

Greater New York City
 
98.4

 
98.4

 
95.0

 
98.4

 
98.4

 
95.0

Suburban Washington, D.C.
 
93.7

 
92.3

 
89.4

 
93.7

 
89.4

 
85.7

Seattle
 
90.1

(1) 
93.1

(1) 
96.3

 
90.1

 
89.9

 
89.6

Research Triangle Park
 
92.0

(2) 
91.4

 
95.5

 
92.0

 
91.4

 
95.5

Canada
 
96.8

 
96.8

 
92.7

 
96.8

 
96.8

 
92.7

Non-cluster markets
 
91.7

 
54.0

 
51.4

 
91.7

 
54.0

 
51.4

North America
 
95.0

 
94.6

 
94.2

 
94.5

 
92.9

 
90.0

Asia
 
63.9

 
68.1

 
68.1

 
59.8

 
59.8

 
57.2

Continuing operations
 
93.5
%
 
93.3
%
 
93.0
%
 
92.8
%
 
91.2
%
 
88.3
%

(1)
Decrease primarily attributable to the delivery of 39,661 vacant RSF from our redevelopment project at 1551 Eastlake Avenue in 2Q13 and the delivery of 26,020 vacant RSF from our redevelopment project at 1616 Eastlake Avenue in 3Q13. Excluding these deliveries, the occupancy percentage of Seattle operating properties was 98.8% as of September 30, 2013, and 98.5% as of June 30, 2013.
(2)
We anticipate an increase in occupancy during the fourth quarter of 2013.


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Client tenants

Our life science properties are leased to a diverse group of client tenants, with no single client tenant accounting for more than 6.9% 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 September 30, 2013 (dollars in thousands):

 
 
 
 
Number of Leases
 
Remaining Lease Term in Years (1)
 
Aggregate Rentable Square Feet
 
Percentage of Aggregate Total Square Feet
 
Annualized
Base Rent 
 
Percentage of Aggregate Annualized Base Rent
 
Investment-Grade
Ratings
 
 
 
Client Tenant
 
 
 
 
 
 
 
Fitch
 
Moody’s
 
S&P
 
1
 
Novartis AG
 
13
 
 
3.4

 
 
636,967

 
3.7
%
 
$
31,900

 
6.9
%
 
AA
 
Aa3
 
AA-
 
2
 
Illumina, Inc.
 
1
 
 
18.1

 
 
497,078

 
2.9

 
19,531

 
4.2

 
—
 
—
 
—
 
3
 
United States Government
 
10
 
 
7.4

 
 
399,633

 
2.3

 
18,132

 
3.9

 
AAA
 
Aaa
 
AA+
 
4
 
Bristol-Myers Squibb Company
 
6
 
 
4.4

 
 
419,624

 
2.4

 
15,840

 
3.4

 
A-
 
A2
 
A+
 
5
 
Eli Lilly and Company
 
6
 
 
9.5

 
 
290,132

 
1.7

 
15,564

 
3.3

 
A
 
A2
 
AA-
 
6
 
Biogen Idec Inc.
 
1
 
 
15.0

 
 
305,212

 
1.8

 
14,302

 
3.1

 
—
 
Baa2
 
A-
 
7
 
FibroGen, Inc.
 
1
 
 
10.1

 
 
234,249

 
1.4

 
14,197

 
3.1

 
—
 
—
 
—
 
8
 
Roche
 
3
 
 
4.6

 
 
348,918

 
2.0

 
13,867

 
3.0

 
AA
 
A1
 
AA
 
9
 
GlaxoSmithKline plc
 
5
 
 
5.8

 
 
208,394

 
1.2

 
10,173

 
2.2

 
A+
 
A1
 
A+
 
10
 
Amgen Inc.
 
3
 
 
9.5

 
 
294,373

 
1.7

 
9,682

 
2.1

 
BBB
 
Baa1
 
A
 
11
 
Celgene Corporation
 
3
 
 
7.8

 
 
250,586

 
1.5

 
9,361

 
2.0

 
—
 
Baa2
 
BBB+
 
12
 
Massachusetts Institute of Technology
 
4
 
 
3.9

 
 
185,403

 
1.1

 
8,496

 
1.8

 
—
 
Aaa
 
AAA
 
13
 
NYU-Neuroscience Translational Research Institute
 
2
 
 
10.3

 
 
86,756

 
0.5

 
8,012

 
1.7

 
—
 
Aa3
 
AA-
 
14
 
The Regents of the University of California
 
3
 
 
7.9

 
 
188,654

 
1.1

 
7,787

 
1.7

 
AA+
 
Aa1
 
AA
 
15
 
Alnylam Pharmaceuticals, Inc.
 
1
 
 
3.0

 
 
129,424

 
0.8

 
6,081

 
1.3

 
—
 
—
 
—
 
16
 
Gilead Sciences, Inc.
 
1
 
 
6.8

 
 
109,969

 
0.6

 
5,824

 
1.3

 
—
 
Baa1
 
A-
 
17
 
Pfizer Inc.
 
2
 
 
5.4

 
 
116,518

 
0.7

 
5,502

 
1.2

 
A+
 
A1
 
AA
 
18
 
Theravance, Inc. (2)
 
2
 
 
6.7

 
 
150,256

 
0.9

 
5,494

 
1.2

 
—
 
—
 
—
 
19
 
The Scripps Research Institute
 
2
 
 
3.1

 
 
101,775

 
0.6

 
5,200

 
1.1

 
AA-
 
Aa3
 
—
 
20
 
Bayer AG
 
3
 
 
7.3

 
 
169,154

 
1.0

 
4,762

 
1.0

 
A
 
A3
 
A-
 
 
 
Total/weighted average
 
72
 
 
7.9

 
 
5,123,075

 
29.9
%
 
$
229,707

 
49.5
%
 
 
 
 
 
 
 

(1)
Represents remaining lease term in years based on percentage of aggregate ABR in effect as of September 30, 2013.
(2)
As of July 30, 2013, GlaxoSmithKline plc owned approximately 27% of the outstanding stock of Theravance, Inc.

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

Investment-Grade Client Tenants Represent 50% of Alexandria’s Total Annualized Base Rent at 3Q13

Investment-Grade Client Tenants Represent 80% of ABR from our Top 20 Client Tenants at 3Q13



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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. See “Update on our ground-up development at 75/125 Binney Street” located earlier within Item 2 of this Report and preceding “Operating Summary.”


Investment in real estate, net

Our investments in real estate, net, consisted of the following as of September 30, 2013 (dollars in thousands):
 
September 30, 2013
 
Book Value
 
Square Feet
Rental properties:
 
 
 
Land (related to rental properties)
$
542,511

 
 
Buildings and building improvements
5,315,447

 
 
Other improvements
170,078

 
 
Rental properties
6,028,036

 
14,950,417

Less: accumulated depreciation
(915,494
)
 
 
Rental properties, net
5,112,542

 
 
 
 
 
 
CIP/current value-creation projects:
 
 
 
Active development in North America
594,973

 
1,136,938

Investment in unconsolidated joint venture
42,537

(1) 
413,536

Active redevelopment in North America
24,960

 
68,423

Active development and redevelopment in Asia
97,319

 
686,898

Generic infrastructure/building improvement projects in North America
46,227

(2) 
 
 
806,016

 
2,305,795

Subtotal
5,918,558

 
17,256,212

 
 
 
 
Land/future value-creation projects:
 
 
 
Land undergoing predevelopment activities (CIP) in North America
351,062

 
2,287,849

Land held for future development in North America
190,427

 
3,325,577

Land held for future development/undergoing predevelopment activities (CIP) in Asia
77,274

 
6,419,707

Land subject to sale negotiations
76,440

 
458,724

 
695,203

 
12,491,857

Investments in real estate, net
6,613,761

 
29,748,069

Add: accumulated depreciation
915,494

 
 
Gross investments in real estate
$
7,529,255

 
29,748,069


(1)
The book value for this unconsolidated joint venture represents our equity investment in the project.
(2)
Represents the book value associated with approximately 75,879 square feet at four projects undergoing construction of generic laboratory improvements as of September 30, 2013. For these projects, 100% was leased or subject to a letter of intent, but not delivered as of September 30, 2013.


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Development, Redevelopment, and Future Value-Creation Projects

A key component of our business model is our value-creation 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.

A significant number 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-creation 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 also intend to reduce our land held for future development through sales. We currently have $85.0 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 September 30, 2013, we had five ground-up development projects in process, including an unconsolidated joint venture development project, aggregating 1,550,474 RSF.  We also had one project undergoing conversion into laboratory space through redevelopment, aggregating 68,423 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:



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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. Our share of the total investment into this project is approximately $42.5 million as of September 30, 2013. We expect to fund an additional $8.1 million of construction costs and our share of the total investment at completion is expected to be approximately $50.6 million. The $350.0 million total project costs are being funded primarily from a non-recourse $213.2 million secured construction loan of which approximately $75.0 million was drawn and outstanding as of September 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 plus two separate one-year options to extend the stated maturity date of April 1, 2017. Construction of this project commenced in April 2012 and the initial occupancy date for this project is expected during the three months ending December 31, 2014. 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. We expect to earn initial stabilized yields of 8.3% on a cash basis, 8.9% on a GAAP basis, and average cash yields during the term of the initial leases of 9.3%.  Our initial stabilized yields are based on our share of the total projected investment at completion and exclude construction management fees and any recurring annual property management fees that will be earned from this project.

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The following table sets forth the key development and redevelopment projects in North America delivered during the three months ended September 30, 2013 (dollars in thousands):
    
 
 
3Q13 Delivery
 
RSF
 
Project Occupancy at September 30, 2013
 
Total Project Investment (1)
 
Project Quarterly GAAP NOI
 
Initial Stabilized
 
Average Cash Yield
 
 
 
 
 
 
 
 
 
 
 
 
Address/Market – Submarket
 
Date Delivered
 
RSF Delivered
 
Delivered Prior to 3Q13
 
Project
 
 
 
2Q13
 
3Q13
 
Estimated 4Q13 (2)
 
Estimated Stabilized
 
Cash Yield
 
GAAP Yield
 
 
Client Tenants
Development projects in North America
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
225 Binney Street/Greater Boston – Cambridge
 
End of September 2013
 
305,212

 
—

 
305,212

 
100%
 
$
174,160

 
$
—

 
$
—

 
$
3,575

 
$
3,575

 
7.7%
 
8.2%
 
8.2%
 
Biogen Idec Inc.
Redevelopment projects in North America
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
285 Bear Hill Road/Greater Boston – Route 128
 
End of September 2013
 
26,270

 
—

 
26,270

 
100%
 
9,267

 
—

 
—

 
203

 
203

 
8.4%
 
8.8%
 
9.2%
 
Intelligent Medical Devices, Inc.
343 Oyster Point Boulevard/San Francisco Bay Area – South San Francisco
 
July 2013
 
36,473

 
17,507

 
53,980

 
79%
 
16,632

 
—

 
258

 
285

 
416

 
9.9%
 
10.0%
 
10.4%
 
Calithera BioSciences, Inc.; CytomX Therapeutics, Inc.
9800 Medical Center Drive/Suburban Washington, D.C. – Rockville (3)
 
August 2013
 
67,055

 
8,001

 
75,056

 
100%
 
79,165

 
66

 
428

 
1,090

 
1,090

 
5.5%
 
5.5%
 
5.5%
 
National Institutes of Health
1616 Eastlake Avenue/Seattle – Lake Union (3)
 
July 2013
 
26,020

 
40,756

 
66,776

 
61%
 
37,906

 
492

 
492

 
492

 
830

 
8.4%
 
8.8%
 
9.4%
 
Infectious Disease Research Institute
Subtotal redevelopment projects in North America/weighted average
 
 
 
155,818

 
66,264

 
222,082

 
83%
 
142,970

 
558

 
1,178

 
2,070

 
2,539

 
 
 
 
 
 
 
 
Total/weighted average
 
 
 
461,030

 
66,264

 
527,294

 
93%
 
$
317,130

 
$
558

 
$
1,178

 
$
5,645

 
$
6,114

 
 
 
 
 
 
 
 
(1)
Total project investment represents the historical gross real estate cost basis in accordance with GAAP, including land, building and other costs.
(2)  
Represents estimated NOI based upon executed leases.
(3) 
Project represents a partial-building redevelopment project. The RSF, occupancy, total investment, yield and NOI information is related to the redevelopment portion of the property and does not represent information for the entire property.

Initial stabilized yield (unlevered)
 
Initial stabilized yield is calculated as the quotient of the estimated amounts of NOI and our investment in the property.  Our initial stabilized yield excludes the impact of leverage.  Our cash rents related to our value-creation projects are expected to increase over time and our average cash yields are expected, in general, to be greater than our initial stabilized yields on a cash basis.  Our estimates for initial cash and GAAP yields, and total costs at completion, represent our initial estimates at the commencement of the project.  We expect to update this information upon completion of the project, or sooner if there are significant changes to the expected project yields or costs.
 
•
Initial stabilized yield - cash basis: reflects cash rents at the stabilization date after initial rental concessions, if any, have elapsed.
•
Initial stabilized yield - GAAP basis: reflects cash rents, including contractual rent escalations and any rent concessions over the term(s) of the lease(s), calculated on a straight-line basis.
 
Average cash yield reflects cash rents, including contractual rent escalations after the initial rental concessions have elapsed, calculated on a straight-line basis.

Stabilized occupancy date

The stabilized occupancy date represents the estimated date on which the project is expected to reach occupancy of 95% or greater.



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The following table provides details on our active development and redevelopment projects in North America as of September 30, 2013 (dollars in thousands, except per square foot amounts):
 
 
 
 
Leased Status
 
Project Start Date
 
Initial Occupancy Date
 
Stabilized Occupancy 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
 
388,270

 
386,111

 
99
%
 
—

 
—
%
 
386,111

 
99
%
 
1Q13
 
1Q15
 
2015
 
ARIAD Pharmaceuticals, Inc.
499 Illinois Street/San Francisco Bay Area – Mission Bay
 
222,780

 
171,987

 
77

 
11,132

 
5

 
183,119

(1) 
82

 
2Q11
 
2Q14
 
2014
 
Illumina, Inc./The Regents of the University of California
269 East Grand Avenue/San Francisco Bay Area – So. San Francisco
 
107,250

 
107,250

 
100

 
—

 
—

 
107,250

 
100

 
1Q13
 
4Q14
 
2014
 
Amgen Inc.
430 East 29th Street/Greater New York City – Manhattan
 
418,638

 
199,220

 
48

 
83,734

 
20

 
282,954

 
68

 
4Q12
 
4Q13
 
2015
 
Roche/Investment-grade entity
Consolidated development projects in North America
 
1,136,938

 
864,568

 
76

 
94,866

 
8

 
959,434

 
84

 
 
 
 
 
 
 
 
Unconsolidated joint venture
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
360 Longwood Avenue/Greater Boston – Longwood Medical Area
 
413,536

 
154,100

 
37

 
78,978

 
19

 
233,078

 
56

 
2Q12
 
4Q14
 
2016
 
Dana-Farber Cancer Institute, Inc.
Total/weighted average
 
1,550,474

 
1,018,668

 
66
%
 
173,844

 
11
%
 
1,192,512

 
77
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated redevelopment projects in North America
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4757 Nexus Center Drive/San Diego – University Town Center
 
68,423

 
68,423

 
100
%
 
—

 
—
%
 
68,423

 
100
%
 
4Q12
 
4Q13
 
    4Q13 (2)
 
Genomatica, Inc.

 
 
Investment
 
 
 
 
 
 
 
 
 
 
Cost to Complete
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
2014 and Thereafter
 
 
 
Initial Stabilized Yield (Unlevered)
 
Average Cash Yield
Property/Market – Submarket
 
CIP
 
Construction
Financing
 
Internal Funding
 
Construction
Financing
 
Internal Funding
 
Total at Completion
 
 
 
 
 
 
 
 
 
Cash
 
GAAP
 
Consolidated development projects in North America
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
75/125 Binney Street/Greater Boston – Cambridge
 
$
142,291

 
$
28,372

 
$
—

 
$
180,776

 
$
—

 
$
351,439

(3) 
8.0
%
 
8.2
%
 
9.1
%
499 Illinois Street/San Francisco Bay Area – Mission Bay
 
118,919

 
—

 
8,657

 
—

 
75,345

 
$
202,921

(4) 
6.4
%
 
7.2
%
 
7.3
%
269 East Grand Avenue/San Francisco Bay Area – So. San Francisco
 
14,448

 
1,265

 
1,017

 
34,570

 
—

 
$
51,300

 
8.1
%
 
9.3
%
 
9.3
%
430 East 29th Street/Greater New York City – Manhattan
 
319,315

 
—

 
29,226

 
—

 
114,704

 
$
463,245

 
6.6
%
 
6.5
%
 
7.1
%
Consolidated development projects in North America
 
594,973

 
29,637

 
38,900

 
215,346

 
190,049

 
1,068,905

 
 
 
 
 
 
Unconsolidated joint venture
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
100% of JV: 360 Longwood Avenue/Greater Boston – Longwood Medical Area
 
198,921

 
20,760

 
4,784

 
122,263

 
3,272

 
$
350,000

 
8.3
%
 
8.9
%
 
9.3
%
Less: Funding from secured construction loans and JV partner capital
 
(156,384
)
 
(20,760
)
 
—

 
(122,263
)

—

 
$
(299,407
)
 
 
 
 
 
 
ARE investment in 360 Longwood Avenue (27.5% interest)
 
42,537

 
—

 
4,784

 
—

 
3,272

 
50,593

 
 
 
 
 
 
Total ARE investment
 
$
637,510

 
$
29,637

 
$
43,684

 
$
215,346

 
$
193,321

 
$
1,119,498

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total 2013, 2014 and thereafter
 
 
 
 
 
$
73,321

 
 
 
$
408,667

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated redevelopment projects in North America
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4757 Nexus Center Drive/San Diego – University Town Center
 
$
24,960

 
$
—

 
$
4,332

 
$
—

 
$
5,537

(2) 
$
34,829

 
7.6
%
 
7.8
%
 
8.5
%

(1)
Includes 43,625 RSF leased to a high-quality biopharmaceutical company in October 2013.
(2)
We expect to deliver 54,012 RSF, or 79% of the total project in the fourth quarter of 2013. Genomatica, Inc. is contractually required to lease the remaining 14,411 RSF 18 to 24 months following the delivery of the initial 54,012 RSF.
(3)
In the third quarter of 2013, we completed the preliminary design and budget for interior improvements for use by Ariad. Based upon our lease with Ariad, we expected an increase in both estimated net operating income and estimated cost of completion; with no significant change in our estimated yields. We expect to finalize the design and budget for the interior improvements in the future and will provide an update on our estimated cost at completion and targeted yields. See “Update on our ground-up development at 75/125 Binney Street” located earlier within Item 2 of this Report and preceding “Operating Summary”.
(4)
The total estimated cost at completion has been updated to reflect the additional costs necessary to incorporate tenant building specifications for Illumina, Inc., The Regents of the University of California, and a high-quality biopharmaceutical tenant aggregating approximately 171,987 RSF. The tenants are funding the costs of the additional improvements through rent over their initial lease term pursuant to their respective leases.

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The following table summarizes the components of the square footage of our near-term and future value-creation development projects in North America as of September 30, 2013 (dollars in thousands, except per square foot amounts):

 
 
Land Undergoing Predevelopment Activities (Additional CIP)
 
Land Held for Future Development
 
Embedded Land (1)
 
Total
Property – Market
 
Book Value
 
Square 
Feet
 
Cost per
Square Foot
 
Book Value
 
Square 
Feet
 
Cost per
Square Foot
 
 
Square Feet
 
 
Book Value
 
Square 
Feet
 
Cost per
Square Foot
Near-term value-creation development projects
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alexandria Center™ at Kendall Square – Greater Boston:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
50 and 100 Binney Street and Residential
 
$
273,871

 
1,062,180

 
$
258

 
$
3,856

 
150,000

 
$
26

 
—
 
 
$
277,727

 
1,212,180

 
$
229

3013/3033 Science Park Road – San Diego
 
17,799

 
176,500

 
101

 
—

 
—

 
—

 
—
 
 
17,799

 
176,500

 
101

5200 Illumina Way – San Diego
 
14,988

 
392,983

 
38

 
—

 
—

 
—

 
—
 
 
14,988

 
392,983

 
38

10300 Campus Point – San Diego
 
4,452

 
140,000

 
32

 
—

 
—

 
—

 
—
 
 
4,452

 
140,000

 
32

East 29th Street – Greater New York City
 
—

 
—

 
—

 
—

 
—

 
—

 
420,000
 
(2) 
—

 
420,000

 
N/A

124 Terry Avenue North – Seattle
 
6,274

 
200,000

 
31

 
—

 
—

 
—

 
—
 
 
6,274

 
200,000

 
31

1150/1165/1166 Eastlake Avenue – Seattle
 
29,611

 
266,266

 
111

 
—

 
—

 
—

 
—
 
 
29,611

 
266,266

 
111

Near-term value-creation development projects
 
$
346,995

 
2,237,929

 
$
155

 
$
3,856

 
150,000

 
$
26

 
420,000
 
 
$
350,851

 
2,807,929

 
$
125

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future value-creation development projects
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology Square – Greater Boston
 
$
—

 
—

 
$
—

 
$
7,721

 
100,000

 
$
77

 
—
 
 
$
7,721

 
100,000

 
$
77

Grand Ave – San Francisco Bay Area
 
—

 
—

 
—

 
42,853

 
397,132

 
108

 
—
 
 
42,853

 
397,132

 
108

Rozzi/Eccles – San Francisco Bay Area
 
—

 
—

 
—

 
72,887

 
514,307

 
142

 
—
 
 
72,887

 
514,307

 
142

Executive Drive – San Diego
 
4,067

 
49,920

 
81

 
—

 
—

 
—

 
—
 
 
4,067

 
49,920

 
81

Other – San Diego
 
—

 
—

 
—

 
—

 
—

 
—

 
279,000
 
 
—

 
279,000

 
N/A

Medical Center Drive – Suburban Washington, D.C.
 
—

 
—

 
—

 
7,548

 
321,721

 
23

 
—
 
 
7,548

 
321,721

 
23

Research Boulevard – Suburban Washington, D.C.
 
—

 
—

 
—

 
7,006

 
347,000

 
20

 
—
 
 
7,006

 
347,000

 
20

Firstfield Road – Suburban Washington, D.C.
 
—

 
—

 
—

 
4,052

 
95,000

 
43

 
—
 
 
4,052

 
95,000

 
43

Dexter Avenue – Seattle
 
—

 
—

 
—

 
12,560

 
186,300

 
67

 
—
 
 
12,560

 
186,300

 
67

Other
 
—

 
—

 
—

 
31,944

 
1,214,117

 
26

 
436,000
 
 
31,944

 
1,650,117

 
19

Future value-creation development projects
 
$
4,067

 
49,920

 
$
81

 
$
186,571

 
3,175,577

 
$
59

 
715,000
 
 
$
190,638

 
3,940,497

 
$
48

Total value-creation development projects
 
$
351,062

 
2,287,849

 
$
153

 
$
190,427

 
3,325,577

 
$
57

 
1,135,000
 
 
$
541,489

 
6,748,426

 
$
80


(1)
Embedded land generally represents adjacent land acquired in connection with the acquisition of operating properties. As a result, the real estate basis attributable to these land parcels is classified in rental properties, net.
(2)
We hold a right to ground lease a parcel supporting the future ground-up development of approximately 420,000 RSF at the Alexandria Center™ for Life Science - New York pursuant to an option under our ground lease.

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Summary of capital expenditures

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

Projected construction spending
 
Three Months Ended
December 31, 2013
 
Thereafter
Development projects – North America
 
$
73,321

 
$
408,667

Redevelopment projects – North America
 
4,332

 
5,537

Development and redevelopment projects – Asia
 
5,945

 
TBD

Future value-creation construction projects
 
23,357

(1) 
TBD

Total development and redevelopment projects
 
106,955

 
414,204

Predevelopment (2)
 
17,607

(2) 
TBD

Generic infrastructure/building improvement projects in North America
 
23,078

(3) 
TBD

Maintenance building improvements
 
4,640

 
TBD

Total construction spending
 
$
152,280

 
$
414,204

Guidance range for the three months ended December 31, 2013
 
$
137,000 - 167,000
 
 

(1)  
Includes future value-creation projects, including, among others, 3033 Science Park Road and 10121 Barnes Canyon Road, and remaining construction costs related to certain value-creation 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 redevelopment projects at 343 Oyster Point Boulevard, 1616 Eastlake Avenue, 400 Technology Square, 1551 Eastlake Avenue, and 10300 Campus Point Drive, which generally have 15,000 to 30,000 RSF of value-creation activities to complete in connection with the lease-up of the space.
(2) 
Includes traditional preconstruction costs plus predevelopment costs related to: (i) approximately $8.0 million related to site and infrastructure costs for the 1.2 million RSF related to 50 Binney Street, 100 Binney Street, and the 238,000 RSF of residential at the Alexandria Center™ at Kendall Square, including utility access and roads, installation of storm drain systems, infiltration systems, traffic lighting/signals, streets, and sidewalks, and (ii) approximately $3.0 million related to the design, permitting, and construction drawings related to 50 Binney Street.  Site and infrastructure costs related to 75/125 Binney Street are included in our estimate of cost at completion and initial stabilized yields.
(3)
Includes, among others, generic infrastructure building improvement projects in North America, including 2625/2627/2631 Hanover Street, 7030 Kit Creek Road, and 215 First Street.


Our historical capital expenditures for the nine months ended September 30, 2013, consisted of the following (in thousands):
Historical construction spending
 
Nine Months Ended September 30, 2013
Development projects – North America
 
$
256,465

Redevelopment projects – North America
 
91,162

Development and redevelopment projects – Asia
 
5,773

Total development and redevelopment projects
 
353,400

Predevelopment (1)
 
48,253

Generic infrastructure/building improvement projects in North America (2)
 
27,806

Total construction spending
 
$
429,459


(1)
See note (2) above.
(2)  
Includes revenue-enhancing projects and amounts shown in the table below related to non-revenue-enhancing capital expenditures.



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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):

 
 
Nine Months Ended September 30, 2013
 
 
Amount
 
Square Feet
 
Per Square Foot
Non-revenue-enhancing capital expenditures (1)
 
$
2,414

 
13,932,949

 
$
0.17

Tenant improvements and leasing costs:
 
 
 
 
 
 
Re-tenanted space
 
$
3,743

 
255,250

 
$
14.66

Renewal space
 
3,868

 
729,817

 
5.30

Total
 
$
7,611

 
985,067

 
$
7.73


(1)
Includes, among other costs, capital expenditures such as roof and HVAC system replacements.

Real estate investment in Asia

As of September 30, 2013, our rental properties, net, in Asia, consisted of five operating properties aggregating approximately 658,670 square feet, with occupancy of 63.9%.  Annualized base rent of our operating properties in Asia was approximately $4.7 million as of September 30, 2013. 

We also had active construction projects in Asia aggregating 686,898 and 734,444 RSF as of September 30, 2013, and December 31, 2012, respectively.

Our investments in real estate, net, in Asia, consisted of the following as of September 30, 2013 (dollars in thousands, except per square foot amounts):
 
 
September 30, 2013
 
 
Book Value
(in thousands)
 
Square Feet
 
Cost per
Square Foot
Rental properties, net, in China
 
$
21,225

 
299,484

 
$
71

Rental properties, net, in India
 
37,862

 
359,186

 
105

 
 
 
 
 
 
 
Construction in progress:
 
 

 
 

 
 

Active development projects in China
 
61,201

 
309,476

 
198

Active development projects in India
 
31,411

 
332,762

 
94

Active redevelopment projects in India
 
4,707

 
44,660

 
105

 
 
97,319

 
686,898

 
142

Land held for future development/land undergoing predevelopment activities (additional CIP) – India
 
77,274

 
6,419,707

 
12

Total investments in real estate, net, in Asia
 
$
233,680

 
7,765,275

 
$
30




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Results of operations

Same Properties

As a result of changes within our total property portfolio during the comparative periods presented, including assets acquired, properties placed into redevelopment and development, and projects delivered into operations from redevelopment and development, the consolidated total rental revenues, tenant recoveries and rental operating expenses in our operating results can show significant changes from period to period. In order to supplement an evaluation of our results of operations during the three and nine months ended September 30, 2013 and 2012, we analyze the operating performance for all properties that were fully operating for the entirety of the comparative periods presented (herein referred to as “Same Properties”) separately from properties acquired subsequent to the first day in the earliest comparable period presented, properties that underwent active development and active redevelopment at any time during the comparative periods, 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 nine months ended September 30, 2013:
Development – active
 
Properties
 
Description
 
Properties
499 Illinois Street
 
1

 
Development – active
 
5

269 East Grand Avenue
 
1

 
Redevelopment – active
 
1

430 East 29th Street
 
1

 
Development – deliveries
 
7

75/125 Binney Street
 
1

 
Redevelopment – deliveries
 
15

360 Longwood Avenue (unconsolidated JV)
 
1

 
 
 
 
 
 
5

 
Development/redevelopment – Asia
 
7

 
 
 
 
 
 
 
Redevelopment – active
 
 
 
Acquisitions in North America since January 1, 2012
4757 Nexus Center Drive
 
1

 
6 Davis Drive
 
1

 
 
 
 
407 Davis Drive
 
1

 
 
 
 
10121/10151 Barnes Canyon Road
 
2

Development – deliveries since January 1, 2012
 
 
 
 
 
 
259 East Grand Avenue
 
1

 
Properties held for sale
 
2

400/450 East Jamie Court
 
2

 
Total properties excluded from same properties
 
41

4755 Nexus Center Drive
 
1

 
Same properties
 
135

5200 Illumina Way
 
1

(1)
 
 
 
225 Binney Street
 
1

 
Total properties as of September 30, 2013
 
176

Canada
 
1

(1)
 
 
 
 
 
7

 
 
 
 
 
 
 
 
 
 
 
Redevelopment – deliveries since January 1, 2012
 
 
 
 
 
 
10300 Campus Point Drive
 
1

 
 
 
 
20 Walkup Drive
 
1

 
 
 
 
11119 North Torrey Pines Road
 
1

 
 
 
 
3530/3550 John Hopkins Court
 
2

 
 
 
 
620 Professional Drive
 
1

 
 
 
 
6275 Nancy Ridge Drive
 
1

 
 
 
 
1551 Eastlake Avenue
 
1

 
 
 
 
400 Technology Square
 
1

 
 
 
 
9800 Medical Center Drive
 
3

 
 
 
 
1616 Eastlake Avenue
 
1

 
 
 
 
285 Bear Hill Road
 
1

 
 
 
 
343 Oyster Point Boulevard
 
1

 
 
 
 
 
 
15

 
 
 
 

(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.



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The following table presents key metrics of our Same Properties for the three and nine months ended September 30, 2013:
Same property data
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
Percentage change in NOI over comparable period from prior year – cash basis
 
4.7%
 
6.5%
Percentage change in NOI over comparable period from prior year – GAAP basis
 
1.9%
 
2.0%
Operating margin – GAAP basis
 
68%
 
69%
Number of same properties
 
139

 
135

Rentable square feet
 
12,050,578

 
11,812,169

Occupancy – current period
 
93.5
%
 
93.2
%
Occupancy – same period prior year
 
92.8
%
 
92.6
%


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Comparison of the three months ended September 30, 2013, to the three months ended September 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 September 30, 2013, compared to the three months ended September 30, 2012, and a reconciliation of NOI to income from continuing operations, the most directly comparable financial measure (dollars in thousands):

 
Three Months Ended September 30,
 
 
Revenues:
2013
 
2012
 
$ Change
 
% Change
Rental – Same Properties
$
96,700

 
$
95,100

 
$
1,600

 
1.7
 %
Rental – Non-Same Properties
19,602

 
11,116

 
8,486

 
76.3

Total rental
116,302

 
106,216

 
10,086

 
9.5

 
 
 
 
 
 
 
 
Tenant recoveries – Same Properties
32,559

 
30,946

 
1,613

 
5.2

Tenant recoveries – Non-Same Properties
6,198

 
3,060

 
3,138

 
102.5

Total tenant recoveries
38,757

 
34,006

 
4,751

 
14.0

 
 
 
 
 
 
 
 
Other income – Same Properties
52

 
217

 
(165
)
 
(76.0
)
Other income – Non-Same Properties
3,519

 
2,411

 
1,108

 
46.0

Total other income
3,571

 
2,628

 
943

 
35.9

 
 
 
 
 
 
 
 
Total revenues – Same Properties
129,311

 
126,263

 
3,048

 
2.4

Total revenues – Non-Same Properties
29,319

 
16,587

 
12,732

 
76.8

Total revenues
158,630

 
142,850

 
15,780

 
11.0

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental operations – Same Properties
41,371

 
39,963

 
1,408

 
3.5

Rental operations – Non-Same Properties
6,371

 
4,240

 
2,131

 
50.3

Total rental operations
47,742

 
44,203

 
3,539

 
8.0

 
 
 
 
 
 
 
 
Net operating income:
 
 
 
 
 
 
 
NOI – Same Properties
87,940

 
86,300

 
1,640

 
1.9

NOI – Non-Same Properties
22,948

 
12,347

 
10,601

 
85.9

Total NOI
110,888

 
98,647

 
12,241

 
12.4

 
 
 
 
 
 
 
 
Other expenses:
 
 
 
 
 
 
 
General and administrative
11,666

 
12,470

 
(804
)
 
(6.4
)
Interest
16,171

 
17,092

 
(921
)
 
(5.4
)
Depreciation and amortization
49,102

 
46,584

 
2,518

 
5.4

Loss on early extinguishment of debt
1,432

 
—

 
1,432

 
100.0

Total other expenses
78,371

 
76,146

 
2,225

 
2.9

Income from continuing operations
$
32,517

 
$
22,501

 
$
10,016

 
44.5
 %
 
 
 
 
 
 
 
 
NOI – Same Properties – GAAP basis
$
87,940

 
$
86,300

 
$
1,640

 
1.9
 %
Less: straight-line rent adjustments
(1,722
)
 
(3,976
)
 
2,254

 
(56.7
)
NOI – Same Properties – cash basis
$
86,218

 
$
82,324

 
$
3,894

 
4.7
 %


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Rental revenues

Total rental revenues for the three months ended September 30, 2013, increased by $10.1 million, or 9.5%, to $116.3 million, compared to $106.2 million for the three months ended September 30, 2012. The increase was due to rental revenues from our Non-Same Properties, including 19 development and redevelopment projects that were completed and delivered after July 1, 2012, and three operating properties that were acquired after July 1, 2012. Occupancy of Same Properties was 93.5% and 92.8% for the three months ended September 30, 2013 and 2012, respectively.

Tenant recoveries

Tenant recoveries for the three months ended September 30, 2013, compared to the three months ended September 30, 2012, increased by $4.8 million, or 14.0%, to $38.8 million, compared to an increase of $3.5 million, or 8.0%, of rental operating expenses. Same Properties tenant recoveries increased by $1.6 million as a result of an increase in Same Properties rental operating expenses of $1.4 million and higher occupancy for these properties in 2013. Rental operating expenses for our Same Properties increased during the three months ended September 30, 2013, compared to the same period in 2012, due to the timing of repairs and maintenance projects. Non-Same Properties tenant recoveries increased by $3.1 million primarily due to an increase of $2.1 million in Non-Same Properties rental operating expense and higher occupancy for the development and redevelopment properties completed and delivered after July 1, 2012. As of September 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 September 30, 2013 and 2012, was as follows (in thousands):
 
Three Months Ended September 30,
 
 
 
2013
 
2012
 
Change
Management fee income
$
328

 
$
925

 
$
(597
)
Interest income
1,193

 
1,031

 
162

Investment income
2,050

 
672

 
1,378

Total other income
$
3,571

 
$
2,628

 
$
943


Rental operating expenses

Total rental operating expenses for the three months ended September 30, 2013, increased by $3.5 million, or 8.0%, to $47.7 million, compared to $44.2 million for the three months ended September 30, 2012. Approximately $2.1 million of the increase was due to an increase in rental operating expenses from our Non-Same Properties, primarily related to 19 development and redevelopment projects that were completed and delivered after July 1, 2012, and three operating properties that were acquired after July 1, 2012.

General and administrative expenses

General and administrative expenses for the three months ended September 30, 2013, decreased by $804 thousand, or 6.4%, to $11.7 million, compared to $12.5 million for the three months ended September 30, 2012. The decrease was primarily due to lower real estate transaction costs and miscellaneous office expenses in 2013, including lower consulting fees during the three months ended September 30, 2013. In 2012, we implemented a new enterprise software which required temporary consulting and computer services. As a percentage of total revenues, general and administrative expenses were 7.4% and 8.7%, respectively, for the three months ended September 30, 2013 and 2012.


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Interest expense

Interest expense for the three months ended September 30, 2013 and 2012 was as follows (in thousands):
 
 
Three Months Ended September 30,
 
 
 
 
2013
 
2012
 
Change
Secured notes payable
 
$
9,494

 
$
10,149

 
$
(655
)
Unsecured senior notes payable and convertible notes
 
11,246

 
6,411

 
4,835

Unsecured senior line of credit
 
971

 
2,570

 
(1,599
)
Unsecured senior bank term loans
 
4,782

 
6,237

 
(1,455
)
Interest rate swaps
 
3,904

 
5,956

 
(2,052
)
Amortization of loan fees and other interest
 
2,562

 
2,532

 
30

Subtotal
 
32,959

 
33,855

 
(896
)
Capitalized interest
 
(16,788
)
 
(16,763
)
 
(25
)
Total interest expense
 
$
16,171

 
$
17,092

 
$
(921
)

Interest expense decreased during the three months ended September 30, 2013 compared to the same period in 2012, primarily as a result of an approximate $802.0 million reduction in unsecured bank debt in 2013 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 $500.0 million of unsecured notes payable at a fixed rate of 3.90%. These decreases in interest costs have been partially offset by the increase in interest expense from the issuances of unsecured senior notes payable. 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”). As of September 30, 2013, our unhedged variable rate debt as a percentage of total debt was approximately 10%.

Depreciation and amortization

Depreciation and amortization for the three months ended September 30, 2013, increased by $2.5 million, or 5.4%, to $49.1 million, compared to $46.6 million for the three months ended September 30, 2012.  The increased depreciation primarily related to building improvements, including 19 development and redevelopment projects that were completed and delivered after July 1, 2012, and three operating properties that were acquired after July 1, 2012.

Loss on early extinguishment of debt

During the three months ended September 30, 2013, in conjunction with the refinancing of our unsecured senior bank term loans and the partial repayment of $100 million of our 2016 Unsecured Senior Bank Term Loan, we recognized a loss on early extinguishment of debt totaling $1.4 million, due to the write-off of unamortized loan fees.

Loss from discontinued operations, net

Loss from discontinued operations, net, of $64 thousand for the three months ended September 30, 2013, includes the results of operations of two operating properties with a net book value of $4.5 million that were classified as “held for sale” as of September 30, 2013.

Loss from discontinued operations, net, of $4.2 million for the three months ended September 30, 2012, includes the results of operations of two operating properties that were classified as “held for sale” as of September 30, 2013, and the results of operations of 10 properties sold between July 1, 2012, and September 30, 2013.


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Comparison of the nine months ended September 30, 2013, to the nine months ended September 30, 2012

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

 
Nine Months Ended September 30,
 
 
 
 
Revenues:
2013
 
2012
 
$ Change
 
% Change
Rental – Same Properties
$
285,684

 
$
278,563

 
$
7,121

 
2.6
 %
Rental – Non-Same Properties
57,137

 
33,183

 
23,954

 
72.2

Total rental
342,821

 
311,746

 
31,075

 
10.0

 
 
 
 
 
 
 
 
Tenant recoveries – Same Properties
92,273

 
88,595

 
3,678

 
4.2

Tenant recoveries – Non-Same Properties
18,018

 
9,174

 
8,844

 
96.4

Total tenant recoveries
110,291

 
97,769

 
12,522

 
12.8

 
 
 
 
 
 
 
 
Other income – Same Properties
303

 
298

 
5

 
1.7

Other income – Non-Same Properties
9,830

 
14,341

 
(4,511
)
 
(31.5
)
Total other income
10,133

 
14,639

 
(4,506
)
 
(30.8
)
 
 
 
 
 
 
 
 
Total revenues – Same Properties
378,260

 
367,456

 
10,804

 
2.9

Total revenues – Non-Same Properties
84,985

 
56,698

 
28,287

 
49.9

Total revenues
463,245

 
424,154

 
39,091

 
9.2

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental operations – Same Properties
119,113

 
113,418

 
5,695

 
5.0

Rental operations – Non-Same Properties
20,176

 
13,340

 
6,836

 
51.2

Total rental operations
139,289

 
126,758

 
12,531

 
9.9

 
 
 
 
 
 
 
 
Net operating income:
 
 
 
 
 
 
 
NOI – Same Properties
259,147

 
254,038

 
5,109

 
2.0

NOI – Non-Same Properties
64,809

 
43,358

 
21,451

 
49.5

Total NOI
323,956

 
297,396

 
26,560

 
8.9

 
 
 
 
 
 
 
 
Other expenses:
 
 
 
 
 
 
 
General and administrative
35,786

 
35,125

 
661

 
1.9

Interest
50,169

 
51,240

 
(1,071
)
 
(2.1
)
Depreciation and amortization
141,747

 
139,111

 
2,636

 
1.9

Loss on early extinguishment of debt
1,992

 
2,225

 
(233
)
 
(10.5
)
Total other expenses
229,694

 
227,701

 
1,993

 
0.9
 %
Income from continuing operations
$
94,262

 
$
69,695

 
$
24,567

 
35.2
 %
 
 
 
 
 
 
 
 
NOI – Same Properties – GAAP basis
$
259,147

 
$
254,038

 
$
5,109

 
2.0
 %
Less: straight-line rent adjustments
(3,382
)
 
(13,900
)
 
10,518

 
(75.7
)
NOI – Same Properties – cash basis
$
255,765

 
$
240,138

 
$
15,627

 
6.5
 %


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Rental revenues

Total rental revenues for the nine months ended September 30, 2013, increased by $31.1 million, or 10.0%, to $342.8 million, compared to $311.7 million for the nine months ended September 30, 2012. The increase was due to rental revenues from our Non-Same Properties, including 22 development and redevelopment projects that were completed and delivered after January 1, 2012, and four operating properties that were acquired after January 1, 2012. Occupancy of Same Properties was 93.2% and 92.6% for the nine months ended September 30, 2013 and 2012, respectively.

Tenant recoveries

Tenant recoveries for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, increased by $12.5 million, or 12.8%, to $110.3 million. This increase mirrors the increase in our rental operating expenses of $12.5 million, as described below. Same Properties tenant recoveries increased by $3.7 million primarily as a result of an increase in Same Properties rental operating expenses of $5.7 million and higher occupancy for these properties in 2013. Rental operating expenses increased during the nine months ended September 30, 2013, compared to the same period in 2012, 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 repairs and maintenance projects during the nine months ended September 30, 2013. Non-Same Properties tenant recoveries increased by $8.8 million as a result of a Non-Same Properties rental operating expense increase of $6.8 million and higher occupancy for the development and redevelopment properties delivered since the beginning of 2012. As of September 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 nine months ended September 30, 2013 and 2012 was as follows (in thousands):
 
 
Nine Months Ended September 30,
 
 
 
 
2013
 
2012
 
Change
Management fee income
 
$
2,435

 
$
1,485

 
$
950

Interest income
 
3,511

 
2,471

 
1,040

Investment income
 
4,187

 
10,683

 
(6,496
)
Total other income
 
$
10,133

 
$
14,639

 
$
(4,506
)

Rental operating expenses

Total rental operating expenses for the nine months ended September 30, 2013, increased by $12.5 million, or 9.9%, to $139.3 million, compared to $126.8 million for the nine months ended September 30, 2012. Approximately $6.8 million of the increase was due to an increase in rental operating expenses from our Non-Same Properties, primarily related to 22 development and redevelopment projects that were completed and delivered after January 1, 2012, and four operating properties that were acquired after January 1, 2012.

General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2013, was relatively consistent at $35.8 million, compared to $35.1 million for the nine months ended September 30, 2012. As a percentage of total revenues, general and administrative expenses were 7.7% and 8.3%, respectively, for the nine months ended September 30, 2013 and 2012.


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Interest expense

Interest expense for the nine months ended September 30, 2013, decreased by $1.1 million, or 2.1% , to $50.2 million, compared to $51.2 million for the nine months ended September 30, 2012, detailed as follows (in thousands):
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Change
Secured notes payable
$
29,043

 
$
30,390

 
$
(1,347
)
Unsecured senior notes payable and senior convertible notes
25,236

 
15,160

 
10,076

Unsecured senior line of credit
5,732

 
9,234

 
(3,502
)
Unsecured senior bank term loans
17,083

 
19,181

 
(2,098
)
Interest rate swaps
12,046

 
17,627

 
(5,581
)
Amortization of loan fees and other interest
7,528

 
7,502

 
26

Subtotal
96,668

 
99,094

 
(2,426
)
Capitalized interest
(46,499
)
 
(47,854
)
 
1,355

Total interest expense
$
50,169

 
$
51,240

 
$
(1,071
)

The total interest incurred decreased by $2.4 million during the nine months ended September 30, 2013 compared to the same period in 2012, primarily as a result of an approximate $802.0 million reduction in unsecured bank debt in 2013 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 $500.0 million of unsecured notes payable at a fixed rate of 3.90%. These decreases in interest costs have been partially offset by the increase in interest expense from the issuances of unsecured senior notes payable. Beginning in 2012, we began to transition outstanding bank debt to long-term fixed-rate unsecured notes payable.  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”). As of September 30, 2013, our unhedged variable rate debt as a percentage of total debt was approximately 10%.

Depreciation and amortization

Depreciation and amortization for the nine months ended September 30, 2013, increased by $2.6 million, or 1.9%, to $141.7 million, compared to $139.1 million for the nine months ended September 30, 2012.  Depreciation increased due to building improvements, including 22 development and redevelopment projects that were completed and delivered after January 1, 2012, and four operating properties that were acquired after January 1, 2012. This was partially offset by changes during the nine months ended September 30, 2012, which were necessary to decrease the remaining useful life of certain buildings and improvements in connection with planned redevelopments.

Loss on early extinguishment of debt

During the nine months ended September 30, 2013, we paid down $250 million on our 2016 Unsecured Senior Bank Term Loan to a total outstanding balance of $500 million. During the nine months ended September 30, 2013, in conjunction with the refinancing of our unsecured senior bank term loans and the partial repayment of $250 million of our 2016 Unsecured Senior Bank Term Loan, we recognized a loss on early extinguishment of debt totaling $2.0 million, due to the write-off of unamortized loan fees.

Income from discontinued operations, net

Income from discontinued operations, net, of $993 thousand for the nine months ended September 30, 2013, includes the results of operations of two operating properties that were classified as “held for sale” and the results of operations of 10 properties sold during the nine months ended September 30, 2013.

Income from discontinued operations, net, of $5.2 million for the nine months ended September 30, 2012, includes the results of operations of two operating properties that were classified as “held for sale” as of September 30, 2013, the results of operations of 10 properties sold during the nine months ended September 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, FFO per share attributable to Alexandria’s common stockholders – diluted and FFO per share attributable to Alexandria’s common stockholders - diluted, each 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 and FFO per share attributable to Alexandria’s common stockholders - diluted, each 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
October 28, 2013
 
Reported on
July 29, 2013
Earnings per share attributable to Alexandria’s common stockholders – diluted
 
$
1.54 - 1.58
 
$
1.53 - 1.63
Add back: depreciation and amortization
 
 
2.81 - 2.85
 
 
2.76 - 2.86
Less: gain on sale of real estate
 
 
(0.01)
 
 
(0.01)
Other
 
 
(0.01)
 
 
(0.01)
FFO per share attributable to Alexandria’s common stockholders – diluted
 
 
4.35 - 4.39
 
 
4.32 - 4.42
Add back: loss on early extinguishment of debt
 
 
0.03
 
 
0.03
FFO per share attributable to Alexandria’s common stockholders – diluted, as adjusted
 
$
4.38 - 4.42
 
$
4.35 - 4.45
Key projection assumptions:
 
 
 
 
 
 
Same property NOI growth – cash basis
 
 
5% - 7%
 
 
5% - 7%
Same property NOI growth – GAAP basis
 
 
1% - 3%
 
 
1% - 3%
Rental rate steps on lease renewals and re-leasing of space – cash basis
 
 
3% - 5%
 
 
3% - 5%
Rental rate steps on lease renewals and re-leasing of space – GAAP basis
 
 
14% - 16%
 
 
11% - 13%
Occupancy percentage for operating properties at December 31, 2013
 
 
94.3% - 94.8%
 
 
94.3% - 94.7%
Straight-line rents
 
$
24 - 26 million
 
$
24 - 26 million
Amortization of above and below market leases
 
$
3 - 4 million
 
$
3 - 4 million
General and administrative expenses
 
$
48 - 51 million
 
$
48 - 51 million
Capitalization of interest
 
$
51 - 57 million
 
$
51 - 57 million
Interest expense, net
 
$
71 - 81 million
 
$
71 - 81 million
Net debt to adjusted EBITDA – three months ended December 31, 2013 – annualized
 
 
6.5x
 
 
6.5x
Fixed charge coverage ratio – three months ended December 31, 2013 – annualized
 
 
3.0x
 
 
3.0x
Non-income-producing assets as a percentage of gross real estate as of December 31, 2013
 
 
15% - 17%
 
 
15% - 17%
 

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 are 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.  Broader access to capital, including the investment grade bond market, allows us to continue to pursue our long-term capital, investment, and operating strategies.

 
 
Three Months Ended September 30,
Key Credit Metrics (1)
 
2013
 
2012
Net debt to Adjusted EBITDA (2)
 
6.8x
 
7.6x
Net debt to gross assets (excluding cash and restricted cash) (3)
 
34%
 
38%
Fixed charge coverage ratio (2)
 
2.8x
 
2.5x
Interest coverage ratio (2)
 
3.4x
 
3.1x
Unencumbered net operating income as a percentage of total net operating income (2)
 
69%
 
72%
Liquidity – unsecured senior line of credit availability and unrestricted cash (3)
 
$1.5 billion
 
$1.2 billion
Unhedged variable rate debt as a percentage of total debt (3)
 
10%
 
15%
Non-income-producing assets as a percentage of gross real estate (3)
 
19%
 
25%
Investment-grade client tenants as a percentage of total annualized base rent (3)
 
50%
 
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 September 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

On July 26, 2013, we amended our 2016 unsecured senior bank term loan to reduce the interest rate on outstanding borrowings.  We expect to repay the loan over the next one to three years.  In addition, on August 30, 2013, we amended our $1.5 billion unsecured senior line of credit and our 2019 unsecured senior bank term loan to reduce the interest rate on outstanding borrowings, extend the maturity dates, and amend certain financial covenants. Also on August 30, 2013, we amended our 2016 Unsecured Senior Bank Term Loan to conform certain financial covenants to those contained in the amended credit agreement related to the unsecured senior line of credit and the 2019 Unsecured Senior Bank Term Loan. The maturity dates below reflect available extension options that we control.
 
 
 
Balance at 9/30/13
 
Maturity Date
 
Applicable Rate
 
Facility Fee
Facility
 
 
Prior
 
Amended
 
Prior
 
Amended
 
Prior
 
Amended
2016 Unsecured Senior Bank Term Loan
 
$
500
 million
 
June 2016
 
July 2016
 
L +1.75%
 
L +1.20%
 
N/A

 
N/A

2019 Unsecured Senior Bank Term Loan
 
$
600
 million
 
January 2017
 
January 2019
 
L +1.50%
 
L +1.20%
 
N/A

 
N/A

$1.5 billion unsecured senior line of credit
 
$
14
 million
 
April 2017
 
January 2019
 
L +1.20%
 
L +1.10%
 
0.25
%
 
0.20
%

On September 30, 2013, we paid down $100 million on our 2016 Unsecured Senior Bank Term Loan to a total outstanding balance of $500 million. During the three months ended September 30, 2013, in conjunction with the refinancing of our unsecured senior bank term loans and the partial repayment of $100 million of our 2016 Unsecured Senior Bank Term Loan, we recognized a loss on early extinguishment of debt totaling $1.4 million, due to the write-off of unamortized loan fees.

The maturity date of the unsecured senior line of credit is January 2019, 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 September 30, 2013, we had $14.0 million of borrowings outstanding. See Note 5 to our consolidated financial statements in Item 1 of this Report for the Applicable Margin in effect at September 30, 2013.  In addition to the Applicable Margin, our unsecured senior line of credit is subject to an annual facility fee of 0.20%.

The requirements of, and our actual performance with respect to, the key financial covenants under our unsecured senior line of credit as of September 30, 2013, are as follows:

Covenant Ratios (1)
 
Requirement
 
Actual
Total Debt to Total Assets
 
Less than or equal to 60%
 
31%
Secured Debt to Total Assets
 
Less than or equal to 45%
 
8%
Consolidated EBITDA to Interest Expense
 
Greater than or equal to 1.50x
 
2.58x
Unsecured Leverage Ratio
 
Less than or equal to 60%
 
35%
Unsecured Interest Coverage Ratio
 
Greater than or equal to 1.50x
 
7.34x

(1)
For a definition of the ratios, refer to the amended unsecured senior line of credit and unsecured senior bank term loan agreements, each dated as of August 30, 2013, which are filed as exhibits to this Quarterly Report on Form 10-Q.


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Unsecured senior notes payable

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 September 30, 2013, are as follows:

Covenant Ratios (1)
 
Requirement
 
Actual
Total Debt to Total Assets
 
Less than or equal to 60%
 
35%
Secured Debt to Total Assets
 
Less than or equal to 40%
 
9%
Consolidated EBITDA to Interest Expense
 
Greater than or equal to 1.50x
 
5.95x
Unencumbered Total Asset Value to Unsecured Debt
 
Greater than or equal to 150%
 
285%

(1)
For a definition of the ratios, refer to the most current indenture and related supplements, which are filed with the SEC as exhibits to our Current Report on Form 8-K on February 29, 2012, and June 7, 2013.

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.

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.

Sources and Uses of Capital for the Year Ended December 31, 2013 (in millions)
 
Reported on
October 28, 2013
 
Reported on
July 29, 2013
 
Completed
 
Projected
 
Total
 
Total
Sources of capital:
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities less dividends
 
$
93

 
$
32 - 42

 
$
125 - 135

 
$
130 - 150

Land sales
 
18

 
 
55

 
 
73

 
 
149 - 189

Income-producing asset sales
 
129

 
 
—

 
 
129

 
 
129 - 134

Secured construction loan borrowings
 
26

 
 
14 - 34

 
 
40 - 60

 
 
45 - 65

Secured loans assumed in connection with acquisitions
 
—

 
 
48

 
 
48

 
 
—

Unsecured senior notes payable
 
500

 
 
—

 
 
500

 
 
500

Common stock offering
 
536

 
 
—

 
 
536

 
 
536

Available cash and borrowings on unsecured senior line of credit
 
271

 
 
58 - 108

 
 
329 - 379

 
 
324 - 369

Total sources of capital
 
$
1,573

 
$
207 - 287

 
$
1,780 - 1,860

 
$
1,813 - 1,943

 
 
 
 
 
 
 
 
 
 
 
 
Uses of capital:
 
 
 
 
 

 
 
 

 
 
 

Development, redevelopment, and construction
 
429

 
$
137 - 167

 
$
566 - 596

 
$
599 - 629

Seller financing of asset sales
 
39

 
 
—

 
 
39

 
 
39

Acquisitions
 
33

 
 
67 - 117

 
 
100 - 150

 
 
200 - 300

Secured notes payable repayments
 
34

 
 
3

 
 
37

 
 
37

Unsecured senior bank term loan repayment
 
250

 
 
—

 
 
250

 
 
150

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

 
 
—

 
 
788

 
 
788

Total uses of capital
 
$
1,573

 
$
207 - 287

 
$
1,780 - 1,860

 
$
1,813 - 1,943


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.


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Sources of capital

Real estate asset sales

We continue the disciplined execution of our asset recycling program to monetize non-strategic 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. See Note 3 to our consolidated financial statements in Item 1 of this Report.

We are also negotiating the sale of the following land parcels with an estimated sales price of $85.0 million:

Description
 
Amount
 
1600 Owens Street, inclusive of parking rights (at negotiated sales price)
 
$
55,000

(1) 
Land subject to sale negotiations
 
30,000

(2) 
Total
 
85,000

 

(1)
Land with a basis of approximately $51 million, inclusive of parking rights and estimated closing costs, projected to close in December 2013.
(2)
Land sales projected to close in 2014.

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 initially used to prepay $150.0 million of the outstanding principal balance of $750.0 million on our 2016 Unsecured Senior Bank Term Loan, to reduce the outstanding borrowings on our unsecured senior line of credit to zero, and held the remaining proceeds in cash and cash equivalents. As a result of the $150.0 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 $535.7 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 $250.0 million of our common stock through our sales agents, with approximately $150.0 million of common stock available for issuance under the program as of September 30, 2013. See Note 10 to our consolidated financial statements in Item 1 of this Report.

Cash and cash equivalents

As of September 30, 2013, we had approximately $53.8 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.

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Restricted cash

Restricted cash consisted of the following as of September 30, 2013, and December 31, 2012 (in thousands):

 
September 30, 2013
 
December 31, 2012
Funds held in trust under the terms of certain secured notes payable
$
15,362

 
$
29,526

Funds held in escrow related to construction projects
5,654

 
5,652

Other restricted funds
9,638

 
4,769

Total
$
30,654

 
$
39,947


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

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 September 30, 2013, we had $1.49 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. In North America, we currently have development projects under way for 1,550,474 rentable square feet of laboratory space. We incur construction costs related to development, redevelopment, and other construction activities and additional project costs, including interest, property taxes, insurance, employee compensation costs, 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.


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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.  Capitalized interest for the nine months ended September 30, 2013 and 2012, of approximately $46.5 million and $47.9 million, respectively, is classified in investments in real estate, net.  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.  We capitalized payroll and other indirect project costs related to development, redevelopment, and construction projects, aggregating approximately $12.5 million and $9.4 million for the nine months ended September 30, 2013 and 2012, respectively. Additionally, should we cease activities necessary to prepare an asset for its intended use, the interest, taxes, insurance, and certain other direct project costs related to this asset would be expensed as incurred.  When construction activities cease, 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 $5.9 million for the nine months ended September 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 nine months ended September 30, 2013 and 2012, were approximately $23.4 million and $28.8 million, respectively, of which approximately $8.3 million and $7.8 million, respectively, represented capitalized and deferred payroll costs directly related and essential to our leasing activities during such periods.

Acquisitions

On July 5, 2013, we acquired 10121/10151 Barnes Canyon Road, a 115,895 RSF office property located in the Sorrento Mesa submarket of San Diego, for a total purchase price of $13.1 million. 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 spaces become available. Initial stabilized yields and average cash yield will be provided in the future upon commencement of the redevelopment.

2016 Unsecured Senior Bank Term Loan repayment

As part of our continuing transition from bank debt financing to unsecured senior notes payable, and from variable-rate debt to fixed-rate debt, and from short-term debt to long-term debt, we repaid $250.0 million of our 2016 Unsecured Senior Bank Term Loan during the nine months ended September 30, 2013. As a result of this early prepayment, we recognized a loss on early extinguishment of debt related to the write-off of a portion of unamortized loan fees during the nine months ended September 30, 2013, totaling $2.0 million. See Note 5 to our consolidated financial statements in Item 1 of this Report.

On September 30, 2013, we paid down $100 million on our 2016 Unsecured Senior Bank Term Loan to a total outstanding balance of $500 million. During the three months ended September 30, 2013, in conjunction with the refinancing of our unsecured senior bank term loans and the partial repayment of $100 million of our 2016 Unsecured Senior Bank Term Loan, we recognized a loss on early extinguishment of debt totaling $1.4 million, due to the write-off of unamortized loan fees.

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. 


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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 nine months ended September 30, 2013 and 2012 (in thousands):

 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Change
Net cash provided by operating activities
$
236,376

 
$
227,490

 
$
8,886

Net cash used in investing activities
$
(391,117
)
 
$
(408,395
)
 
$
17,278

Net cash provided by financing activities
$
66,857

 
$
196,204

 
$
(129,347
)

Operating activities

Cash flows provided by operating activities consisted of the following amounts (in thousands):

 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Change
Net cash provided by operating activities
$
236,376

 
$
227,490

 
$
8,886

Less: changes in operating assets and liabilities
(3,791
)
 
(12,355
)
 
8,564

Net cash provided by operating activities before changes in assets and liabilities
$
232,585

 
$
215,135

 
$
17,450


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 nine months ended September 30, 2013, increased to $236.4 million, compared to $227.5 million for the nine months ended September 30, 2012.  Excluding the changes in assets and liabilities, net cash provided by operating activities for the nine months ended September 30, 2013, increased by approximately $17.5 million, or 8.1%, to $232.6 million, compared to $215.1 million for the nine months ended September 30, 2012.  This increase was primarily attributable to an increase in our Same Properties cash net operating income of approximately $15.6 million, or 6.5%, to $255.8 million for the nine months ended September 30, 2013, compared to $240.1 million for the nine months ended September 30, 2012.

Investing activities

Net cash used in investing activities for the nine months ended September 30, 2013, was $391.1 million, compared to $408.4 million for the nine months ended September 30, 2012.  This change consisted of the following amounts (in thousands):

 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Change
Proceeds from sales of properties
$
101,815

 
$
36,179

 
$
65,636

Additions to properties
(450,140
)
 
(406,066
)
 
(44,074
)
Purchase of properties
(24,537
)
 
(42,171
)
 
17,634

Other
(18,255
)
 
3,663

 
(21,918
)
Net cash used in investing activities
$
(391,117
)
 
$
(408,395
)
 
$
17,278


The change in net cash used in investing activities for the nine months ended September 30, 2013, is primarily due to proceeds from sales of properties, a lower investment amount in property acquisitions in the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012, offset by an increase in capital expenditures for construction, including capital expenditures related to our development and redevelopment projects during the nine months ended September 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.


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Value-creation opportunities and external growth
 
As of September 30, 2013, we had five ground-up development projects in process in North America, including an unconsolidated joint venture development project, aggregating 1,550,474 RSF.  We also had one project in North America with 68,423 RSF undergoing conversion into laboratory space through redevelopment.  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 after initial rental concessions, if any, have elapsed.  We expect, on average, our cash rents related to our value-creation projects to increase over time pursuant to contractual rent escalations.  As of September 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 nine months ended September 30, 2013, we executed leases aggregating approximately 229,000 and 955,000 RSF related to our development and redevelopment projects, respectively.

For information of our commencement of key development and redevelopment projects for the nine months ended September 30, 2013, see “Investment in Real Estate, Net – Development, Redevelopment, and Future Value-Creation Projects” located earlier within Item 2 of this Report and preceding “Investment in unconsolidated real estate entity”.

Financing activities

Net cash flows provided by financing activities for the nine months ended September 30, 2013, decreased by $129.3 million, to $66.9 million, compared to $196.2 million for the nine months ended September 30, 2012.  This decrease consisted of the following amounts (in thousands):
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Change
Borrowings from secured notes payable
$
26,319

 
$
2,874

 
$
23,445

Repayments of borrowings from secured notes payable
(34,120
)
 
(8,125
)
 
(25,995
)
Proceeds from issuance of unsecured senior notes payable
498,561

 
549,533

 
(50,972
)
Principal borrowings from unsecured senior line of credit
319,000

 
623,147

 
(304,147
)
Repayment of unsecured senior line of credit
(871,000
)
 
(580,147
)
 
(290,853
)
Repayment of unsecured senior bank term loan
(250,000
)
 
(250,000
)
 
—

Repurchase of unsecured senior convertible notes
(384
)
 
(84,801
)
 
84,417

Total changes related to debt
(311,624
)
 
252,481

 
(564,105
)
 
 
 
 
 
 
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
535,686

 
98,443

 
437,243

Dividend payments
(139,781
)
 
(114,091
)
 
(25,690
)
Other
(17,424
)
 
(35,859
)
 
18,435

Net cash provided by financing activities
$
66,857

 
$
196,204

 
$
(129,347
)

The decrease in net cash provided by financing activities is primarily related to the repayment of a portion of the outstanding principal balance of our 2016 Senior Loan and reduction of outstanding borrowings on our unsecured senior line of credit, partially offset by net proceeds from our common stock offering. See Note 5 to our consolidated financial statements in Item 1 of this Report.


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Dividends

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

 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Change
Common stock dividends
$
120,367

 
$
92,743

 
$
27,624

Series C Cumulative Redeemable Preferred Stock dividends
—

 
5,428

 
(5,428
)
Series D Cumulative Convertible Preferred Stock dividends
13,125

 
13,125

 
—

Series E Cumulative Redeemable Preferred Stock dividends
6,289

 
2,795

 
3,494

 
$
139,781

 
$
114,091

 
$
25,690


The increase in dividends paid on our common stock is primarily due to an increase in the related dividends to $1.81 per common share for the nine months ended September 30, 2013, from $1.49 per common share for the nine months ended September 30, 2012.  The increase was also due to an increase in number of shares of common stock outstanding to 71.1 million shares as of September 30, 2013, compared to 63.2 million shares as of September 30, 2012. See Note 10 to our consolidated financial statements in Item 1 of this Report.

Inflation

As of September 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 September 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)
$
2,872,765

 
$
2,677

 
$
361,674

 
$
735,172

 
$
1,773,242

Estimated interest payments on fixed rate and hedged variable rate debt (4)
146,335

 
15,977

 
73,959

 
31,416

 
24,983

Estimated interest payments on variable rate debt (5)
36,610

 
933

 
23,266

 
12,411

 
—

Ground lease obligations
639,874

 
1,981

 
18,859

 
19,973

 
599,061

Other obligations
5,638

 
221

 
1,688

 
1,851

 
1,878

Total
$
3,701,222

 
$
21,789

 
$
479,446

 
$
800,823

 
$
2,399,164


(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 September 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 September 30, 2013, approximately 90% 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 10% 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 September 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 September 30, 2013 (in thousands):

Effective
Date
 
Termination
Date
 
Interest Pay
Rate (1)
 
Fair Value as of September 30, 2013
 
Notional Amount in Effect as of
 
 
 
 
September 30, 2013
 
December 31, 2013
December 29, 2006
 
March 31, 2014
4.990%
 
$
(1,205
)
 
$
50,000

 
$
50,000

November 30, 2009
 
March 31, 2014
5.015%
 
(1,817
)
 
75,000

 
75,000

November 30, 2009
 
March 31, 2014
5.023%
 
(1,820
)
 
75,000

 
75,000

December 31, 2012
 
December 31, 2013
0.640%
 
(291
)
 
250,000

 
—

December 31, 2012
 
December 31, 2013
0.640%
 
(291
)
 
250,000

 
—

December 31, 2012
 
December 31, 2013
0.644%
 
(147
)
 
125,000

 
—

December 31, 2012
 
December 31, 2013
0.644%
 
(147
)
 
125,000

 
—

December 31, 2013
 
December 31, 2014
0.977%
 
(1,802
)
 
—

 
250,000

December 31, 2013
 
December 31, 2014
0.976%
 
(1,799
)
 
—

 
250,000

Total
 
 
 
 
 
$
(9,319
)
 
$
950,000

 
$
700,000


(1)
In addition to the interest pay rate, borrowings outstanding under our unsecured senior bank term loans include an applicable margin of 1.20% as of September 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 September 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 September 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 $9.3 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 nine months ended September 30, 2013 and 2012, approximately $12.0 million and $17.6 million 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 $8.5 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 September 30, 2013, included leases for 26 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 $8.5 million at September 30, 2013, our ground lease obligations have remaining lease terms ranging from 40 to 196 years, including extension options.

Commitments

In addition to the above, as of September 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 $258.0 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 $48.8 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 is being 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 the two 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.  See Notes 3 and 5 in Item 1 of this Report, as well as 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 were no significant changes to these policies during the nine months ended September 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 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: (i) non-revenue-enhancing capital expenditures, tenant improvements, and leasing commissions (excludes development and redevelopment expenditures); (ii) effects of straight-line rent and straight-line rent on ground leases; (iii) capitalized income from development projects; (iv) amortization of acquired above and below market leases, loan fees, and debt premiums/discounts; (v) non-cash compensation expense; and (vi) allocation of AFFO attributable to unvested restricted stock awards.

We believe that AFFO is a useful supplemental performance measure because it further adjusts to: (i) deduct certain expenditures that, although capitalized and classified in depreciation expense, do not enhance the revenue or cash flows of our properties; (ii) eliminate the effect of straight-lining our rental income and capitalizing income from development projects and (iii) 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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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 September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Net income attributable to Alexandria’s common stockholders – basic
 
$
24,579

 
$
10,646

 
$
72,504

 
$
46,630

Depreciation and amortization
 
49,102

 
48,173

 
142,677

 
143,933

(Gain) loss on sale of real estate
 
—

 
(1,562
)
 
121

 
(1,564
)
Impairment of real estate
 
—

 
9,799

 
—

 
9,799

Gain on sale of land parcel
 
—

 
—

 
(772
)
 
(1,864
)
Amount attributable to noncontrolling interests/unvested restricted stock awards:
 
 
 
 
 
 
 
 
Net income
 
1,402

 
1,188

 
4,109

 
3,256

FFO
 
(1,494
)
 
(1,148
)
 
(3,995
)
 
(3,452
)
FFO attributable to Alexandria’s common stockholders – basic
 
73,589

 
67,096

 
214,644

 
196,738

Assumed conversion of 8.00% unsecured senior convertible notes
 
5

 
5

 
15

 
16

FFO attributable to Alexandria’s common stockholders – diluted
 
73,594

 
67,101

 
214,659

 
196,754

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

 
—

 
—

 
(5,811
)
Loss on early extinguishment of debt
 
1,432

 
—

 
1,992

 
2,225

Preferred stock redemption charge
 
—

 
—

 
—

 
5,978

Allocation to unvested restricted stock awards
 
(11
)
 
—

 
(23
)
 
(21
)
FFO attributable to Alexandria’s common stockholders – diluted, as adjusted
 
75,015

 
67,101

 
216,628

 
199,125

 
 
 
 
 
 
 
 
 
Non-revenue-enhancing capital expenditures:
 
 
 
 
 
 
 
 
Maintenance building improvements
 
(1,481
)
 
(935
)
 
(2,414
)
 
(1,739
)
Tenant improvements and leasing commissions
 
(3,739
)
 
(1,844
)
 
(7,611
)
 
(6,011
)
Straight-line rent revenue
 
(5,570
)
 
(5,225
)
 
(20,007
)
 
(19,216
)
Straight-line rent expense on ground leases
 
374

 
201

 
1,451

 
2,814

Capitalized income from development projects
 
40

 
50

 
71

 
600

Amortization of acquired above and below market leases
 
(830
)
 
(778
)
 
(2,490
)
 
(2,356
)
Amortization of loan fees
 
2,487

 
2,470

 
7,300

 
7,327

Amortization of debt premiums/discounts
 
153

 
112

 
383

 
401

Stock compensation
 
3,729

 
3,845

 
11,541

 
10,412

Allocation to unvested restricted stock awards
 
28

 
19

 
105

 
67

AFFO attributable to Alexandria’s common stockholders – diluted
 
$
70,206

 
$
65,016

 
$
204,957

 
$
191,424






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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 September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Net income per share attributable to Alexandria’s common stockholders – basic
 
$
0.35

 
$
0.17

 
$
1.08

 
$
0.75

Depreciation and amortization
 
0.69

 
0.78

 
2.13

 
2.34

Gain on sale of real estate
 
—

 
(0.03
)
 
—

 
(0.03
)
Impairment of real estate
 
—

 
0.16

 
—

 
0.16

Gain on sale of land parcel
 
—

 
—

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

 
 
 
 
Net income
 
0.02

 
0.02

 
0.06

 
0.05

FFO
 
(0.02
)
 
(0.02
)
 
(0.06
)
 
(0.06
)
FFO per share attributable to Alexandria’s common stockholders – basic and diluted
 
1.04

 
1.08

 
3.20

 
3.18

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

 
—

 
—

 
(0.09
)
Loss on early extinguishment of debt
 
0.02

 
—

 
0.03

 
0.03

Preferred stock redemption charge
 
—

 
—

 
—

 
0.10

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

 
1.08

 
3.23

 
3.22

 
 
 
 
 
 
 
 
 
Non-revenue-enhancing capital expenditures:
 
 
 
 

 
 
 
 
Maintenance building improvements
 
(0.02
)
 
(0.01
)
 
(0.04
)
 
(0.03
)
Tenant improvements and leasing commissions
 
(0.05
)
 
(0.03
)
 
(0.11
)
 
(0.10
)
Straight-line rent revenue
 
(0.08
)
 
(0.08
)
 
(0.30
)
 
(0.31
)
Straight-line rent expense on ground leases
 
0.01

 
—

 
0.02

 
0.05

Amortization of acquired above and below market leases
 
(0.01
)
 
(0.01
)
 
(0.04
)
 
(0.04
)
Amortization of loan fees
 
0.03

 
0.03

 
0.12

 
0.11

Stock compensation
 
0.05

 
0.06

 
0.17

 
0.17

Other
 
—

 
—

 
0.01

 
0.02

AFFO per share attributable to Alexandria’s common stockholders – diluted
 
$
0.99

 
$
1.04

 
$
3.06

 
$
3.09




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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 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. Adjusted EBITDA margins is the percentage derived from dividing Adjusted EBITDA margins by total revenues. 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 nine months ended September 30, 2013 and 2012 (dollars in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September, 30
(dollars in thousands)
2013
 
2012
 
2013
 
2012
Net income
$
32,453

 
$
18,305

 
$
96,027

 
$
76,721

Interest expense – continuing operations
16,171

 
17,092

 
50,169

 
51,240

Depreciation and amortization – continuing operations
49,102

 
46,584

 
141,747

 
139,111

Depreciation and amortization – discontinued operations
—

 
1,589

 
930

 
4,822

EBITDA
97,726

 
83,570

 
288,873

 
271,894

Stock compensation expense
3,729

 
3,845

 
11,541

 
10,412

Loss on early extinguishment of debt
1,432

 
—

 
1,992

 
2,225

(Gain) loss on sale of real estate
—

 
(1,562
)
 
121

 
(1,564
)
Gain on sale of land parcel
—

 
—

 
(772
)
 
(1,864
)
Impairment of real estate
—

 
9,799

 
—

 
9,799

Adjusted EBITDA
$
102,887

 
$
95,652

 
$
301,755

 
$
290,902

 
 
 
 
 
 
 
 
Total revenues
$
158,630

 
$
142,850

 
$
463,245

 
424,154

Adjusted EBITDA margins
65%

 
67%

 
65%

 
69%



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Fixed charge coverage ratio

The fixed charge coverage ratio is the ratio of Adjusted EBITDA to fixed charges. This 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 nine months ended September 30, 2013 and 2012 (dollars in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Adjusted EBITDA
$
102,887

 
$
95,652

 
$
301,755

 
$
290,902

 
 
 
 
 
 
 
 
Interest expense – continuing operations
$
16,171

 
$
17,092

 
$
50,169

 
$
51,240

Add: capitalized interest
16,788

 
16,763

 
46,499

 
47,854

Less: amortization of loan fees
(2,487
)
 
(2,470
)
 
(7,300
)
 
(7,327
)
Less: amortization of debt premium/discounts
(153
)
 
(112
)
 
(383
)
 
(401
)
Cash interest
30,319

 
31,273

 
88,985

 
91,366

Dividends on preferred stock
6,472

 
6,471

 
19,414

 
20,857

Fixed charges
$
36,791

 
$
37,744

 
$
108,399

 
$
112,223

 
 
 
 
 
 
 
 
Fixed charge coverage ratio – period annualized
2.8
x
 
2.5x

 
2.8
x
 
2.6
x
Fixed charge coverage ratio – trailing 12 months
2.8
x
 
2.6x

 
2.8
x
 
2.6
x

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 nine months ended September 30, 2013 and 2012  (dollars in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Adjusted EBITDA
$
102,887

 
$
95,652

 
$
301,755

 
$
290,902

 
 
 
 
 
 
 
 
Interest expense – continuing operations
$
16,171

 
$
17,092

 
$
50,169

 
$
51,240

Add: capitalized interest
16,788

 
16,763

 
46,499

 
47,854

Less: amortization of loan fees
(2,487
)
 
(2,470
)
 
(7,300
)
 
(7,327
)
Less: amortization of debt premium/discounts
(153
)
 
(112
)
 
(383
)
 
(401
)
Cash interest
$
30,319

 
$
31,273

 
$
88,985

 
$
91,366

 
 
 
 
 
 
 
 
Interest coverage ratio – period annualized
3.4
x
 
3.1
x
 
3.4
x
 
3.2
x


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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 September 30, 2013, and December 31, 2012 (dollars in thousands):

 
September 30, 2013
 
December 31, 2012
Secured notes payable
$
708,653

 
$
716,144

Unsecured senior notes payable
1,048,190

 
549,805

Unsecured senior line of credit
14,000

 
566,000

Unsecured senior bank term loans
1,100,000

 
1,350,000

Less: cash and cash equivalents
(53,839
)
 
(140,971
)
Less: restricted cash
(30,654
)
 
(39,947
)
Net debt
$
2,786,350

 
$
3,001,031

 
 
 
 
Adjusted EBITDA (quarter annualized)(1)
$
411,548

 
$
408,876

Net debt to Adjusted EBITDA (quarter annualized)(1)
6.8
x
 
7.3x

Adjusted EBITDA (trailing 12 months)
$
403,974

 
$
393,124

Net debt to Adjusted EBITDA (trailing 12 months)
6.9
x
 
7.6x


(1)
We believe the Adjusted EBITDA and net debt to Adjusted EBITDA for the three months ended September 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 balance sheet 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 September 30, 2013, and December 31, 2012 (dollars in thousands):

 
September 30, 2013
 
December 31, 2012
Net debt
$
2,786,350

 
$
3,001,031

 
 
 
 
Total assets
$
7,358,369

 
$
7,150,116

Add: accumulated depreciation
915,494

 
875,035

Less: cash and cash equivalents
(53,839
)
 
(140,971
)
Less: restricted cash
(30,654
)
 
(39,947
)
Gross assets (excluding cash and restricted cash)
$
8,189,370

 
$
7,844,233

 
 
 
 
Net debt to gross assets (excluding cash and restricted cash)
34
%
 
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 the performance of an equity REIT.

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 September 30,
 
Nine Months Ended September 30,
Continuing operations
2013
 
2012
 
2013
 
2012
Total revenues
$
158,630

 
$
142,850

 
$
463,245

 
$
424,154

Operating expenses
47,742

 
44,203

 
139,289

 
126,758

NOI from continuing operations
110,888

 
98,647

 
323,956

 
297,396

General and administrative
11,666

 
12,470

 
35,786

 
35,125

Interest expense
16,171

 
17,092

 
50,169

 
51,240

Depreciation expense
49,102

 
46,584

 
141,747

 
139,111

Loss on early extinguishment of debt
1,432

 
—

 
1,992

 
2,225

Income from continuing operations, net
$
32,517

 
$
22,501

 
$
94,262

 
$
69,695


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 September 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 nine months ended September 30, 2013 and 2012 (dollars in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Unencumbered NOI
$
76,864

 
$
71,349

 
$
223,491

 
$
212,371

Encumbered NOI
34,024

 
27,298

 
100,465

 
85,025

Total NOI from continuing operations
$
110,888

 
$
98,647

 
$
323,956

 
$
297,396

 
 
 
 
 
 
 
 
Unencumbered NOI as a percentage of total NOI
69
%
 
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 September 30, 2013
 
As of December 31, 2012
Annualized impact to future earnings due to variable rate debt:
 
 
 
Rate increase of 1%
$
(5,313
)
 
$
(5,870
)
Rate decrease of 1%
$
2,056

 
$
1,101

Effect on fair value of secured debt:
 
 
 
Rate increase of 1%
$
(27,053
)
 
$
(37,146
)
Rate decrease of 1%
$
21,730

 
$
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 September 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 September 30, 2013
 
As of December 31, 2012
Equity price risk:
 
 
 
Increase in fair value of 10%
$
12,916

 
$
11,505

Decrease in fair value of 10%
$
(12,916
)
 
$
(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 September 30, 2013
 
As of December 31, 2012
Foreign currency exchange rate risk:
 
 
 
Increase in foreign currency exchange rate of 10%
$
(76
)
 
$
(29
)
Decrease in foreign currency exchange rate of 10%
$
76

 
$
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 September 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 September 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 September 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

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.

Our life science industry client tenants are subject to a number of risks unique to the life science industry, including (i) high levels of regulation, (ii) safety and efficacy of their products, (iii) significant funding requirements for product research and development, and (iv) changes in technology, patent expiration and intellectual property protection. These risks, including the following, may adversely affect their ability to make rental payments to us or satisfy their other lease obligations, and consequently, may materially adversely affect our business, results of operations, financial condition, and stock price:

High levels of regulation
•
Drugs that are developed and manufactured by some of our client tenants require regulatory approval, including the approval of the U.S. Food and Drug Administration, prior to being made, marketed, sold, and used. The regulatory approval process to manufacture and market drugs is costly, typically takes several years, requires validation through clinical trials and the use of substantial resources, and is often unpredictable. A client tenant may fail to obtain or experience significant delays in obtaining these approvals. Even if they obtain regulatory approvals, marketed products will be subject to ongoing regulatory review and potential loss of approvals.
•
The ability of some of our client tenants to commercialize any future products successfully will depend in part on the coverage and reimbursement levels set by governmental authorities, private health insurers and other third-party payors. Additionally, reimbursements may decrease in the future.

Safety and efficacy of their products
•
Some of our client tenants developing potential products may find that their products are not effective, or may even be harmful, when tested in humans.
•
Some of our client tenants are dependent upon the commercial success of certain lead products. Even if a product made by a client tenant is successfully developed, proven safe and effective in human clinical trials, and the requisite regulatory approvals are obtained, subsequent discovery of safety issues with these products could cause product liability events, additional regulatory scrutiny and requirements for additional labeling, loss of approval, withdrawal of products from the market and the imposition of fines or criminal penalties.
•
A drug made by a client tenant may not be well accepted by doctors and patients, or may be less effective or accepted than a competitor’s drug, even if it is successfully developed.
•
The negative results of safety signals arising from the clinical trials of the competitors of our client tenants may prompt regulatory agencies to take actions that may adversely affect the clinical trials or products of our client tenants.

Significant funding requirements for product research and development
•
Some of our client tenants require significant funding to develop and commercialize their products and technologies, which funding must be obtained from venture capital firms; private investors; the public markets; companies in the life science industry; or federal, state, and local governments. Such funding may become unavailable or difficult to obtain. The ability of each client tenant to raise capital will depend on its financial and operating condition and the overall condition of the financial, banking, and economic environment.
•
Even with sufficient funding, some of our client tenants may not be able to discover or identify potential drug targets in humans, or potential drugs for use in humans, or to create tools or technologies that are commercially useful in the discovery or identification of potential drug targets or drugs.
•
Some of our client tenants may not be able to successfully manufacture their drugs economically, even if such drugs are proven through human clinical trials to be safe and effective in humans.
•
Marketed products also face commercialization risk, and client tenants may never realize projected levels of product utilization or revenues.

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•
Negative news regarding the products, clinical trials or other business developments of our client tenants may cause their stock prices or credit profile to deteriorate.

Changes in technology, patent expiration and intellectual property protection
•
Our client tenants sell products and services in an industry that is characterized by rapid and significant technological changes, frequent new product and service introductions and enhancements, evolving industry standards, and uncertainty over the implementation of new healthcare reform legislation, which may cause them to lose competitive positions and adversely affect their operations.
•
Some of our client tenants and their licensors require patent, copyright, or trade secret protection to develop, make, market, and sell their products and technologies. A client tenant may be unable to commercialize its products or technologies if patents covering such products or technologies are not issued, or are successfully challenged, narrowed, invalidated, or circumvented by third parties, or if the client tenant fails to obtain licenses to the discoveries of third parties necessary to commercialize its products or technologies.

We cannot assure our stockholders that our client tenants will be able to develop, make, market, or sell their products and technologies due to the risks inherent in the life science industry. Any client tenant that is unable to avoid, or sufficiently mitigate, the risks described above may have difficulty making rental payments to us or satisfying their other lease obligations to us. Such risks may also decrease the credit quality of our tenant clients, or cause us to expend more funds and resources on the space leased by these client tenants than we originally anticipated. The increased burden on our resources due to adverse developments relating to our tenant clients may cause us to achieve lower than expected yields on the space leased by these client tenants. Negative news relating to our more significant client tenants may also adversely impact our stock price.

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 the near future 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.



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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.
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).
10.1
Fourth Amended and Restated Credit Agreement, dated as of August 30, 2013, among the Company, as Borrower, Alexandria Real Estate Equities, L.P., as Guarantor, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Book Runners, JPMorgan Chase Bank, N.A. and Citigroup Global Markets Inc., as Co-Syndication Agents, Barclays Bank PLC, Capital One, N.A., Compass Bank, Credit Agricole Corporate and Investment Bank, Goldman Sachs Bank USA, HSBC Bank USA, National Association, Royal Bank of Canada, The Bank of Nova Scotia, and The Royal Bank of Scotland PLC, as Co-Documentation Agents.

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10.2
Amended and Restated Term Loan Agreement, dated as of August 30, 2013, among the Company, as Borrower, Alexandria Real Estate Equities, L.P., as Guarantor, Bank of America, N.A., as Administrative Agent, JPMorgan Chase Bank, N.A. and Citigroup Global Markets Inc., as Co-Syndication Agents, Barclays Bank PLC, Capital One, N.A., Compass Bank, Credit Agricole Corporate and Investment Bank, Goldman Sachs Bank USA, HSBC Bank USA, National Association, Royal Bank of Canada, The Bank of Nova Scotia, and The Royal Bank of Scotland PLC, as Co-Documentation Agents, and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Lead Book Runners.
10.3
Second Amended and Restated Term Loan Agreement, dated as of July 26, 2013, among the Company, as Borrower, Alexandria Real Estate Equities, L.P., as Guarantor, Citibank, N.A., as Administrative Agent, Royal Bank of Canada and The Royal Bank of Scotland PLC, as Co-Syndication Agents, The Bank of Nova Scotia and Compass Bank, as Co-Documentation Agents, and Citigroup Global Markets Inc., RBC Capital Markets, and RBS Securities Inc., as Joint Lead Arrangers and Joint Book Running Managers.
10.4
First Amendment to Second Amended and Restated Term Loan Agreement, dated as of August 30, 2013, among the Company and Alexandria Real Estate Equities, L.P., as Credit Parties, Citibank, N.A., as Administrative Agent, Royal Bank of Canada and The Royal Bank of Scotland PLC, as Co-Syndication Agents, The Bank of Nova Scotia and Compass Bank, as Co-Documentation Agents, and Citigroup Global Markets Inc., RBC Capital Markets, and RBS Securities Inc., as Joint Lead Arrangers and Joint Book Running Managers.
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 nine months ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2013, and December 31, 2012 (unaudited), (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2012 (unaudited), (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012 (unaudited), (iv) Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests for the nine months ended September 30, 2013 (unaudited), (v) Consolidated Statements of Cash Flows for the nine months ended September 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 November 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)

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