10-Q
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, 2015

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 ý
Accelerated filer o
Non-accelerated filer o   (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý

As of October 16, 2015, 72,498,946 shares of common stock, par value $.01 per share, were outstanding.



TABLE OF CONTENTS

 
 
Page
 
 
 
 
FINANCIAL STATEMENTS (UNAUDITED)
 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014
 
 
 
 
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended
September 30, 2015 and 2014
 
 
 
 
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests for the Nine Months Ended September 30, 2015
 
 
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i



GLOSSARY

The following abbreviations or acronyms that may be used in this document shall have the adjacent meanings set forth below:

ABR
Annualized Base Rent
AFFO
Adjusted Funds from Operations
CIP
Construction in Progress
EBITDA
Earnings before Interest, Taxes, Depreciation, and Amortization
EPS
Earnings per Share
FASB
Financial Accounting Standards Board
FFO
Funds from Operations
GAAP
U.S. Generally Accepted Accounting Principles
HVAC
Heating, Ventilation, and Air Conditioning
LEED®
Leadership in Energy and Environmental Design
LIBOR
London Interbank Offered Rate
NAREIT
National Association of Real Estate Investment Trusts
NAV
Net Asset Value
NOI
Net Operating Income
NYSE
New York Stock Exchange
REIT
Real Estate Investment Trust
RSF
Rentable Square Feet/Foot
SEC
Securities and Exchange Commission
SoMa
South of Market (submarket of the San Francisco market)
U.S.
United States
VIE
Variable Interest Entity



ii



PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

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

 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Investments in real estate
$
7,654,209

 
$
7,226,016

Cash and cash equivalents
76,383

 
86,011

Restricted cash
36,993

 
26,884

Tenant receivables
10,124

 
10,548

Deferred rent
267,954

 
234,124

Deferred leasing and financing costs
222,343

 
201,798

Investments
330,570

 
236,389

Other assets
138,768

 
114,266

Total assets
$
8,737,344

 
$
8,136,036

 
 
 
 
Liabilities, Noncontrolling Interests, and Equity
 
 
 
Secured notes payable
$
773,619

 
$
652,209

Unsecured senior notes payable
1,747,613

 
1,747,370

Unsecured senior line of credit
843,000

 
304,000

Unsecured senior bank term loans
950,000

 
975,000

Accounts payable, accrued expenses, and tenant security deposits
586,594

 
489,085

Dividends payable
61,340

 
58,814

Total liabilities
4,962,166

 
4,226,478

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Redeemable noncontrolling interests
14,218

 
14,315

 
 
 
 
Alexandria Real Estate Equities, Inc.’s stockholders’ equity:
 
 
 
Series D cumulative convertible preferred stock
237,163

 
237,163

Series E cumulative redeemable preferred stock
130,000

 
130,000

Common stock
718

 
715

Additional paid-in capital
3,356,043

 
3,461,189

Accumulated other comprehensive income (loss)
35,238

 
(628
)
Alexandria’s stockholders’ equity
3,759,162

 
3,828,439

Noncontrolling interests
1,798

 
66,804

Total equity
3,760,960

 
3,895,243

Total liabilities, noncontrolling interests, and equity
$
8,737,344

 
$
8,136,036


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

1



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,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rental
$
155,311

 
$
137,718

 
$
450,724

 
$
403,280

Tenant recoveries
56,119

 
45,572

 
154,107

 
128,198

Other income
7,180

 
2,325

 
14,688

 
6,725

Total revenues
218,610

 
185,615

 
619,519

 
538,203

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental operations
68,846

 
57,423

 
192,319

 
162,283

General and administrative
15,143

 
12,609

 
44,519

 
39,669

Interest
27,679

 
20,555

 
77,583

 
57,111

Depreciation and amortization
67,953

 
58,388

 
189,044

 
166,123

Impairment of real estate
—

 
—

 
14,510

 
—

Loss on early extinguishment of debt
—

 
525

 
189

 
525

Total expenses
179,621

 
149,500

 
518,164

 
425,711

 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated joint ventures
710

 
—

 
1,825

 
—

Income from continuing operations
39,699

 
36,115

 
103,180

 
112,492

Loss from discontinued operations
—

 
(180
)
 
(43
)
 
(489
)
Gain on sales of real estate – land parcels
—

 
8

 
—

 
805

Net income
39,699

 
35,943

 
103,137

 
112,808

 
 
 
 
 
 
 
 
Dividends on preferred stock
(6,247
)
 
(6,471
)
 
(18,740
)
 
(19,414
)
Net income attributable to noncontrolling interests
(170
)
 
(1,340
)
 
(925
)
 
(3,842
)
Net income attributable to unvested restricted stock awards
(623
)
 
(506
)
 
(1,736
)
 
(1,285
)
Net income attributable to Alexandria’s common stockholders
$
32,659

 
$
27,626

 
$
81,736

 
$
88,267

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

 
$
0.39

 
$
1.14

 
$
1.25

Discontinued operations
—

 
—

 
—

 
(0.01
)
EPS – basic and diluted
$
0.46

 
$
0.39

 
$
1.14

 
$
1.24

 
 
 
 
 
 
 
 
Dividends declared per share of common stock
$
0.77

 
$
0.72

 
$
2.28

 
$
2.14


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


2



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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
39,699

 
$
35,943

 
$
103,137

 
$
112,808

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Unrealized (losses) gains on marketable equity securities:
 
 
 
 
 
 
 
Unrealized holding (losses) gains arising during the period
(29,832
)
 
(2,454
)
 
54,004

 
13,591

Reclassification adjustment for (gains) losses included in net income
(4,968
)
 
111

 
(2,503
)
 
517

Unrealized (losses) gains on marketable equity securities, net
(34,800
)
 
(2,343
)
 
51,501

 
14,108

 
 
 
 
 
 
 
 
Unrealized (losses) gains on interest rate swap agreements:
 
 
 
 
 
 
 
Unrealized interest rate swap (losses) gains arising during the period
(5,474
)
 
1,206

 
(9,712
)
 
(2,708
)
Reclassification adjustment for amortization of losses to interest expense included in net income
727

 
1,129

 
1,942

 
5,742

Unrealized (losses) gains on interest rate swap agreements, net
(4,747
)
 
2,335

 
(7,770
)
 
3,034

 
 
 
 
 
 
 
 
Unrealized losses on foreign currency translation:
 
 
 
 
 
 
 
Unrealized foreign currency translation losses arising during the period
(9,294
)
 
(12,259
)
 
(17,072
)
 
(9,450
)
Reclassification adjustment for (gains) losses included in net income
—

 
(199
)
 
9,236

 
(199
)
Unrealized losses on foreign currency translation, net
(9,294
)
 
(12,458
)
 
(7,836
)
 
(9,649
)
 
 
 
 
 
 
 
 
Total other comprehensive (loss) income
(48,841
)
 
(12,466
)
 
35,895

 
7,493

Comprehensive (loss) income
(9,142
)
 
23,477

 
139,032

 
120,301

Less: comprehensive income attributable to noncontrolling interests
(71
)
 
(1,340
)
 
(954
)
 
(3,842
)
Comprehensive (loss) income attributable to Alexandria’s common stockholders
$
(9,213
)
 
$
22,137

 
$
138,078

 
$
116,459


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


3



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) Income
 
Noncontrolling
Interests
 
Total
Equity
 
Redeemable
Noncontrolling
Interests
Balance as of December 31, 2014
 
$
237,163

 
$
130,000

 
71,463,876

 
$
715

 
$
3,461,189

 
$
—

 
$
(628
)
 
$
66,804

 
$
3,895,243

 
$
14,315

Net income
 
—

 
—

 
—

 
—

 
—

 
102,212

 
—

 
129

 
102,341

 
796

Total other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
—

 
35,866

 
29

 
35,895

 
—

Contributions by noncontrolling interests
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
340

 
340

 
—

Distributions to noncontrolling interests
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(893
)
Issuances of common stock
 
—

 
—

 
56,874

 
1

 
5,051

 
—

 
—

 
—

 
5,052

 
—

Issuances pursuant to stock plan
 
—

 
—

 
270,140

 
2

 
19,600

 
—

 
—

 
—

 
19,602

 
—

Purchase of noncontrolling interest
 
—

 
—

 
—

 
—

 
(48,463
)
 
—

 
—

 
(65,504
)
 
(113,967
)
 
—

Dividends declared on common stock
 
—

 
—

 
—

 
—

 
—

 
(164,806
)
 
—

 
—

 
(164,806
)
 
—

Dividends declared on preferred stock
 
—

 
—

 
—

 
—

 
—

 
(18,740
)
 
—

 
—

 
(18,740
)
 
—

Distributions in excess of earnings
 
—

 
—

 
—

 
—

 
(81,334
)
 
81,334

 
—

 
—

 
—

 
—

Balance as of September 30, 2015
 
$
237,163

 
$
130,000

 
71,790,890

 
$
718

 
$
3,356,043

 
$
—

 
$
35,238

 
$
1,798

 
$
3,760,960

 
$
14,218



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

4



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

 
Nine Months Ended September 30,
 
2015
 
2014
Operating Activities
 
 
 
Net income
$
103,137

 
$
112,808

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
189,044

 
166,123

Loss on early extinguishment of debt
189

 
525

Gain on sales of real estate – land parcels
—

 
(805
)
Impairment of real estate
14,510

 
—

Equity in earnings of unconsolidated joint ventures
(1,825
)
 
—

Distributions of earnings from unconsolidated joint ventures
740

 
—

Amortization of loan fees
8,348

 
8,090

Amortization of debt (premiums) discounts
(282
)
 
100

Amortization of acquired below-market leases
(5,121
)
 
(2,191
)
Deferred rent
(34,421
)
 
(35,511
)
Stock compensation expense
12,922

 
9,372

Investment gains
(22,368
)
 
(9,481
)
Investment losses
11,157

 
8,725

Changes in operating assets and liabilities:
 
 
 
Restricted cash
24

 
—

Tenant receivables
380

 
(939
)
Deferred leasing costs
(47,725
)
 
(25,910
)
Other assets
(13,721
)
 
(12,228
)
Accounts payable, accrued expenses, and tenant security deposits
31,423

 
36,446

Net cash provided by operating activities
246,411

 
255,124

 
 
 
 
Investing Activities
 
 
 
Proceeds from sales of real estate
92,455

 
28,378

Additions to real estate
(362,215
)
 
(345,074
)
Purchase of real estate
(248,933
)
 
(97,785
)
Deposits for investing activities
(6,707
)
 
(7,292
)
Change in restricted cash related to construction projects
—

 
6,694

Investment in unconsolidated real estate joint ventures
(7,979
)
 
(67,525
)
Additions to investments
(67,965
)
 
(35,484
)
Sales of investments
39,590

 
13,883

Repayment of notes receivable
4,264

 
29,866

Net cash used in investing activities
$
(557,490
)
 
$
(474,339
)

5



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

 
Nine Months Ended September 30,
 
2015
 
2014
Financing Activities
 
 
 
Borrowings from secured notes payable
$
47,375

 
$
108,626

Repayments of borrowings from secured notes payable
(12,217
)
 
(228,909
)
Proceeds from issuance of unsecured senior notes payable
—

 
698,908

Borrowings from unsecured senior line of credit
1,432,000

 
890,000

Repayments of borrowings from unsecured senior line of credit
(893,000
)
 
(952,000
)
Repayments of borrowings from unsecured senior bank term loans
(25,000
)
 
(125,000
)
Change in restricted cash related to financing activities
(4,737
)
 
375

Payment of loan fees
(4,182
)
 
(7,989
)
Proceeds from the issuance of common stock
5,052

 
—

Dividends on common stock
(162,280
)
 
(150,540
)
Dividends on preferred stock
(18,740
)
 
(19,414
)
Contributions by noncontrolling interests
340

 
19,410

Distributions to and purchases of noncontrolling interests
(62,973
)
 
(3,487
)
Net cash provided by financing activities
301,638

 
229,980

 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
(187
)
 
(1,438
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(9,628
)
 
9,327

Cash and cash equivalents as of the beginning of period
86,011

 
57,696

Cash and cash equivalents as of the end of period
$
76,383

 
$
67,023

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest, net of interest capitalized
$
64,197

 
$
33,783

 
 
 
 
Non-Cash Investing Activities
 
 
 
Change in accrued construction
$
(7,305
)
 
$
36,235

Assumption of secured notes payable in connection with purchase of real estate
$
(82,000
)
 
$
(48,329
)
 
 
 
 
Non-Cash Financing Activities
 
 
 
Payable for purchase of noncontrolling interest
$
(51,887
)
 
$
—


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


6

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,” “ARE,” “we,” “us,” and “our” refer to Alexandria Real Estate Equities Inc., and its consolidated subsidiaries.

Alexandria Real Estate Equities, Inc. (NYSE:ARE) is a fully integrated, self-administered, and self-managed urban office REIT uniquely focused on collaborative science and technology campuses in AAA innovation cluster locations with a total market capitalization of $10.8 billion as of September 30, 2015, and an asset base of 31.5 million square feet, including 19.9 million RSF of operating properties and development and redevelopment projects under construction, as well as an additional 11.6 million square feet of near-term and future ground-up development projects. Alexandria pioneered this niche in 1994 and has since established a dominant market presence in key locations, including Greater Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and Research Triangle Park. Alexandria is known for its high-quality and diverse client tenant base. Alexandria has a longstanding and proven track record of developing Class A assets clustered in urban science and technology campuses that provide its innovative client tenants with highly dynamic and collaborative environments that enhance their ability to successfully recruit and retain world-class talent and inspire productivity, efficiency, creativity, and success. We believe these advantages result in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value. For additional information on Alexandria, please visit www.are.com.

Our asset base (including unconsolidated joint ventures) consisted of the following, as of September 30, 2015:
 
 
Square Feet
Operating properties
 
16,803,766

Development projects under construction
 
2,614,491

Redevelopment projects under construction
 
525,482

Total operating and development and redevelopment projects under construction
 
19,943,739

 
 
 
Near-term value-creation projects (CIP), all in North America
 
1,310,186

Future value-creation projects:
 
 
North America
 
3,797,375

Asia
 
6,419,707

 
 
10,217,082

 
 
 
Near-term and future value-creation projects
 
11,527,268

 
 
 
Total
 
31,471,007


As of September 30, 2015:

•
Investment-grade client tenants represented approximately 53% of our total annualized base rent;
•
Approximately 96% of our leases (on an RSF basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area, and other operating expenses (including increases thereto) in addition to base rent;
•
Approximately 95% of our leases (on an RSF basis) contained effective annual rent escalations that were either fixed (generally ranging from 3% to 3.5%) or indexed based on a consumer price index or other indices; and
•
Approximately 94% of our leases (on an RSF basis) provided for the recapture of certain capital expenditures (such as HVAC systems maintenance and/or replacement, roof replacement, and parking lot resurfacing) that we believe would typically be borne by the landlord in traditional office leases.

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

7

2.
Basis of presentation and summary of significant accounting policies

We have prepared the accompanying interim consolidated financial statements in accordance with GAAP and in conformity with the rules and regulations of the SEC. In our opinion, the interim consolidated financial statements presented herein reflect all adjustments that are necessary to fairly present the interim consolidated financial statements. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2014.

Basis of presentation and consolidation

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

In certain circumstances, we may enter into joint venture arrangements with outside partners. On a quarterly basis, we evaluate each joint venture arrangement under the VIE model, and if the entity is determined not to be a VIE, we then evaluate the entity under the voting model to determine if the entity should be consolidated.

Under the VIE model, an entity is determined to be a VIE if it has any of the following characteristics:

•
The entity does not have sufficient equity to finance its activities without additional subordinated financial support;
•
The equity holders, as a group, lack the characteristics of a controlling financial interest; or
•
The legal entity is established with non-substantive voting rights.

If an entity is determined to be a VIE, we evaluate whether we are the primary beneficiary using qualitative analyses. Factors considered include, but are not limited to, the purpose and design of the VIE, risks that the VIE was designed to create and pass through, the form of our ownership interest, our representation on the entity’s governing body, the size and seniority of our investment, our ability to participate in policy-making decisions, and the rights of the other investors to participate in the decision-making process and/or liquidate the venture, if applicable. We consolidate VIEs whenever we determine that we are the primary beneficiary.

If an entity is determined not to be a VIE, we then evaluate such entity under the voting model. Under the voting model, if we are the general partner or managing member, or have a similar role that can direct the operations of the entity, we have a presumption that we control the entity and we should consolidate regardless of our ownership percentage. If we determine that the other equity holders have any one of the following rights, it is assumed that we do not control the entity and therefore should not consolidate the entity: (i) the substantive ability to dissolve the entity or remove us from the lead role of the entity or (ii) substantive rights that allow them to participate in the activities that most significantly impact the entity’s economic performance.

As of September 30, 2015, we had two real estate joint ventures that did not meet the requirements for consolidation and were accounted for under the equity method of accounting. Refer to Note 3 – “Investments in Real Estate” to our unaudited consolidated financial statements under Item 1 of this report for further information on our unconsolidated joint ventures.

Use of estimates

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


8


2.
Basis of presentation and summary of significant accounting policies (continued)

Investments in real estate and properties classified as “held for sale”

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

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

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

A property is classified as “held for sale” when all of the following criteria for a plan of sale have been met: (i) management, having the authority to approve the action, commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition, subject only to terms that are usual and customary; (iii) an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; (iv) the sale of the property is probable and is expected to be completed within one year; (v) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Depreciation of assets ceases upon designation of a property as “held for sale.” Prior to our adoption of the new discontinued operations accounting standard on October 1, 2014, the operations of properties “held for sale” were classified as discontinued operations in our consolidated statements of income.

Subsequent to the adoption of the new discontinued operations accounting standard on October 1, 2014, if the disposal of the property represents a strategic shift that has (or will have) a major effect on our operations or financial results, such as (i) a major line of business, (ii) a major geographic area, (iii) a major equity method investment, or (iv) other major parts of an entity, then the operations of the property “held for sale,” including any interest expense directly attributable to it, are classified as discontinued operations in our consolidated statements of income, and amounts for all prior periods presented are reclassified from continuing operations to discontinued operations. The disposal of an individual property generally will not represent a strategic shift and therefore will typically not meet the criteria for classification as discontinued operations.


9


2.
Basis of presentation and summary of significant accounting policies (continued)

Impairment of long-lived assets

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

We use the “held for sale” impairment model for our properties classified as “held for sale.” The “held for sale” impairment model is different from the held for use 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 for use to require the recognition of an impairment charge upon classification as “held for sale.”

On a quarterly basis, we review current activities and changes in the business conditions of all of our properties prior to and subsequent to the end of each quarter to determine the existence of any triggering events requiring an impairment analysis. If triggering events are identified, we review an estimate of the future undiscounted cash flows for the properties, including a probability-weighted approach if multiple outcomes are under consideration.

Investments

We hold equity investments in certain publicly traded companies and investments in certain privately held entities primarily involved in the science industry. All of our investments in actively traded public companies are considered “available-for-sale” and are reflected in the accompanying consolidated balance sheets at fair value. Fair value has been determined based upon the closing price as of each balance sheet date, with unrealized gains and losses shown as a separate component of comprehensive income. The classification of each investment is determined at the time each investment is made, and such determination is reevaluated at each balance sheet date. The cost of each investment sold is determined by the specific identification method, with realized gains or losses classified in other income in the accompanying consolidated statements of income. Investments in privately held entities are generally accounted for under the cost method when our interest in the entity is so minor that we have virtually no influence over the entity’s operating and financial policies. Certain investments in privately held entities are accounted for under the equity method unless our interest in the entity is deemed to be so minor that we have virtually no influence over the entity’s operating and financial policies. Under the equity method of accounting, we recognize our investment initially at cost and adjust the 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, 2015, and December 31, 2014, our ownership percentage in the voting stock of each individual entity was less than 10%.

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


10


2.
Basis of presentation and summary of significant accounting policies (continued)

Recognition of rental income and tenant recoveries

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

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

Tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes, and other expenses recoverable from client tenants. Tenant receivables are expected to be collected within one year. We may maintain an allowance for estimated losses that may result from the inability of our client tenants to make payments required under the terms of the lease and for tenant recoveries due. If a client tenant fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the amount of uncollectible tenant receivables and deferred rent arising from the straight-lining of rent. As of September 30, 2015, and December 31, 2014, we had no allowance for uncollectible tenant receivables and deferred rent.

Monitoring client tenant credit quality

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

Other income

The following is a summary of the other income in the accompanying consolidated statements of income for the three and nine months ended September 30, 2015, and 2014 (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Management fee income
 
$
530

 
$
560

 
$
1,341

 
$
2,202

Interest and other income
 
1,272

 
1,994

 
2,136

 
3,767

Investment income (loss)
 
5,378

 
(229
)
 
11,211

 
756

Total other income
 
$
7,180

 
$
2,325

 
$
14,688

 
$
6,725


Income taxes

We are organized and qualify as a REIT pursuant to the Internal Revenue Code (the “Code”). Under the Code, a REIT that distributes at least 90% of its REIT taxable income to its shareholders annually and meets certain other conditions is not subject to federal income taxes, but could be subject to certain state and local taxes. We distribute 100% of our taxable income annually; therefore, a provision for federal income taxes is not required. In addition to our REIT returns, we file federal, state, and local tax returns for our subsidiaries. We file with jurisdictions located in the U.S., Canada, India, China, and other international locations. Our tax returns are subject to routine examination in various jurisdictions for calendar years 2010 through 2013.


11


2.
Basis of presentation and summary of significant accounting policies (continued)

Recent accounting pronouncements

In February 2015, the FASB issued an Accounting Standards Update that requires reporting entities to evaluate whether they should consolidate certain legal entities. The update modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities and eliminates the presumption that a general partner should consolidate a limited partnership. This update affects the consolidation analyses of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related-party relationships. The update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. A reporting entity may apply the amendments in this update by (i) using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or (ii) applying the amendments retrospectively. We are currently assessing the potential impact that the adoption of the update will have on our consolidated financial statements.

In April 2015, the FASB issued an Accounting Standards Update that requires reporting entities to present debt issuance costs as a direct deduction from the face amount of the related note payable presented in the balance sheet. The update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. A reporting entity is required to apply the amendments in this update retrospectively to all prior periods. We are currently assessing the potential impact that the adoption of the update will have on our consolidated financial statements.


12



3.
Investments in real estate

Our investments in real estate consisted of the following as of September 30, 2015, and December 31, 2014 (in thousands):
 
 
September 30, 2015
 
December 31, 2014
Land (related to rental properties)
 
$
676,459

 
$
624,681

Buildings and building improvements
 
6,764,292

 
6,171,504

Other improvements
 
250,364

 
192,128

Rental properties
 
7,691,115

 
6,988,313

 
 
 
 
 
Development and redevelopment projects under construction/Construction in progress (CIP):
 
 
 
 
Development projects under construction in North America
 
644,500

 
500,894

Redevelopment projects under construction in North America
 
139,931

 
42,482

Development projects under construction in Asia
 
—

 
14,065

 
 
784,431

 
557,441

 
 
 
 
 
Rental properties and development and redevelopment projects under construction
 
8,475,546

 
7,545,754

 
 
 
 
 
Near-term value-creation projects in North America (CIP):
 
 
 
 
Alexandria Center® at Kendall Square – Binney Street 
 
—

 
321,907

Other projects
 
47,358

 
107,471

 
 
47,358

 
429,378

 
 
 
 
 
Future value-creation projects:
 
 
 
 
North America
 
187,313

 
175,175

Asia
 
77,261

 
78,548

 
 
264,574

 
253,723

 
 
 
 
 
Near-term and future value-creation projects
 
311,932

 
683,101

 
 
 
 
 
Value-creation pipeline
 
1,096,363

 
1,240,542

 
 
 
 
 
Gross investments in real estate
 
8,787,478

 
8,228,855

Equity method of accounting – unconsolidated joint ventures
 
126,471

 
117,406

Gross investments in real estate – including unconsolidated joint ventures
 
8,913,949

 
8,346,261

Less: accumulated depreciation
 
(1,259,740
)
 
(1,120,245
)
Investments in real estate
 
$
7,654,209

 
$
7,226,016


Acquisitions
    
During the nine months ended September 30, 2015, we acquired real estate and real estate related assets with an aggregate purchase price of $438.1 million, including the assumption of debt, consisting of one operating property, two land parcels, two redevelopment projects under construction, and the outstanding noncontrolling interest related to seven operating properties.


13


3.
Investments in real estate (continued)

Sales of real estate assets and related impairment charges

In June 2015, we completed the sale of 270 Third Street, a residential development project with 91 units at our Alexandria Center® at Kendall Square in our Cambridge submarket in Greater Boston, for a sales price of $43.0 million. The net proceeds of $25.5 million reflect the assumption by the buyer of the cost to complete the construction of $17.5 million. The net proceeds from the sale approximated our carrying amount.

During the three months ended March 31, 2015, we completed the sale of our land and land improvements at 661 University Avenue in Toronto, Canada, for $54.1 million. In December 2014, we recognized an impairment charge of $16.6 million to lower the carrying costs of this property to its estimated fair value less cost to sell, including an estimated $5.0 million foreign currency exchange translation loss. Also, during the three months ended March 31, 2015, we sold a 21,859 RSF operating property located in Pennsylvania for $1.9 million. The sales price less cost to sell for this property approximated its carrying value at the time of sale and resulted in no gain or loss on sale.

During the three months ended December 31, 2014, we placed into service a 175,000 RSF building in Hyderabad, India. We completed a probability-weighted cash flow analysis for this building, inclusive of the estimated costs to complete, and determined that the estimated undiscounted cash flows exceeded the carrying amount of the building as of December 31, 2014.

During the three months ended March 31, 2015, we determined that this building in Hyderabad, India, met the criteria for classification as “held for sale,” including, among others, the following: (i) management committed to sell the real estate and executed a purchase and sale agreement on March 23, 2015, and (ii) management determined that the sale was probable within one year. Upon classification as “held for sale,” we recognized an impairment charge of $14.5 million to lower the carrying costs of the real estate to its estimated fair value less cost to sell, including an estimated $4.2 million foreign currency exchange translation loss. On March 26, 2015, we completed the sale of the building to an Indian multispecialty healthcare provider for $12.4 million.

As a result of our sales in Canada and India discussed above, our statement of comprehensive income reflects an aggregate $9.2 million of losses that we realized during the nine months ended September 30, 2015, related to foreign currency exchange translation losses, noted above, that were previously classified in accumulated other comprehensive income (loss) on our accompanying consolidated balance sheets.

Development and redevelopment projects under construction

As of September 30, 2015, we had ten ground-up development projects, including two unconsolidated joint venture development projects, under construction in North America. The projects at completion will aggregate 3.3 million RSF, of which 713,524 RSF has been completed and placed into service.

As of September 30, 2015, we had three redevelopment projects under construction in North America aggregating 525,482 RSF.

Investments in unconsolidated joint ventures

Refer to our consolidation policy described in Note 2 – “Basis of Presentation and Summary of Significant Accounting Policies,” regarding the following two unconsolidated joint ventures.

360 Longwood Avenue

We are currently developing a building aggregating 413,536 RSF in our Longwood Medical Area submarket of the Greater Boston market through an unconsolidated joint venture. The cost at completion for this unconsolidated joint venture real estate project is approximately $350.0 million. As of September 30, 2015, we had 259,859 RSF, or 63% of the project, leased and in service. The joint venture has a secured construction loan with commitments aggregating $213.2 million, $175.3 million of which was outstanding as of September 30, 2015. The remaining cost to complete the development is expected to be funded primarily from the remaining commitments of $37.9 million under the secured construction loan. The secured construction loan bears interest at LIBOR+3.75%, with a floor of 5.25%. The maturity date of the loan is April 1, 2017, with two, one-year options to extend the stated maturity date to April 1, 2019, subject to certain conditions.


14


3.
Investments in real estate (continued)

We have a 27.5% interest in this unconsolidated joint venture that we account for under the equity method of accounting. Our investment under the equity method of accounting was $50.4 million as of September 30, 2015, and is classified in investments in real estate in our accompanying consolidated balance sheets.

1455/1515 Third Street

In September 2014, Alexandria and Uber Technologies, Inc. (“Uber”), entered into a joint venture agreement and acquired two land parcels supporting the development of two buildings aggregating 422,980 RSF at 1455/1515 Third Street in the Mission Bay submarket of the San Francisco market for a total purchase price of $125.0 million. We have a 51% interest and Uber has a 49% interest in this unconsolidated joint venture. The purchase price was funded by contributions into the joint venture by Uber and us. We account for our investment in this joint venture under the equity method of accounting. Our investment under the equity method of accounting was $76.1 million as of September 30, 2015, and was classified in investments in real estate in our accompanying consolidated balance sheets. The project is expected to be funded by equity contributions from Uber and us. The project is 100% leased to Uber for a 15-year term.

Near-term value-creation projects in North America (CIP)
    
Land undergoing predevelopment activities is classified as CIP and is undergoing activities prior to commencement of construction of aboveground building improvements. We generally will not commence ground-up development of any land parcels without first securing pre-leasing for such space, except when there is solid market demand. If aboveground construction is not initiated at completion of predevelopment activities, the land parcel will be classified as future value-creation projects. Our objective with predevelopment is to reduce the time it takes to deliver projects to prospective client tenants. Additionally, during predevelopment, we focus on the design of cost-effective buildings with generic and reusable infrastructure to accommodate single-tenancy and multi-tenancy. As of September 30, 2015, we had $47.4 million of land undergoing predevelopment activities in North America aggregating 1.3 million square feet.

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

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

•
Site and infrastructure construction costs, including belowground site work, utility connections, land grading, drainage, egress and regress access points, foundation, and other costs to prepare the site for construction of aboveground building improvements.

Future value-creation projects

Future value-creation projects represent land that we plan to develop in the future, but for which, as of each period presented, no construction or predevelopment activities were ongoing. As a result, interest, property taxes, insurance, and other costs are expensed as incurred. As of September 30, 2015, we had $264.6 million of land held for future development supporting an aggregate of 10.2 million square feet of ground-up development.


15



4.
Investments

Our investments in privately held entities are primarily accounted for under the cost method. Our investments in publicly traded companies are principally marketable equity securities that are accounted for as “available-for-sale” marketable equity securities that are carried at their fair values. Investments in “available-for-sale” marketable equity securities with gross unrealized losses as of September 30, 2015, had been in a continuous unrealized loss position for less than 12 months. We have the ability and intent to hold these investments for a reasonable period of time sufficient for the recovery of our investment. We believe that these unrealized losses are temporary; accordingly, there are no other-than-temporary impairments in accumulated other comprehensive income related to “available-for-sale” marketable equity securities as of September 30, 2015, or December 31, 2014.

The following table summarizes our investments as of September 30, 2015, and December 31, 2014 (in thousands):
 
September 30, 2015
 
December 31, 2014
“Available-for-sale” marketable equity securities, cost basis
$
31,399

 
$
21,898

Unrealized gains
107,518

 
53,625

Unrealized losses
(3,650
)
 
(1,258
)
“Available-for-sale” marketable equity securities, at fair value
135,267

 
74,265

Investments accounted for under cost method
195,303

 
162,124

Total investments
$
330,570

 
$
236,389

    
The following table outlines our investment income (loss), which is classified in other income in the accompanying consolidated statements of income (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Investment gains
$
8,658

 
$
3,256

 
$
22,368

 
$
9,481

Investment losses
(3,280
)
 
(3,485
)
 
(11,157
)
 
(8,725
)
Investment income (loss)
$
5,378

 
$
(229
)
 
$
11,211

 
$
756


5.
Fair value measurements

We are required to disclose fair value information about all financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. We measure and disclose the estimated fair value of financial assets and liabilities utilizing a fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. This hierarchy consists of three broad levels, as follows: (i) quoted prices in active markets for identical assets or liabilities, (ii) “significant other observable inputs,” and (iii) “significant unobservable inputs.” “Significant other observable inputs” can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. “Significant unobservable inputs” are typically based on an entity’s own assumptions, since there is little, if any, related market activity. In instances in which the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level of input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers between the levels in the fair value hierarchy during the nine months ended September 30, 2015 and 2014.


16


5.
Fair value measurements (continued)

The following tables set forth the assets and liabilities that we measure at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2015, and December 31, 2014 (in thousands):
 
 
 
 
September 30, 2015
Description
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Assets:
 
 
 
 
 
 
 
 
“Available-for-sale” marketable equity securities
 
$
135,267

 
$
135,267

 
$
—

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
8,679

 
$
—

 
$
8,679

 
$
—

 
 
 
 
December 31, 2014
Description
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Assets:
 
 
 
 
 
 
 
 
“Available-for-sale” marketable equity securities
 
$
74,265

 
$
74,265

 
$
—

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
909

 
$
—

 
$
909

 
$
—


The carrying values of cash and cash equivalents, restricted cash, tenant receivables, other assets, accounts payable, accrued expenses, and tenant security deposits approximate fair value. Our “available-for-sale” marketable equity securities and our interest rate swap agreements have been recognized at fair value. Refer to Note 4 – “Investments” and Note 7 – “Interest Rate Swap Agreements” in our unaudited consolidated financial statements under Item 1 of this report for further details. The fair values of our secured notes payable, unsecured senior notes payable, unsecured senior line of credit, and unsecured senior bank term loans were estimated using widely accepted valuation techniques, including discounted cash flow analyses of “significant other observable inputs” such as available market information on discount and borrowing rates with similar terms, maturities, and credit ratings. Because the valuations of our financial instruments are based on these types of estimates, the actual fair value of our financial instruments may differ materially if our estimates do not prove to be accurate. Additionally, the use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

As of September 30, 2015, and December 31, 2014, the book and estimated fair values of our “available-for-sale” marketable equity securities, interest rate swap agreements, secured notes payable, unsecured senior notes payable, unsecured senior line of credit, and unsecured senior bank term loans were as follows (in thousands):
 
September 30, 2015
 
December 31, 2014
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
“Available-for-sale” marketable equity securities
$
135,267

 
$
135,267

 
$
74,265

 
$
74,265

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate swap agreements
$
8,679

 
$
8,679

 
$
909

 
$
909

Secured notes payable
$
773,619

 
$
807,566

 
$
652,209

 
$
693,338

Unsecured senior notes payable
$
1,747,613

 
$
1,776,375

 
$
1,747,370

 
$
1,793,255

Unsecured senior line of credit
$
843,000

 
$
843,909

 
$
304,000

 
$
304,369

Unsecured senior bank term loans
$
950,000

 
$
951,540

 
$
975,000

 
$
976,010


Fair value measurements for other than on a non-recurring basis

Refer to Note 3 – “Investments in Real Estate” and Note 11 – “Noncontrolling Interests” to our unaudited consolidated financial statements under Item 1 of this report.

17



6.
Secured and unsecured senior debt

The following table summarizes our secured and unsecured senior debt as of September 30, 2015 (dollars in thousands):
 
Fixed-Rate/Hedged
Variable-Rate
 
Unhedged
Variable-Rate
 
Total
Consolidated
 
Percentage of Total Debt
 
Weighted-Average
Interest Rate at
End of Period (1)
 
Weighted-Average
Remaining Term
(in years)
Secured notes payable
$
478,016

 
$
295,603

 
$
773,619

 
17.9
%
 
4.23
%
 
2.6
Unsecured senior notes payable
1,747,613

 
—

 
1,747,613

 
40.5

 
3.98

 
7.6
$1.5 billion unsecured senior line of credit
100,000

 
743,000

 
843,000

 
19.6

 
1.19

 
3.3
2019 Unsecured Senior Bank Term Loan
600,000

 
—

 
600,000

 
13.9

 
1.72

 
3.3
2021 Unsecured Senior Bank Term Loan
350,000

 
—

 
350,000

 
8.1

 
1.52

 
5.3
Total/weighted-average
$
3,275,629

 
$
1,038,603

 
$
4,314,232

 
100.0
%
 
2.97
%
 
5.1
Percentage of total debt
76
%
 
24
%
 
100
%
 
 
 
 
 
 

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


18


6.
Secured and unsecured senior debt (continued)

The following table summarizes our outstanding indebtedness and respective principal maturities as of September 30, 2015 (dollars in thousands):
 
 
Stated 
Rate
 
Weighted- Average
Interest Rate(1)
 
Maturity Date(2)
  
Principal Payments Remaining for the Periods Ending December 31,
 
 
 
 
Debt
 
 
 
  
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
Secured notes payable
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 

Greater Boston, San Francisco, and San Diego
 
5.73
%
 
5.73
%
 
(3) 
 
$
466

 
$
75,501

 
$
—

 
$
—

 
$
—

 
$
—

 
$
75,967

Greater Boston, New York City, and San Diego,
 
5.82
 
 
5.82
 
 
4/1/16
  
249

 
29,389

 
—

 
—

 
—

 
—

 
29,638

San Diego
 
5.74
 
 
3.00
 
 
4/15/16
 
45

 
6,916

 
—

 
—

 
—

 
—

 
6,961

San Francisco
 
L+1.40
 
 
1.59
 
 
6/1/16
(4) 
—

 
20,714

 
—

 
—

 
—

 
—

 
20,714

San Francisco
 
L+1.50
 
 
1.69
 
 
7/1/16
(5) 
—

 
47,385

 
—

 
—

 
—

 
—

 
47,385

San Francisco
 
6.35
 
 
6.35
 
 
8/1/16
 
662

 
126,715

 
—

 
—

 
—

 
—

 
127,377

Maryland
 
2.18
 
 
2.18
 
 
1/20/17
 
—

 
—

 
76,000

 
—

 
—

 
—

 
76,000

Greater Boston
 
L+1.35
 
 
1.54
 
 
8/23/17
(6) 
—

 
—

 
151,504

 
—

 
—

 
—

 
151,504

San Diego, Seattle, and Maryland
 
7.75
 
 
7.75
 
 
4/1/20
 
404

 
1,696

 
1,832

 
1,979

 
2,138

 
104,352

 
112,401

San Diego
 
4.66
 
 
4.66
 
 
1/1/23
 
354

 
1,464

 
1,540

 
1,614

 
1,692

 
31,674

 
38,338

Greater Boston
 
3.93
 
 
3.10
 
 
3/10/23
 
—

 
—

 
—

 
1,091

 
1,505

 
79,404

 
82,000

San Francisco
 
6.50
 
 
6.50
 
 
7/1/36
  
1

 
19

 
20

 
22

 
23

 
728

 
813

Unamortized premiums
 
 
 
 
 
 
 
 
 
184

 
610

 
573

 
588

 
595

 
1,971

 
4,521

Secured notes payable weighted-average/subtotal
 
4.35
%
 
4.23
 
 
 
  
2,365

 
310,409

 
231,469

 
5,294

 
5,953

 
218,129

 
773,619

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019 Unsecured Senior Bank Term Loan
 
L+1.20
%
 
1.72
 
 
1/3/19
 
—

 
—

 
—

 
—

 
600,000

 
—

 
600,000

2021 Unsecured Senior Bank Term Loan
 
L+1.10
%
 
1.52
 
 
1/15/21
 
—

 
—

 
—

 
—

 
—

 
350,000

 
350,000

$1.5 billion unsecured senior line of credit
 
L+1.10
%
(7) 
1.19
 
 
1/3/19
  
—

 
—

 
—

 
—

 
843,000

 
—

 
843,000

Unsecured senior notes payable
 
2.75
%
 
2.79
 
 
1/15/20
  
—

 
—

 
—

 
—

 
—

 
400,000

 
400,000

Unsecured senior notes payable
 
4.60
%
 
4.61
 
 
4/1/22
  
—

 
—

 
—

 
—

 
—

 
550,000

 
550,000

Unsecured senior notes payable
 
3.90
%
 
3.94
 
 
6/15/23
 
—

 
—

 
—

 
—

 
—

 
500,000

 
500,000

Unsecured senior notes payable
 
4.50
%
 
4.51
 
 
7/30/29
 
—

 
—

 
—

 
—

 
—

 
300,000

 
300,000

Unamortized discounts
 
 
 
 
 
 
 
 
 
(83
)
 
(337
)
 
(350
)
 
(362
)
 
(375
)
 
(880
)
 
(2,387
)
Unsecured debt weighted-average/subtotal
 
 
 
 
2.69
 
 
 
  
(83
)
 
(337
)
 
(350
)
 
(362
)
 
1,442,625

 
2,099,120

 
3,540,613

Weighted-average/total
 
 
 
 
2.97
%
 
 
  
$
2,282

 
$
310,072

 
$
231,119

 
$
4,932

 
$
1,448,578

 
$
2,317,249

 
$
4,314,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balloon payments
 
 
 
 
 
 
 
 
  
$
—

 
$
304,999

 
$
227,504

 
$
—

 
$
1,443,000

 
$
2,304,466

 
$
4,279,969

Principal amortization
 
 
 
 
 
 
 
 
  
2,282

 
5,073

 
3,615

 
4,932

 
5,578

 
12,783

 
34,263

Total consolidated debt
 
 
 
 
 
 
 
 
  
$
2,282

 
$
310,072

 
$
231,119

 
$
4,932

 
$
1,448,578

 
$
2,317,249

 
$
4,314,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate/hedged variable-rate debt
 
 
 
 
 
 
 
 
  
$
2,282

 
$
241,973

 
$
3,615

 
$
4,932

 
$
705,578

 
$
2,317,249

 
$
3,275,629

Unhedged variable-rate debt
 
 
 
 
 
 
 
 
  
—

 
68,099

 
227,504

 
—

 
743,000

 
—

 
1,038,603

Total consolidated debt
 
 
 
 
 
 
 
 
  
$
2,282

 
$
310,072

 
$
231,119

 
$
4,932

 
$
1,448,578

 
$
2,317,249

 
$
4,314,232


(1)
Represents the weighted-average interest rate as of the end of the period plus the impact of debt premiums/discounts and our interest rate swap agreements. The weighted-average interest rate excludes bank fees and amortization of loan fees.
(2)
Includes any extension options that we control.
(3)
In October 2015, we repaid this secured note payable.
(4)
We have two, one-year options to extend the stated maturity date to June 1, 2018, subject to certain conditions.
(5)
We have a one-year option to extend the stated maturity date to July 1, 2017, subject to certain conditions.
(6)
We have a one-year option to extend the stated maturity date to August 23, 2018, subject to certain conditions.
(7)
Our unsecured senior line of credit contains a feature that allows lenders to competitively bid on the interest rate for borrowings under the facility. This may result in an interest rate that is below the stated rate of LIBOR+1.10%. In addition to the cost of borrowing, the facility is subject to an annual facility fee of 0.20%, based on the aggregate commitments outstanding.



19


6.
Secured and unsecured senior debt (continued)

Interest expense

The following table summarizes interest expense for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Gross interest
$
36,115

 
$
32,680

 
$
105,427

 
$
92,551

Capitalized interest
(8,436
)
 
(12,125
)
 
(27,844
)
 
(35,440
)
Interest expense
$
27,679

 
$
20,555

 
$
77,583

 
$
57,111


Amendment of unsecured senior bank term loan

In June 2015, we completed a partial principal repayment of $25.0 million and extended the maturity of the remaining $350.0 million unsecured senior bank term loan (“2021 Unsecured Senior Bank Term Loan”) from July 31, 2015, to June 30, 2019, subject to our option to extend the maturity up to three times upon the satisfaction of certain conditions, for an additional term of six months for the first and second extensions and for an additional term ending on January 15, 2021, for the third extension. In addition, we reduced the applicable interest rate margin with respect to borrowings outstanding under the loan to LIBOR+1.10% from LIBOR+1.20%. In conjunction with the amendment of our 2021 Unsecured Senior Bank Term Loan and the principal repayment, we recognized a loss on early extinguishment of debt aggregating $189 thousand related to the write-off of a portion of unamortized loan fees.

Secured construction loans

In June 2015, we exercised the first of two, one-year extensions on a $47.4 million secured construction loan, which extended the maturity date from July 1, 2015, to July 1, 2016.

The following table summarizes our secured construction loans as of September 30, 2015 (dollars in thousands):
Market
 
Stated Rate
 
Maturity Date
 
Outstanding Balance
 
Remaining Commitments
 
Total Commitments
San Francisco
 
 
L+1.40
%
 
6/1/16
(1) 
 
$
20,714

 
$
15,286

 
$
36,000

San Francisco
 
 
L+1.50
%
 
7/1/16
(2) 
 
47,385

 
7,615

 
55,000

Greater Boston
 
 
L+1.35
%
 
8/23/17
(3) 
 
151,504

 
98,896

 
250,400

 
 
 
 
 
 
 
 
 
 
$
219,603

 
$
121,797

 
$
341,400


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

During October 2015, we executed the following secured construction loan (dollars in thousands):
Market
 
Stated Rate
 
Maturity Date
 
Outstanding Balance
 
Remaining Commitments
 
Total Commitments
Greater Boston (1)
 
 
L+1.50%
 
1/28/19
 
 
$
—

 
$
350,000

 
$
350,000


(1)
In October 2015, closed a secured construction loan with aggregate commitments available for borrowing of $350.0 million, for our 98% leased development project at 50/60 Binney Street in our Cambridge submarket, which bears interest at a rate of LIBOR+150 bps.


20

7.
Interest rate swap agreements

We use interest rate swap agreements to hedge the variable cash flows associated with certain of our existing LIBOR-based variable-rate debt, including our unsecured senior line of credit, unsecured senior bank term loans, and secured notes payable. 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, 2015 and 2014, our interest rate swap agreements were 100% effective; as a result, no hedge ineffectiveness was recognized in earnings. Changes in fair value, including accrued interest and adjustments for non-performance risk, on the effective portion of our interest rate swap agreements that are designated and that qualify as cash flow hedges are classified in accumulated other comprehensive income (loss). Amounts classified in accumulated other comprehensive income (loss) are subsequently reclassified into earnings in the period during which the hedged transactions affect earnings. During the next 12 months, we expect to reclassify approximately $4.4 million in accumulated other comprehensive income (loss) to earnings as an increase to interest expense. As of September 30, 2015, and December 31, 2014, the fair values of our interest rate swap agreements aggregating an asset balance were classified in other assets, and those aggregating a liability balance were classified in accounts payable, accrued expenses, and tenant security deposits, based upon their respective fair values, without any offsetting pursuant to master netting agreements. Refer to Note 5 – “Fair Value Measurements” to our unaudited consolidated financial statements under Item 1 of this report. Under our interest rate swap agreements, we have no collateral posting requirements.

The Company has agreements with certain of its derivative counterparties that contain a provision wherein (i) the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness; or (ii) if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. If the Company had breached any of these provisions as of September 30, 2015, it could have been required to settle its obligations under the agreements at their termination value of $8.7 million.

We had the following outstanding interest rate swap agreements that were designated as cash flow hedges of interest rate risk as of September 30, 2015 (dollars in thousands):
 
 
 
 
Number of Contracts
 
Weighted-Average Interest Pay Rate (1)
 
Fair Value as of 9/30/15
 
Notional Amount in Effect as of
Effective Date
 
Maturity Date
 
 
 
 
9/30/15
 
12/31/15
 
12/31/16
 
12/31/17
December 31, 2014
 
March 31, 2016
 
3
 
0.53%
 
$
(627
)
 
$
500,000

 
$
500,000

 
$
—

 
$
—

March 31, 2015
 
March 31, 2016
 
7
 
0.42%
 
(331
)
 
450,000

 
450,000

 
—

 
—

September 1, 2015
 
March 31, 2017
 
2
 
0.57%
 
(85
)
 
100,000

 
100,000

 
100,000

 
—

March 31, 2016
 
March 31, 2017
 
11
 
1.15%
 
(5,149
)
 
—

 
—

 
1,000,000

 
—

March 31, 2017
 
March 31, 2018
 
11
 
1.51%
 
(2,487
)
 
—

 
—

 
—

 
650,000

Total
 
 
 
 
 
 
 
$
(8,679
)
 
$
1,050,000

 
$
1,050,000

 
$
1,100,000

 
$
650,000


(1)
In addition to the interest pay rate for each swap agreement, interest is payable at an applicable margin for borrowings outstanding as of September 30, 2015. Borrowings under our 2019 unsecured senior bank term loan (“2019 Unsecured Senior Bank Term Loan”) include an applicable margin of 1.20%, and borrowings outstanding under our unsecured senior line of credit and 2021 Unsecured Senior Bank Term Loan include an applicable margin of 1.10%.


21

8.
Accounts payable, accrued expenses, and tenant security deposits

The following table summarizes the components of accounts payable, accrued expenses, and tenant security deposits as of September 30, 2015, and December 31, 2014 (in thousands):
 
September 30, 2015
 
December 31, 2014
Accounts payable and accrued expenses
$
143,556

 
$
127,828

Accrued construction
83,805

 
91,110

Acquired below-market leases
27,072

 
8,810

Conditional asset retirement obligations
7,828

 
9,108

Deferred rent liabilities
27,300

 
36,231

Interest rate swap liabilities
8,679

 
909

Unearned rent and tenant security deposits
209,584

 
193,699

Other liabilities (1)
78,770

 
21,390

Total
$
586,594

 
$
489,085


(1)
Balance as of September 30, 2015. includes a $54.0 million liability related to the second installment payment for our acquisition of the remaining noncontrolling interest in our 1.2 million RSF campus at Alexandria Technology Square®. For additional information, refer to Note 11 – “Noncontrolling Interests” to our unaudited consolidated financial statements under Item 1 of this report.

22



9.
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 EPS. Pursuant to the presentation and disclosure literature on gains or losses on sales or disposals by REITs and EPS required by the SEC and the FASB, gains or losses on sales or disposals by a REIT that do not qualify as discontinued operations are classified below income from discontinued operations in the consolidated statements of income and included in the numerator for the computation of EPS for income from continuing operations.

We account for unvested restricted stock awards that contain nonforfeitable rights to dividends as participating securities and include these securities in the computation of EPS using the two-class method. Our 7% series D cumulative convertible preferred stock (“Series D Convertible Preferred Stock”) is not a participating security, and is not included in the computation of EPS 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 EPS is computed using the weighted-average shares of common stock outstanding determined for the basic EPS computation plus the effect of any dilutive securities. We had no dilutive securities outstanding during the three and nine months ended September 30, 2015 and 2014.

The table below is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the three and nine months ended September 30, 2015 and 2014 (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Income from continuing operations
$
39,699

 
$
36,115

 
$
103,180

 
$
112,492

Gain on sales of real estate – land parcels
—

 
8

 
—

 
805

Dividends on preferred stock
(6,247
)
 
(6,471
)
 
(18,740
)
 
(19,414
)
Net income attributable to noncontrolling interests
(170
)
 
(1,340
)
 
(925
)
 
(3,842
)
Net income attributable to unvested restricted stock awards
(623
)
 
(506
)
 
(1,736
)
 
(1,285
)
Income from continuing operations attributable to Alexandria’s common stockholders – basic and diluted
32,659

 
27,806

 
81,779

 
88,756

Loss from discontinued operations
—

 
(180
)
 
(43
)
 
(489
)
Net income attributable to Alexandria’s common stockholders – basic and diluted
$
32,659

 
$
27,626

 
$
81,736

 
$
88,267

 
 
 
 
 
 
 
 
Weighted-average shares of common stock
outstanding – basic and diluted
71,500

 
71,195

 
71,426

 
71,121

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

 
$
0.39

 
$
1.14

 
$
1.25

Discontinued operations
—

 
—

 
—

 
(0.01
)
EPS – basic and diluted
$
0.46

 
$
0.39

 
$
1.14

 
$
1.24



23

10.
Stockholders’ equity

“At the market” common stock offering program

During the nine months ended September 30, 2015, we sold an aggregate of 56,874 shares of common stock for gross proceeds of $5.3 million at an average stock price of $94.02 and net proceeds of approximately $5.1 million, including commissions and other expenses of approximately $295 thousand.

Dividends

In September 2015, we declared cash dividends on our common stock for the third quarter of 2015, aggregating $55.8 million, or $0.77 per share. Also in September 2015, we declared cash dividends on our Series D Convertible Preferred Stock for the third quarter of 2015, aggregating approximately $4.2 million, or $0.4375 per share. Additionally, we declared cash dividends on our Series E cumulative redeemable preferred stock (“Series E Preferred Stock”) for the third quarter of 2015, aggregating approximately $2.1 million, or $0.403125 per share. In October 2015, we paid the cash dividends on our common stock, Series D Preferred Stock, and Series E Preferred Stock for the third quarter of 2015.

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income (loss) attributable to Alexandria consists of the following (in thousands):
 
 
Unrealized Gains on Marketable Securities
 
Unrealized Losses on Interest Rate Swap Agreements
 
Unrealized Losses on Foreign Currency Translation
 
Total
Balance as of December 31, 2014
 
$
52,367

 
$
(909
)
 
$
(52,086
)
 
$
(628
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 
54,004

 
(9,712
)
 
(17,072
)
 
27,220

Amounts reclassified from other comprehensive (loss) income
 
(2,503
)
 
1,942

 
9,236

 
8,675

 
 
51,501

 
(7,770
)
 
(7,836
)
 
35,895

Amounts attributable to noncontrolling interest
 
—

 
—

 
(29
)
 
(29
)
Net other comprehensive income (loss)
 
51,501

 
(7,770
)
 
(7,865
)
 
35,866

 
 
 
 
 
 
 
 
 
Balance as of September 30, 2015
 
$
103,868

 
$
(8,679
)
 
$
(59,951
)
 
$
35,238


Preferred stock and excess stock authorizations

Our charter authorizes the issuance of up to 100.0 million shares of preferred stock, of which 14.7 million shares were issued and outstanding as of September 30, 2015. In addition, 200.0 million shares of “excess stock” (as defined in our charter) are authorized, none of which were issued and outstanding as of September 30, 2015.


24



11.
Noncontrolling interests

Noncontrolling interests represent the third-party interests in certain entities in which we have a controlling interest. These entities owned four projects as of September 30, 2015, 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.

The following table represents income from continuing operations and discontinued operations attributable to Alexandria Real Estate Equities, Inc., for the three and nine months ended September 30, 2015 and 2014, excluding the amounts attributable to these noncontrolling interests (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Income from continuing operations attributable to Alexandria
 
$
39,529

 
$
34,775

 
$
102,255

 
$
108,650

Loss from discontinued operations
 
$
—

 
$
(180
)
 
$
(43
)
 
$
(489
)

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. If the amount of a redeemable noncontrolling interest is less than the maximum redemption value at the balance sheet date, such amount is adjusted to the maximum redemption value. Subsequent declines in the redemption value are recognized only to the extent that previous increases have been recognized.

During the three months ended March 31, 2015, we executed an agreement to purchase the outstanding 10% noncontrolling interest in our 1.2 million RSF campus at Alexandria Technology Square® for $108.3 million. The first installment of $54.3 million was paid on April 1, 2015, and the second installment of $54.0 million is due on April 1, 2016. Upon execution of the purchase agreement, we recognized a liability representing the fair value of the aggregate consideration, primarily consisting of the purchase price in accounts payable, accrued expenses, and tenant security deposits on our accompanying consolidated balance sheet. We measured the fair value of the liability using significant observable inputs, including a discount rate that approximates our cost of debt capital in effect during the period the liability is outstanding. The difference between the noncontrolling interest purchase liability and the noncontrolling interest balance of $48.5 million was recognized as a reduction of additional paid-in capital.


25

12.
Assets classified as “held for sale”

On October 1, 2014, we adopted an Accounting Standards Update on the reporting of discontinued operations that raised the threshold for classification of assets “held for sale” as discontinued operations. As of September 30, 2015, there are no properties which meet the criteria for classification as a discontinued operation in our consolidated financial statements.

The following is a summary of net assets “held for sale” as of September 30, 2015, and December 31, 2014, (in thousands):
 
September 30, 2015
 
December 31, 2014
Investments in real estate
$
138,200

 
$
173,706

Other assets
6,659

 
10,147

Total assets
144,859

 
183,853

 
 

 
 
Total liabilities
—

 
(6,044
)
Net assets classified as “held for sale” (1)
$
144,859

 
$
177,809


(1)
As of September 30, 2015, net assets classified as “held for sale” were composed of three properties.

The following is a summary of the income (loss) included in our income from continuing operations for the three and nine months ended September 30, 2015 and 2014, from assets classified as “held for sale” (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Total revenues
 
$
3,454

 
$
3,108

 
$
9,694

 
$
9,418

Operating expenses
 
(1,163
)
 
(1,134
)
 
(3,293
)
 
(2,971
)
Total revenues less operating expenses from assets “held for sale”
 
2,291

 
1,974

 
6,401


6,447

Depreciation expense
 
—

 
(2,025
)
 
(503
)
 
(6,103
)
Impairment of real estate
 
—

 
(295
)
 
(14,510
)
 
(295
)
Income (loss) from assets “held for sale” (1)
 
$
2,291

 
$
(346
)
 
$
(8,612
)
 
$
49


(1)
Includes the results of operations of three properties with an aggregate 317,060 RSF that were classified as “held for sale” as of September 30, 2015, and three properties with an aggregate 196,859 RSF that were sold during the nine months ended September 30, 2015, but do not qualify for classification as discontinued operations. For additional information, refer to Note 2 – “Basis of Presentation and Summary of Significant Accounting Policies” to our unaudited consolidated financial statements under Item 1 of this report.


26



13.
Subsequent events

Repayment of Secured Note Payable

In October 2015, we repaid a $76 million secured note payable with an effective interest rate of 5.73%.

Issuance of Secured Construction Loan

In October 2015, we closed a secured construction loan with aggregate commitments available for borrowing aggregating $350.0 million, for our development project at 50/60 Binney Street in our Cambridge submarket. This loan bears interest at a rate of LIBOR+150 bps.

Sale of partial interest in 1500 Owens

In October 2015, we executed an agreement to sell a 49.9% interest in our 158,267 RSF, property at 1500 Owens Street in our Mission Bay submarket in San Francisco to a high-quality institutional investor for $73.4 million, with closing in the fourth quarter of 2015.

Sale of 75/125 Shoreway Road

In October 2015, we executed an agreement for the sale of 75/125 Shoreway Road in our Palo Alto/Stanford Research Park submarket in San Francisco, to a high-quality institutional investor for a sales price of $38.5 million; with closing in the fourth quarter of 2015.


27

14.
Condensed consolidating financial information

Alexandria Real Estate Equities, Inc. (the “Issuer”) has sold certain debt securities registered under the Securities Act of 1933, as amended, that are fully and unconditionally guaranteed by Alexandria Real Estate Equities, L.P. (the “LP” or the “Guarantor Subsidiary”), an indirectly 100% owned subsidiary of the Issuer. The Company’s other subsidiaries, including, but not limited to, the subsidiaries that own substantially all of its real estate (collectively, the “Combined Non-Guarantor Subsidiaries”), will not provide a guarantee of such securities, including the subsidiaries that are partially or 100% owned by the LP. The following condensed consolidating financial information presents the condensed consolidating balance sheets as of September 30, 2015, and December 31, 2014, the condensed consolidating statements of income and comprehensive income for the three and nine months ended September 30, 2015 and 2014, and the condensed consolidating statements of cash flows for the nine months ended September 30, 2015 and 2014, for the Issuer, the Guarantor Subsidiary, and the Combined Non-Guarantor Subsidiaries, as well as the eliminations necessary to arrive at the information for Alexandria Real Estate Equities, Inc., on a consolidated basis, and consolidated amounts. In presenting the condensed consolidating financial statements, the equity method of accounting has been applied to (i) the Issuer’s interests in the Guarantor Subsidiary and the Combined Non-Guarantor Subsidiaries, (ii) the Guarantor Subsidiary’s interests in the Combined Non-Guarantor Subsidiaries, and (iii) the Combined Non-Guarantor Subsidiaries’ interests in the Guarantor Subsidiary, where applicable, even though all such subsidiaries meet the requirements to be consolidated under GAAP. All intercompany balances and transactions between the Issuer, the Guarantor Subsidiary, and the Combined Non-Guarantor Subsidiaries have been eliminated, as shown in the column “Eliminations.” All assets and liabilities have been allocated to the Issuer, the Guarantor Subsidiary, and the Combined Non-Guarantor Subsidiaries generally based on legal entity ownership.



28


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Balance Sheet
as of September 30, 2015
(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
$
—

 
$
—

 
$
7,654,209

 
$
—

 
$
7,654,209

Cash and cash equivalents
42,738

 
8

 
33,637

 
—

 
76,383

Restricted cash
95

 
—

 
36,898

 
—

 
36,993

Tenant receivables
—

 
—

 
10,124

 
—

 
10,124

Deferred rent
—

 
—

 
267,954

 
—

 
267,954

Deferred leasing and financing costs
31,708

 
—

 
190,635

 
—

 
222,343

Investments
—

 
4,711

 
325,859

 
—

 
330,570

Investments in and advances to affiliates
7,370,645

 
6,685,933

 
136,885

 
(14,193,463
)
 
—

Other assets
24,470

 
—

 
114,298

 
—

 
138,768

Total assets
$
7,469,656

 
$
6,690,652

 
$
8,770,499

 
$
(14,193,463
)
 
$
8,737,344

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

 
$
—

 
$
773,619

 
$
—

 
$
773,619

Unsecured senior notes payable
1,747,613

 
—

 
—

 
—

 
1,747,613

Unsecured senior line of credit
843,000

 
—

 
—

 
—

 
843,000

Unsecured senior bank term loans
950,000

 
—

 
—

 
—

 
950,000

Accounts payable, accrued expenses, and tenant security deposits
108,828

 
—

 
477,766

 
—

 
586,594

Dividends payable
61,053

 
—

 
287

 
—

 
61,340

Total liabilities
3,710,494

 
—

 
1,251,672

 
—

 
4,962,166

Redeemable noncontrolling interests
—

 
—

 
14,218

 
—

 
14,218

Alexandria’s stockholders’ equity
3,759,162

 
6,690,652

 
7,502,811

 
(14,193,463
)
 
3,759,162

Noncontrolling interests
—

 
—

 
1,798

 
—

 
1,798

Total equity
3,759,162

 
6,690,652

 
7,504,609

 
(14,193,463
)
 
3,760,960

Total liabilities, noncontrolling interests, and equity
$
7,469,656

 
$
6,690,652

 
$
8,770,499

 
$
(14,193,463
)
 
$
8,737,344



29


14.
Condensed consolidating financial information (continued)

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

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

 
$
—

 
$
7,226,016

 
$
—

 
$
7,226,016

Cash and cash equivalents
52,491

 
63

 
33,457

 
—

 
86,011

Restricted cash
67

 
—

 
26,817

 
—

 
26,884

Tenant receivables
—

 
—

 
10,548

 
—

 
10,548

Deferred rent
—

 
—

 
234,124

 
—

 
234,124

Deferred leasing and financing costs
35,462

 
—

 
166,336

 
—

 
201,798

Investments
—

 
5,235

 
231,154

 
—

 
236,389

Investments in and advances to affiliates
6,874,866

 
6,295,852

 
128,943

 
(13,299,661
)
 
—

Other assets
19,461

 
—

 
94,805

 
—

 
114,266

Total assets
$
6,982,347

 
$
6,301,150

 
$
8,152,200

 
$
(13,299,661
)
 
$
8,136,036

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

 
$
—

 
$
652,209

 
$
—

 
$
652,209

Unsecured senior notes payable
1,747,370

 
—

 
—

 
—

 
1,747,370

Unsecured senior line of credit
304,000

 
—

 
—

 
—

 
304,000

Unsecured senior bank term loans
975,000

 
—

 
—

 
—

 
975,000

Accounts payable, accrued expenses, and tenant security deposits
69,013

 
—

 
420,072

 
—

 
489,085

Dividends payable
58,525

 
—

 
289

 
—

 
58,814

Total liabilities
3,153,908

 
—

 
1,072,570

 
—

 
4,226,478

Redeemable noncontrolling interests
—

 
—

 
14,315

 
—

 
14,315

Alexandria’s stockholders’ equity
3,828,439

 
6,301,150

 
6,998,511

 
(13,299,661
)
 
3,828,439

Noncontrolling interests
—

 
—

 
66,804

 
—

 
66,804

Total equity
3,828,439

 
6,301,150

 
7,065,315

 
(13,299,661
)
 
3,895,243

Total liabilities, noncontrolling interests, and equity
$
6,982,347

 
$
6,301,150

 
$
8,152,200

 
$
(13,299,661
)
 
$
8,136,036





30


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Income
for the Three Months Ended September 30, 2015
(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
$
—

 
$
—

 
$
155,311

 
$
—

 
$
155,311

Tenant recoveries
—

 
—

 
56,119

 
—

 
56,119

Other income
3,355

 
(87
)
 
8,025

 
(4,113
)
 
7,180

Total revenues
3,355

 
(87
)
 
219,455

 
(4,113
)
 
218,610

 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Rental operations
—

 
—

 
68,846

 
—

 
68,846

General and administrative
13,511

 
—

 
5,745

 
(4,113
)
 
15,143

Interest
20,470

 
—

 
7,209

 
—

 
27,679

Depreciation and amortization
1,799

 
—

 
66,154

 
—

 
67,953

Total expenses
35,780

 
—

 
147,954

 
(4,113
)
 
179,621

 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated joint ventures
—

 
—

 
710

 
—

 
710

Equity in earnings of affiliates
71,954

 
63,964

 
1,259

 
(137,177
)
 
—

Net income
39,529

 
63,877

 
73,470

 
(137,177
)
 
39,699

 
 
 
 
 
 
 
 
 
 
Dividends on preferred stock
(6,247
)
 
—

 
—

 
—

 
(6,247
)
Net income attributable to noncontrolling interests
—

 
—

 
(170
)
 
—

 
(170
)
Net income attributable to unvested restricted stock awards
(623
)
 
—

 
—

 
—

 
(623
)
Net income attributable to Alexandria’s common stockholders
$
32,659

 
$
63,877

 
$
73,300

 
$
(137,177
)
 
$
32,659




31


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Income
for the Three Months Ended September 30, 2014
(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
$
—

 
$
—

 
$
137,718

 
$
—

 
$
137,718

Tenant recoveries
—

 
—

 
45,572

 
—

 
45,572

Other income
2,797

 
(1,264
)
 
4,369

 
(3,577
)
 
2,325

Total revenues
2,797

 
(1,264
)
 
187,659

 
(3,577
)
 
185,615

 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Rental operations
—

 
—

 
57,423

 
—

 
57,423

General and administrative
11,369

 
—

 
4,817

 
(3,577
)
 
12,609

Interest
15,307

 
—

 
5,248

 
—

 
20,555

Depreciation and amortization
1,408

 
—

 
56,980

 
—

 
58,388

Loss on early extinguishment of debt
525

 
—

 
—

 
—

 
525

Total expenses
28,609

 
—

 
124,468

 
(3,577
)
 
149,500

 
 
 
 
 
 
 
 
 
 
Equity in earnings of affiliates
60,415

 
58,381

 
1,127

 
(119,923
)
 
—

Income from continuing operations
34,603

 
57,117

 
64,318

 
(119,923
)
 
36,115

Loss from discontinued operations
—

 
—

 
(180
)
 
—

 
(180
)
Gain on sales of real estate – land parcels
—

 
—

 
8

 
—

 
8

Net income
34,603

 
57,117

 
64,146

 
(119,923
)
 
35,943

 
 
 
 
 
 
 
 
 
 
Dividends on preferred stock
(6,471
)
 
—

 
—

 
—

 
(6,471
)
Net income attributable to noncontrolling interests
—

 
—

 
(1,340
)
 
—

 
(1,340
)
Net income attributable to unvested restricted stock awards
(506
)
 
—

 
—

 
—

 
(506
)
Net income attributable to Alexandria’s common stockholders
$
27,626

 
$
57,117

 
$
62,806

 
$
(119,923
)
 
$
27,626




32


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Income
for the Nine Months Ended September 30, 2015
(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
$
—

 
$
—

 
$
450,724

 
$
—

 
$
450,724

Tenant recoveries
—

 
—

 
154,107

 
—

 
154,107

Other income
9,890

 
(128
)
 
17,014

 
(12,088
)
 
14,688

Total revenues
9,890

 
(128
)
 
621,845

 
(12,088
)
 
619,519

 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Rental operations
—

 
—

 
192,319

 
—

 
192,319

General and administrative
38,960

 
—

 
17,647

 
(12,088
)
 
44,519

Interest
57,494

 
—

 
20,089

 
—

 
77,583

Depreciation and amortization
4,515

 
—

 
184,529

 
—

 
189,044

Impairment of real estate
—

 
—

 
14,510

 
—

 
14,510

Loss on early extinguishment of debt
189

 
—

 
—

 
—

 
189

Total expenses
101,158

 
—

 
429,094

 
(12,088
)
 
518,164

 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated joint ventures
—

 
—

 
1,825

 
—

 
1,825

Equity in earnings of affiliates
193,480

 
174,800

 
3,446

 
(371,726
)
 
—

Income from continuing operations
102,212

 
174,672

 
198,022

 
(371,726
)
 
103,180

Loss from discontinued operations
—

 
—

 
(43
)
 
—

 
(43
)
Net income
102,212

 
174,672

 
197,979

 
(371,726
)
 
103,137

 
 
 
 
 
 
 
 
 
 
Dividends on preferred stock
(18,740
)
 
—

 
—

 
—

 
(18,740
)
Net income attributable to noncontrolling interests
—

 
—

 
(925
)
 
—

 
(925
)
Net income attributable to unvested restricted stock awards
(1,736
)
 
—

 
—

 
—

 
(1,736
)
Net income attributable to Alexandria’s common stockholders
$
81,736

 
$
174,672

 
$
197,054

 
$
(371,726
)
 
$
81,736




33


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Income
for the Nine Months Ended September 30, 2014
(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
$
—

 
$
—

 
$
403,280

 
$
—

 
$
403,280

Tenant recoveries
—

 
—

 
128,198

 
—

 
128,198

Other income
8,632

 
(2,799
)
 
11,534

 
(10,642
)
 
6,725

Total revenues
8,632

 
(2,799
)
 
543,012

 
(10,642
)
 
538,203

 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
Rental operations
—

 
—

 
162,283

 
—

 
162,283

General and administrative
33,735

 
—

 
16,576

 
(10,642
)
 
39,669

Interest
41,339

 
—

 
15,772

 
—

 
57,111

Depreciation and amortization
4,335

 
—

 
161,788

 
—

 
166,123

Loss on early extinguishment of debt
525

 
—

 
—

 
—

 
525

Total expenses
79,934

 
—

 
356,419

 
(10,642
)
 
425,711

 
 
 
 
 
 
 
 
 
 
Equity in earnings of affiliates
180,275

 
172,989

 
3,356

 
(356,620
)
 
—

Income from continuing operations
108,973

 
170,190

 
189,949

 
(356,620
)
 
112,492

Loss from discontinued operations
(7
)
 
—

 
(482
)
 
—

 
(489
)
Gain on sales of real estate – land parcels
—

 
—

 
805

 
—

 
805

Net income
108,966

 
170,190

 
190,272

 
(356,620
)
 
112,808

 
 
 
 
 
 
 
 
 
 
Dividends on preferred stock
(19,414
)
 
—

 
—

 
—

 
(19,414
)
Net income attributable to noncontrolling interests
—

 
—

 
(3,842
)
 
—

 
(3,842
)
Net income attributable to unvested restricted stock awards
(1,285
)
 
—

 
—

 
—

 
(1,285
)
Net income attributable to Alexandria’s common stockholders
$
88,267

 
$
170,190

 
$
186,430

 
$
(356,620
)
 
$
88,267










34


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Comprehensive Income
for the Three Months Ended September 30, 2015
(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
$
39,529

 
$
63,877

 
$
73,470

 
$
(137,177
)
 
$
39,699

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Unrealized losses on marketable equity securities:
 
 
 
 
 
 
 
 
 
Unrealized holding losses arising during the period
—

 
(41
)
 
(29,791
)
 
—

 
(29,832
)
Reclassification adjustment for gains included in net income
—

 
(117
)
 
(4,851
)
 
—

 
(4,968
)
Unrealized losses on marketable equity securities, net
—

 
(158
)
 
(34,642
)
 
—

 
(34,800
)
 
 
 
 
 
 
 
 
 
 
Unrealized losses on interest rate swap agreements:
 
 
 
 
 
 
 
 
 
Unrealized interest rate swap losses arising during the period
(5,474
)
 
—

 
—

 
—

 
(5,474
)
Reclassification adjustment for amortization of interest income included in net income
727

 
—

 
—

 
—

 
727

Unrealized losses on interest rate swap agreements, net
(4,747
)
 
—

 
—

 
—

 
(4,747
)
 
 
 
 
 
 
 
 
 
 
Unrealized losses on foreign currency translation:
 
 
 
 
 
 
 
 
 
Unrealized foreign currency translation losses during the period
—

 
—

 
(9,294
)
 
—

 
(9,294
)
Unrealized losses on foreign currency translation, net
—

 
—

 
(9,294
)
 
—

 
(9,294
)
 
 
 
 
 
 
 
 
 
 
Total other comprehensive loss
(4,747
)
 
(158
)
 
(43,936
)
 
—

 
(48,841
)
Comprehensive income
34,782

 
63,719

 
29,534

 
(137,177
)
 
(9,142
)
Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(71
)
 
—

 
(71
)
Comprehensive income attributable to Alexandria’s common stockholders
$
34,782

 
$
63,719

 
$
29,463

 
$
(137,177
)
 
$
(9,213
)



35


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Comprehensive Income
for the Three Months Ended September 30, 2014
(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
$
34,603

 
$
57,117

 
$
64,146

 
$
(119,923
)
 
$
35,943

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

 
(310
)
 
(2,144
)
 
—

 
(2,454
)
Reclassification adjustment for losses included in net income
—

 
—

 
111

 
—

 
111

Unrealized losses on marketable equity securities, net
—

 
(310
)
 
(2,033
)
 
—

 
(2,343
)
 
 
 
 
 
 
 
 
 
 
Unrealized gains on interest rate swap agreements:
 
 
 
 
 
 
 
 
 
Unrealized interest rate swap gains arising during the period
1,206

 
—

 
—

 
—

 
1,206

Reclassification adjustment for amortization of interest expense included in net income
1,129

 
—

 
—

 
—

 
1,129

Unrealized gains on interest rate swap agreements, net
2,335

 
—

 
—

 
—

 
2,335

 
 
 
 
 
 
 
 
 
 
Unrealized losses on foreign currency translation:
 
 
 
 
 
 
 
 
 
Unrealized foreign currency translation losses during the period
—

 
—

 
(12,259
)
 
—

 
(12,259
)
Reclassification adjustment for gains included in net income
—

 
—

 
(199
)
 
—

 
(199
)
Unrealized foreign currency translation losses, net
—

 
—

 
(12,458
)
 
—

 
(12,458
)
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
2,335

 
(310
)
 
(14,491
)
 
—

 
(12,466
)
Comprehensive income
36,938

 
56,807

 
49,655

 
(119,923
)
 
23,477

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(1,340
)
 
—

 
(1,340
)
Comprehensive income attributable to Alexandria’s common stockholders
$
36,938

 
$
56,807

 
$
48,315

 
$
(119,923
)
 
$
22,137



36


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Comprehensive Income
for the Nine Months Ended September 30, 2015
(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
$
102,212

 
$
174,672

 
$
197,979

 
$
(371,726
)
 
$
103,137

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

 
(19
)
 
54,023

 
—

 
54,004

Reclassification adjustment for gains included in net income
—

 
(76
)
 
(2,427
)
 
—

 
(2,503
)
Unrealized (losses) gains on marketable equity securities, net
—

 
(95
)
 
51,596

 
—

 
51,501

 
 
 
 
 
 
 
 
 
 
Unrealized losses on interest rate swap agreements:
 
 
 
 
 
 
 
 
 
Unrealized interest rate swap losses arising during the year
(9,712
)
 
—

 
—

 
—

 
(9,712
)
Reclassification adjustment for amortization of interest expense included in net income
1,942

 
—

 
—

 
—

 
1,942

Unrealized losses on interest rate swap agreements, net
(7,770
)
 
—

 
—

 
—

 
(7,770
)
 
 
 
 
 
 
 
 
 
 
Unrealized losses on foreign currency translation:
 
 
 
 
 
 
 
 
 
Unrealized foreign currency translation losses arising during the year
—

 
—

 
(17,072
)
 
—

 
(17,072
)
Reclassification adjustment for losses included in net income
—

 
—

 
9,236

 
—

 
9,236

Unrealized losses on foreign currency translation, net
—

 
—

 
(7,836
)
 
—

 
(7,836
)
 
 
 
 
 
 
 
 
 
 
Total other comprehensive (loss) income
(7,770
)
 
(95
)
 
43,760

 
—

 
35,895

Comprehensive income
94,442

 
174,577

 
241,739

 
(371,726
)
 
139,032

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(954
)
 
—

 
(954
)
Comprehensive income attributable to Alexandria's common stockholders
$
94,442

 
$
174,577

 
$
240,785

 
$
(371,726
)
 
$
138,078




37


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Comprehensive Income
for the Nine Months Ended September 30, 2014
(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
$
108,966

 
$
170,190

 
$
190,272

 
$
(356,620
)
 
$
112,808

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Unrealized gains on marketable equity securities:
 
 
 
 
 
 
 
 
 
Unrealized holding gains arising during the year
—

 
—

 
13,591

 
—

 
13,591

Reclassification adjustment for losses included in net income
—

 
—

 
517

 
—

 
517

Unrealized gains on marketable equity securities, net
—

 
—

 
14,108

 
—

 
14,108

 
 
 
 
 
 
 
 
 
 
Unrealized gains on interest rate swap agreements:
 
 
 
 
 
 
 
 
 
Unrealized interest rate swap losses arising during the year
(2,708
)
 
—

 
—

 
—

 
(2,708
)
Reclassification adjustment for amortization of interest expense included in net income
5,742

 
—

 
—

 
—

 
5,742

Unrealized gains on interest rate swap agreements, net
3,034

 
—

 
—

 
—

 
3,034

 
 
 
 
 
 
 
 
 
 
Unrealized losses on foreign currency translation:
 
 
 
 
 
 
 
 
 
Unrealized foreign currency translation losses
—

 
—

 
(9,450
)
 
—

 
(9,450
)
Reclassification adjustment for gains included in net income
—

 
—

 
(199
)
 
—

 
(199
)
Unrealized losses on foreign currency translation, net
—

 
—

 
(9,649
)
 
—

 
(9,649
)
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income
3,034

 
—

 
4,459

 
—

 
7,493

Comprehensive income
112,000

 
170,190

 
194,731

 
(356,620
)
 
120,301

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(3,842
)
 
—

 
(3,842
)
Comprehensive income attributable to Alexandria’s common stockholders
$
112,000

 
$
170,190

 
$
190,889

 
$
(356,620
)
 
$
116,459





38


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Cash Flows
for the Nine Months Ended September 30, 2015
(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
$
102,212

 
$
174,672

 
$
197,979

 
$
(371,726
)
 
$
103,137

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
4,515

 
—

 
184,529

 
—

 
189,044

Loss on early extinguishment of debt
189

 
—

 
—

 
—

 
189

Impairment of real estate
—

 
—

 
14,510

 
—

 
14,510

Equity in earnings of unconsolidated joint ventures
—

 
—

 
(1,825
)
 
—

 
(1,825
)
Distributions of earnings from unconsolidated joint ventures
—

 
—

 
740

 
—

 
740

Amortization of loan fees
5,717

 
—

 
2,631

 
—

 
8,348

Amortization of debt discounts (premiums)
243

 
—

 
(525
)
 
—

 
(282
)
Amortization of acquired below-market leases
—

 
—

 
(5,121
)
 
—

 
(5,121
)
Deferred rent
—

 
—

 
(34,421
)
 
—

 
(34,421
)
Stock compensation expense
12,922

 
—

 
—

 
—

 
12,922

Equity in earnings of affiliates
(193,480
)
 
(174,800
)
 
(3,446
)
 
371,726

 
—

Investment gains
—

 
—

 
(22,368
)
 
—

 
(22,368
)
Investment losses
—

 
269

 
10,888

 
—

 
11,157

Changes in operating assets and liabilities:
 
 
 
 
 
 


 
 
Restricted cash
(28
)
 
—

 
52

 
—

 
24

Tenant receivables
—

 
—

 
380

 
—

 
380

Deferred leasing costs
—

 
—

 
(47,725
)
 
—

 
(47,725
)
Other assets
(9,228
)
 
—

 
(4,493
)
 
—

 
(13,721
)
Accounts payable, accrued expenses, and tenant security deposits
31,895

 
—

 
(472
)
 
—

 
31,423

Net cash (used in) provided by operating activities
(45,043
)
 
141

 
291,313

 
—

 
246,411

 
 
 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
 
 
Proceeds from sale of real estate
—

 
—

 
92,455

 
—

 
92,455

Additions to real estate
—

 
—

 
(362,215
)
 
—

 
(362,215
)
Purchase of real estate
—

 
—

 
(248,933
)
 
—

 
(248,933
)
Deposits for investing activities
—

 
—

 
(6,707
)
 
—

 
(6,707
)
Investment in unconsolidated real estate joint ventures
—

 
—

 
(7,979
)
 
—

 
(7,979
)
Investments in subsidiaries
(302,455
)
 
(215,128
)
 
(4,493
)
 
522,076

 
—

Additions to investments
—

 
—

 
(67,965
)
 
—

 
(67,965
)
Sales of investments
—

 
6

 
39,584

 
—

 
39,590

Repayment of notes receivable
—

 
—

 
4,264

 
—

 
4,264

Net cash used in investing activities
$
(302,455
)
 
$
(215,122
)
 
$
(561,989
)
 
$
522,076

 
$
(557,490
)








39


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Cash Flows (continued)
for the Nine Months Ended September 30, 2015
(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
$
—

 
$
—

 
$
47,375

 
$
—

 
$
47,375

Repayments of borrowings from secured notes payable
—

 
—

 
(12,217
)
 
—

 
(12,217
)
Borrowings from unsecured senior line of credit
1,432,000

 
—

 
—

 
—

 
1,432,000

Repayments of borrowings from unsecured senior line of credit
(893,000
)
 
—

 
—

 
—

 
(893,000
)
Repayments of borrowings from unsecured senior bank term loans
(25,000
)
 
—

 
—

 
—

 
(25,000
)
Transfer to/from parent company
1,853

 
214,926

 
305,297

 
(522,076
)
 
—

Change in restricted cash related to financing activities
—

 
—

 
(4,737
)
 
—

 
(4,737
)
Payment of loan fees
(2,140
)
 
—

 
(2,042
)
 
—

 
(4,182
)
Proceeds from the issuance of common stock
5,052

 
—

 
—

 
—

 
5,052

Dividends on common stock
(162,280
)
 
—

 
—

 
—

 
(162,280
)
Dividends on preferred stock
(18,740
)
 
—

 
—

 
—

 
(18,740
)
Contributions by noncontrolling interests
—

 
—

 
340

 
—

 
340

Distributions to and purchases of noncontrolling interests
—

 
—

 
(62,973
)
 
—

 
(62,973
)
Net cash provided by financing activities
337,745

 
214,926

 
271,043

 
(522,076
)
 
301,638

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

 
—

 
(187
)
 
—

 
(187
)
 
 
 
 
 
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(9,753
)
 
(55
)
 
180

 
—

 
(9,628
)
Cash and cash equivalents as of the beginning of period
52,491

 
63

 
33,457

 
—

 
86,011

Cash and cash equivalents as of the end of period
$
42,738

 
$
8

 
$
33,637

 
$
—

 
$
76,383

 
 
 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
 
 
 
 
Cash paid during the period for interest, net of interest capitalized
$
47,193

 
$
—

 
$
17,004

 
$
—

 
$
64,197

 
 
 
 
 
 
 
 
 
 
Non-Cash Investing Activities
 
 
 
 
 
 
 
 
 
Change in accrued construction
$
—

 
$
—

 
$
(7,305
)
 
$
—

 
$
(7,305
)
Assumption of secured notes payable in connection with purchase of properties
$
—

 
$
—

 
$
(82,000
)
 
$
—

 
$
(82,000
)
 
 
 
 
 
 
 
 
 
 
Non-Cash Financing Activities
 
 
 
 
 
 
 
 
 
Payable for purchase of noncontrolling interest
$
(51,887
)
 
$
—

 
$
—

 
$
—

 
$
(51,887
)

40


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Cash Flows
for the Nine Months Ended September 30, 2014
(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
$
108,966

 
$
170,190

 
$
190,272

 
$
(356,620
)
 
$
112,808

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
4,335

 
—

 
161,788

 
—

 
166,123

Loss on early extinguishment of debt
525

 
—

 
—

 
—

 
525

Gain on sale of land parcel
—

 
—

 
(805
)
 
—

 
(805
)
Amortization of loan fees
5,424

 
—

 
2,666

 
—

 
8,090

Amortization of debt discounts (premiums)
152

 
—

 
(52
)
 
—

 
100

Amortization of acquired below-market leases
—

 
—

 
(2,191
)
 
—

 
(2,191
)
Deferred rent
—

 
—

 
(35,511
)
 
—

 
(35,511
)
Stock compensation expense
9,372

 
—

 
—

 
—

 
9,372

Equity in earnings of affiliates
(180,275
)
 
(172,989
)
 
(3,356
)
 
356,620

 
—

Investment gains
—

 
(3
)
 
(9,478
)
 
—

 
(9,481
)
Investment losses
—

 
2,802

 
5,923

 
—

 
8,725

Changes in operating assets and liabilities:
 
 
 
 
 
 


 
 
Restricted cash
(15
)
 
—

 
15

 
—

 
—

Tenant receivables
—

 
—

 
(939
)
 
—

 
(939
)
Deferred leasing costs
(80
)
 
—

 
(25,830
)
 
—

 
(25,910
)
Other assets
(5,263
)
 
—

 
(6,965
)
 
—

 
(12,228
)
Accounts payable, accrued expenses, and tenant security deposits
50,210

 
—

 
(13,764
)
 
—

 
36,446

Net cash (used in) provided by operating activities
(6,649
)
 
—

 
261,773

 
—

 
255,124

 
 
 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
 
 
Proceeds from sale of real estate
—

 
—

 
28,378

 
—

 
28,378

Additions to real estate
—

 
—

 
(345,074
)
 
—

 
(345,074
)
Purchase of real estate
—

 
—

 
(97,785
)
 
—

 
(97,785
)
Deposit for investing activities
—

 
—

 
(7,292
)
 
—

 
(7,292
)
Change in restricted cash related to construction projects
—

 
—

 
6,694

 
—

 
6,694

Investment in unconsolidated real estate joint ventures
—

 
—

 
(67,525
)
 
—

 
(67,525
)
Investments in subsidiaries
(322,228
)
 
(291,300
)
 
(12,150
)
 
625,678

 
—

Additions to investments
—

 
—

 
(35,484
)
 
—

 
(35,484
)
Sales of investments
—

 
—

 
13,883

 
—

 
13,883

Repayment of notes receivable
—

 
—

 
29,866

 
—

 
29,866

Net cash used in investing activities
$
(322,228
)
 
$
(291,300
)
 
$
(486,489
)
 
$
625,678

 
$
(474,339
)





41


14.
Condensed consolidating financial information (continued)

Condensed Consolidating Statement of Cash Flows (continued)
for the Nine Months Ended September 30, 2014
(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
$
—

 
$
—

 
$
108,626

 
$
—

 
$
108,626

Repayments of borrowings from secured notes payable
—

 
—

 
(228,909
)
 
—

 
(228,909
)
Proceeds from issuance of unsecured senior notes payable
698,908

 
—

 
—

 
—

 
698,908

Borrowings from unsecured senior line of credit
890,000

 
—

 
—

 
—

 
890,000

Repayments of borrowings from unsecured senior line of credit
(952,000
)
 
—

 
—

 
—

 
(952,000
)
Repayment of unsecured senior bank term loan
(125,000
)
 
—

 
—

 
—

 
(125,000
)
Transfer to/from parent company
103

 
291,300

 
334,275

 
(625,678
)
 
—

Change in restricted cash related to financing activities
—

 
—

 
375

 
—

 
375

Payment of loan fees
(6,515
)
 
—

 
(1,474
)
 
—

 
(7,989
)
Dividends on common stock
(150,540
)
 
—

 
—

 
—

 
(150,540
)
Dividends on preferred stock
(19,414
)
 
—

 
—

 
—

 
(19,414
)
Contributions by noncontrolling interests
—

 
—

 
19,410

 
—

 
19,410

Distributions to and purchases of noncontrolling interests
—

 
—

 
(3,487
)
 
—

 
(3,487
)
Net cash provided by financing activities
335,542

 
291,300

 
228,816

 
(625,678
)
 
229,980

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

 
—

 
(1,438
)
 
—

 
(1,438
)
 
 
 
 
 
 
 
 
 
 
Net increase in cash and cash equivalents
6,665

 
—

 
2,662

 
—

 
9,327

Cash and cash equivalents as of the beginning of period
14,790

 
—

 
42,906

 
—

 
57,696

Cash and cash equivalents as of the end of period
$
21,455

 
$
—

 
$
45,568

 
$
—

 
$
67,023

 
 
 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
 
 
 
 
Cash paid during the period for interest, net of interest capitalized
$
20,089

 
$
—

 
$
13,694

 
$
—

 
$
33,783

 
 
 
 
 
 
 
 
 
 
Non-Cash Investing Activities
 
 
 
 
 
 
 
 
 
Change in accrued construction
$
—

 
$
—

 
$
36,235

 
$
—

 
$
36,235

Assumption of secured notes payable in connection with purchase of properties
$
—

 
$
—

 
$
(48,329
)
 
$
—

 
$
(48,329
)








42



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 “forecast,” “guidance,” “projects,” “estimates,” “anticipates,” “believes,” “expects,” “intends,” “may,” “plans,” “seeks,” “should,” or “will,” 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:

•
Operating factors such as a failure to operate our business successfully in comparison to market expectations or in comparison to our competitors, our inability to obtain capital when desired or refinance debt maturities when desired, and/or a failure to maintain our status as a REIT for federal tax purposes.
•
Market and industry factors such as adverse developments concerning the science and technology industries and/or our client tenants.
•
Government factors such as any unfavorable effects resulting from federal, state, local, and/or foreign government policies, laws, and/or funding levels.
•
Global factors such as negative economic, political, financial, credit market, and/or banking conditions.
•
Other factors such as climate change, cyber intrusions, and/or changes in laws, regulations, and financial accounting standards.

This list of risks and uncertainties is not exhaustive. Additional information regarding risk factors that may affect us is included under “Item 1A. Risk Factors” and “Item 7. 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, 2014. 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.


43



Overview

We are a Maryland corporation formed in October 1994 that has elected to be taxed as a REIT for federal income tax purposes. We are the largest and leading urban office REIT uniquely focused on collaborative science and technology campuses in AAA innovation cluster locations with a total market capitalization of $10.8 billion as of September 30, 2015, and an asset base of 31.5 million square feet, including 19.9 million RSF of operating properties and development and redevelopment projects under construction, as well as an additional 11.6 million square feet of near-term and future ground-up development projects. Alexandria pioneered this niche in 1994 and has since established a dominant market presence in key locations, including Greater Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and Research Triangle Park. Alexandria is known for its high-quality and diverse client tenant base, with approximately 53% of total annualized base rent as of September 30, 2015, generated from investment-grade client tenants – a REIT industry-leading percentage. Alexandria has a longstanding and proven track record of developing Class A assets clustered in urban science and technology campuses that provide its innovative client tenants with highly dynamic and collaborative environments that enhance their ability to successfully recruit and retain world-class talent and inspire productivity, efficiency, creativity, and success. We believe these advantages result in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value.

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. A key element of our strategy is our unique focus on Class A assets clustered in urban campuses. These key urban campus locations are characterized by high barriers to entry for new landlords, and a limited supply of available space. They represent highly desirable locations for tenancy by science and technology 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 broad real estate, science, and technology relationships in order to identify and attract new and leading client tenants and to source additional value-creation real estate opportunities.

Executive summary

Our best-in-class team delivered another strong quarter of financial and operating results, including the following key highlights:

•
Executed agreement for the sales of partial interests in Class A facilities to TIAA-CREF with closings in the fourth quarter of 2015:
•
4.8% cash cap rate on sale of 49.9% interest in 1500 Owens Street located in our Mission Bay submarket for a sale price of $73.4 million;
•
4.5% cash cap rate on sale of 70% interest in 225 Binney Street in our Cambridge submarket for a sale price of $190 million;
•
Highly leased development and redevelopment projects:
•
1.5 million RSF, 89% leased, targeted for completion by 4Q16 (weighted toward 4Q16), will generate $75 to $80 million incremental annual NOI upon stabilization;
•
1.8 million RSF, 71% leased, targeted for completion in 2017 and 2018, will generate $105 to $110 million of incremental annual NOI upon stabilization;
•
FFO per share – diluted, as adjusted, for the three months ended September 30, 2015, of $1.33, up 9.9%, compared to $1.21 for the three months ended September 30, 2014;
•
Same property NOI growth of 1.1% and 4.8% (cash basis) for the three months ended September 30, 2015, compared to the three months ended September 30, 2014;
•
Executed leases for 1,021,756 RSF and 3,959,804 RSF during the three and nine months ended September 30, 2015, respectively, highest nine-month leasing volume in the Company’s 20-year history;
•
Rental rate increases of 17.5% and 8.8% (cash basis) for the three months ended September 30, 2015 lease renewals and re-leasing of space aggregating 456,602 RSF (included in the 1,021,756 RSF above); and
•
Common stock dividend for the three months ended September 30, 2015, of $0.77 per common share, up 5 cents, or 7%, over the three months ended September 30, 2014; continuation of strategy to share growth in cash flows from operating activities with our shareholders while also importantly retaining capital for reinvestment.


44



Sales of partial interest in two core real estate assets at 4.5% and 4.8% cash cap rates:

•
In July and October 2015, we executed agreements for the sales of partial interests in two Class A facilities to TIAA-CREF, with closings in the fourth quarter of 2015:
Property
 
Submarket
 
Interest To
Be Sold
 
RSF
 
Sales Price
 
Cash Cap Rate
225 Binney Street
 
Cambridge
 
70%
 
305,212

 
$
190,110

 
4.5%
1500 Owens Street
 
Mission Bay
 
49.9%
 
158,267

 
73,353

 
4.8%
 
 
 
 
 
 
463,479

 
$
263,463

 
4.6%

Refer to our “Dispositions and other sources of capital” for information on additional asset sales expected in the fourth quarter of 2015.

Results

•
FFO attributable to Alexandria’s common stockholders – diluted, as adjusted:
•
$1.33 per share for the three months ended September 30, 2015, up 9.9%, compared to
$1.21 per share for the three months ended September 30, 2014
•
$3.92 per share for the nine months ended September 30, 2015, up 9.8%, compared to
$3.57 per share for the nine months ended September 30, 2014
•
$95.0 million for the three months ended September 30, 2015, up $9.0 million, or 10.4%, compared to
$86.1 million for the three months ended September 30, 2014
•
$280.0 million for the nine months ended September 30, 2015, up $26.3 million, or 10.4%, compared to $253.7 million for the nine months ended September 30, 2014
•
Investment income of $5.4 million, or $0.08 per share, included gross investment gains of $8.7 million, primarily from the sale of two publicly traded securities.

•
Net income attributable to Alexandria’s common stockholders – diluted:
•
$32.7 million, or $0.46 per share, for the three months ended September 30, 2015, compared to
$27.6 million, or $0.39 per share, for the three months ended September 30, 2014
•
$81.7 million, or $1.14 per share, for the nine months ended September 30, 2015, compared to
$88.3 million, or $1.24 per share, for the nine months ended September 30, 2014

Core operating metrics

•
Total revenues:
•
$218.6 million for the three months ended September 30, 2015, up $33.0 million, or 17.8%, compared to
$185.6 million for the three months ended September 30, 2014
•
$619.5 million for the nine months ended September 30, 2015, up $81.3 million, or 15.1%, compared to
$538.2 million for the nine months ended September 30, 2014
•
NOI, including our share of unconsolidated joint ventures:
•
$151.2 million for the three months ended September 30, 2015, up $23.0 million, or 17.9%, compared to
$128.2 million for the three months ended September 30, 2014
•
$430.4 million for the nine months ended September 30, 2015, up $54.5 million, or 14.5%, compared to
$375.9 million for the nine months ended September 30, 2014
•
Occupancy for operating properties in North America of 96.2% as of September 30, 2015
•
53% of our total ABR generated from investment-grade client tenants
•
Same property NOI growth:
•
1.1% and 4.8% (cash basis) increase for the three months ended September 30, 2015, compared to the three months ended September 30, 2014
•
1.2% and 5.6% (cash basis) increase for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014
•
Operating margins at 69% for the three months ended September 30, 2015
•
Adjusted EBITDA margins at 65% for the three months ended September 30, 2015




45



Core operating metrics (continued)

•
Executed leases for 1,021,756 RSF during the three months ended September 30, 2015:
•
253,108 RSF to bluebird bio, Inc., representing 99% of our 60 Binney Street development project under construction in our Cambridge submarket in Greater Boston
•
150,000 RSF to Pinterest, Inc., representing 100% of phase one of the recently acquired near-term development project at 505 Brannan Street in our SoMa submarket in San Francisco
•
78,916 RSF renewal with UMass Memorial Realty, Inc. at 306 Belmont Street in our Route 495/Worcester submarket in Greater Boston
•
60,917 RSF renewal with Vertex Pharmaceuticals Incorporated at 245/275 Armand Frappier Boulevard in our Canadian submarket
•
50,231 RSF leased and delivered to The Children’s Hospital Corporation at 360 Longwood Avenue in our Longwood Medical Area submarket in Greater Boston
•
17.5% and 8.8% (cash basis) rental rate increases on lease renewals and re-leasing of space aggregating 456,602 RSF
•
Executed leases for 3,959,804 RSF for the nine months ended September 30, 2015; highest nine-month leasing volume in the Company’s 20-year history
•
19.6% and 10.6% (cash basis) rental rate increases on lease renewals and re-leasing of space aggregating 1,729,239 RSF

External growth: development and redevelopment projects under construction and acquisitions

Highly leased development and redevelopment projects under construction

•
Highly leased development and redevelopment projects:
•
1.5 million RSF, 89% leased, targeted for completion by fourth quarter of 2016 (weighted toward fourth quarter of 2016), will generate $75 to $80 million incremental annual NOI upon stabilization
•
1.8 million RSF 71% leased, targeted for completion in 2017 and 2018, will generate $105 to $110 million of incremental annual NOI upon stabilization
•
Key development projects placed into service during the three months ended September 30, 2015, include:
•
62,490 RSF, including 30,408 RSF to Eli Lilly and Company and 30,408 RSF to Galderma Laboratories, L.P. (a wholly-owned subsidiary of Nestle S.A.), at our 430 East 29th Street development in our Manhattan submarket in New York City
•
50,231 RSF to The Children’s Hospital Corporation at our 360 Longwood Avenue development in our Longwood Medical Area submarket in Greater Boston
•
Commencements of development and redevelopment projects during the three months ended September 30, 2015, including:
•
431,483 RSF development project at 100 Binney Street in our Cambridge submarket; 98% leased/negotiating, including 58% leased to Bristol-Myers Squibb Company
•
304,326 RSF redevelopment project at 10290 Campus Point Drive in our University Town Center submarket, acquired in July 2015 for $105.0 million; 100% leased to Eli Lilly and Company
•
300,000 RSF development project at 510 Townsend Street in our SoMa submarket; 100% leased to Stripe, Inc.
•
162,156 RSF redevelopment project at 9625 Towne Centre Drive in our University Town Center submarket
•
59,000 RSF redevelopment project at 11 Hurley Street, in our Cambridge submarket, acquired in September 2015 for $5.9 million; 100% under negotiation

Acquisitions

•
In July and September 2015, we acquired 10290 Campus Point Drive and 11 Hurley Street, respectively. We commenced conversion of these buildings into office/laboratory space through redevelopment during the three months ended September 30, 2015.


46



Balance sheet

•
In October 2015, closed a secured construction loan with aggregate commitments available for borrowing of $350.0 million, for our 98% leased development project at 50/60 Binney Street in our Cambridge submarket, which bears interest at a rate of LIBOR+1.50%
•
$855 million of liquidity as of as of September 30, 2015; $1.2 billion of liquidity as of September 30, 2015 on a pro forma basis for the available borrowings under the construction loan noted immediately above
•
$10.8 billion total market capitalization as of September 30, 2015
•
13% of gross investments in real estate in value-creation pipeline (74% of pipeline undergoing construction) as of September 30, 2015, with a target range from 10% to 15% as of the fourth quarter of 2016
•
7.4 times net debt to Adjusted EBITDA – third quarter of 2015 annualized, with target of less than 7.0 times by the fourth quarter of 2015
•
3.5 times fixed-charge coverage ratio – third quarter of 2015 annualized
•
Limited debt maturities through 2018; well-laddered maturity profile
•
Executed additional interest rate swap agreements during the three months ended September 30, 2015, with an aggregate notional amount of $750 million, to increase notional hedged variable-rate debt to a minimum of $1.1 billion and $650 million during 2016 and 2017, respectively
•
24% unhedged variable-rate debt as a percentage of total debt as of September 30, 2015, with a target of less than 15% by December 31, 2015

LEED statistics

•
56% of our total ABR will be generated from LEED projects upon completion of our in-process projects

Other subsequent events

•
In October 2015, we repaid a $76.0 million secured note payable with an effective interest rate of 5.73%
•
In October 2015, we executed an agreement to sell a 49.9% interest in our 158,267 RSF, property at 1500 Owens Street in our Mission Bay submarket in San Francisco to a high-quality institutional investor for $73.4 million, with closing in the fourth quarter of 2015
•
In October 2015, we executed an agreement for the sale of 75/125 Shoreway Road in our Palo Alto/Stanford Research Park submarket in San Francisco to a high-quality institutional investor at a sales price of $38.5 million and a cash capitalization rate of 5.8%; with closing in the fourth quarter of 2015

47



Operating summary

Key real estate statistics

The following table presents information regarding our asset base, including unconsolidated joint ventures, as of September 30, 2015, and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
(Rentable square feet)
 
 
 
Operating properties
16,803,766

 
16,727,985

Development properties
2,614,491

 
1,857,520

Redevelopment properties
525,482

 
143,777

Total properties
19,943,739

 
18,729,282

 
 
 
 
Number of properties
198

 
193

Occupancy in North America at period-end – operating
96.2
%
 
97.0
%
Occupancy in North America at period-end – operating and redevelopment
93.0
%
 
96.1
%
Annualized base rent per occupied RSF at period-end
$
39.44

 
$
37.23


Leasing

•
Executed a total of 172 leases, with a weighted-average lease term of 9.0 years, for 3,959,804 RSF, including 2,003,746 RSF related to our development and redevelopment projects during the nine months ended September 30, 2015
•
Achieved rental rate increases for renewed/re-leased space of 19.6% and 10.6% (cash basis) on 1,729,239 RSF during the nine months ended September 30, 2015
•
Occupancy rate for operating properties in North America of 96.2% as of September 30, 2015

Approximately 64% of the 172 leases executed during the nine months ended September 30, 2015, did not include concessions for free rent. During the nine months ended September 30, 2015, we granted tenant concessions/free rent averaging 2.8 months with respect to the 3,959,804 RSF leased.



48



The following table summarizes our leasing activity at our properties:
 
 
Three Months Ended
September 30, 2015
 
Nine Months Ended
September 30, 2015
 
Year Ended
December 31, 2014
 
 
Including
Straight-line Rent
 
Cash Basis
 
Including
Straight-line Rent
 
Cash Basis
 
Including
Straight-line Rent
 
Cash Basis
(Dollars are per RSF)
 
 
 
 
 
 
 
 
 
 
 
 
Leasing activity:
 
 
 
 
 
 
 
 
 
 
 
 
Renewed/re-leased space (1)
 
 

 
 

 
 

 
 

 
 

 
 

Rental rate changes
 
17.5%

 
8.8%

 
19.6%

 
10.6%

 
13.3%

 
5.4%

New rates
 
$
34.85

 
$
34.64

 
$
36.13

 
$
36.37

 
$
40.32

 
$
40.73

Expiring rates
 
$
29.66

 
$
31.83

 
$
30.21

 
$
32.87

 
$
35.60

 
$
38.63

Rentable square footage
 
456,602

 
 
 
1,729,239

 
 
 
1,447,516

 
 
Number of leases
 
32

 
 
 
117

 
 
 
124

 
 
Tenant improvements/leasing commissions
 
$
11.82

 
 
 
$
10.24

 
 
 
$
10.49

 
 
Average lease terms
 
5.2 years

 
 
 
4.8 years

 
 
 
3.5 years

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Developed/redeveloped/previously vacant space leased
 
 
 
 
 
 
 
 
 
 
 
 
New rates
 
$
68.18

 
$
64.29

 
$
59.72

 
$
54.30

 
$
40.62

 
$
36.50

Rentable square footage
 
565,154

 
 
 
2,230,565

 
 
 
1,321,317

 
 
Number of leases
 
17

 
 
 
55

 
 
 
66

 
 
Tenant improvements/leasing commissions
 
$
17.38

 
 
 
$
19.01

 
 
 
$
14.96

 
 
Average lease terms
 
11.5 years

 
 
 
12.2 years

 
 
 
11.5 years

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Leasing activity summary (totals):
 
 
 
 
 
 
 
 
 
 
 
 
New rates
 
$
53.29

 
$
51.04

 
$
49.42

 
$
46.47

 
$
40.46

 
$
38.71

Rentable square footage
 
1,021,756

 
 
 
3,959,804

(2) 
 
 
2,768,833

 
 
Number of leases
 
49

 
 
 
172

 
 
 
190

 
 
Tenant improvements/leasing commissions
 
$
14.89

 
 
 
$
15.18

 
 
 
$
12.62

 
 
Average lease terms
 
8.7 years

 
 
 
9.0 years

 
 
 
7.3 years

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease expirations (1)
 
 
 
 
 
 
 
 
 
 
 
 
Expiring rates
 
$
26.84

 
$
28.54

 
$
28.67

 
$
30.94

 
$
33.09

 
$
35.79

Rentable square footage
 
635,195

 
 
 
2,262,674

 
 
 
1,733,614

 
 
Number of leases
 
45

 
 
 
158

 
 
 
151

 
 

(1)
Excludes 16 month-to-month leases for 37,054 RSF and 20 month-to-month leases for 43,672 RSF as of September 30, 2015, and December 31, 2014, respectively.
(2)
During the nine months ended September 30, 2015, we granted tenant concessions/free rent averaging 2.8 months with respect to the 3,959,804 RSF leased.


49



Summary of lease expirations
    
The following table summarizes information with respect to the lease expirations at our properties as of September 30, 2015:
Year of Lease Expiration
 
Number of Leases Expiring
 
RSF of Expiring Leases
 
Percentage of
Aggregate Total RSF
 
ABR of
Expiring Leases (per RSF)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
 
20

(1) 
 
 
232,526

(1) 
 
 
1.4
%
 
 
 
$
37.03

 
2016
 
 
80

 
 
 
1,321,642

 
 
 
7.9
%
 
 
 
$
31.79

 
2017
 
 
81

 
 
 
1,386,364

 
 
 
8.3
%
 
 
 
$
27.89

 
2018
 
 
86

 
 
 
1,838,064

 
 
 
10.9
%
 
 
 
$
38.73

 
2019
 
 
68

 
 
 
1,401,460

 
 
 
8.3
%
 
 
 
$
35.98

 
2020
 
 
65

 
 
 
1,556,981

 
 
 
9.3
%
 
 
 
$
37.05

 
2021
 
 
43

 
 
 
1,320,614

 
 
 
7.9
%
 
 
 
$
39.08

 
2022
 
 
27

 
 
 
900,680

 
 
 
5.4
%
 
 
 
$
34.35

 
2023
 
 
22

 
 
 
1,188,496

 
 
 
7.1
%
 
 
 
$
37.66

 
2024
 
 
15

 
 
 
830,169

 
 
 
4.9
%
 
 
 
$
45.26

 
Thereafter
 
 
50

 
 
 
3,704,202

 
 
 
22.0
%
 
 
 
$
48.00

 

(1)
Excludes 16 month-to-month leases for 37,054 RSF.

The following tables present information by market with respect to our lease expirations as of September 30, 2015, for the remainder of 2015 and all of 2016:
 
 
2015 RSF of Expiring Leases
 
ABR of
Expiring Leases
(per RSF)
 
 
Leased
 
Negotiating/
Anticipating
 
Targeted for
Redevelopment
 
Remaining
Expiring Leases
 
Total (1)
 
Market
 
 
 
 
 
 
Greater Boston
 
—

 
34,560

 
—

 
4,284

 
38,844

 
$
46.40

San Francisco
 
87,834

 
—

 
—

 
—

 
87,834

 
43.98

New York City
 
—

 
199

 
—

 
9,528

 
9,727

 
N/A

San Diego
 
—

 
—

 
48,880

(2) 
1,000

 
49,880

 
N/A

Seattle
 
—

 
27,200

 
—

 
1,893

 
29,093

 
22.45

Maryland
 
2,109

 
—

 
—

 
3,386

 
5,495

 
20.69

Research Triangle Park
 
4,575

 
—

 
—

 
—

 
4,575

 
29.03

Non-cluster markets
 
—

 
—

 
—

 
3,009

 
3,009

 
14.00

Asia
 
—

 
—

 
—

 
4,069

 
4,069

 
N/A

Total
 
94,518

 
61,959

 
48,880

 
27,169

 
232,526

 
$
37.03

Percentage of expiring leases
 
41
%
 
27
%
 
21
%
 
11
%
 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 RSF of Expiring Leases
 
ABR of
Expiring Leases
(per RSF)
 
 
Leased
 
Negotiating/
Anticipating
 
Targeted for
Redevelopment
 
Remaining
Expiring Leases
 
Total
 
Market
 
 
 
 
 
 
Greater Boston
 
104,369

 
27,232

 
—

 
47,561

 
179,162

 
$
43.51

San Francisco
 
726

 
31,611

 
—

 
111,578

 
143,915

 
30.75

New York City
 
—

 
—

 
—

 
5,447

 
5,447

 
N/A

San Diego
 
46,033

 
158,645

(3) 
—

 
367,013

(4) 
571,691

 
33.90

Seattle
 
2,468

 
—

 
—

 
44,684

 
47,152

 
38.79

Maryland
 
16,560

 
—

 
—

 
125,103

 
141,663

 
25.74

Research Triangle Park
 
54,642

 
—

 
—

 
88,383

 
143,025

 
23.13

Non-cluster markets
 
—

 
346

 
—

 
3,508

 
3,854

 
20.57

Asia
 
45,835

 
35,335

 
—

 
4,563

 
85,733

 
16.29

Total
 
270,633

 
253,169

 
—

 
797,840

 
1,321,642

 
$
31.79

Percentage of expiring leases
 
20
%
 
19
%
 
—
%
 
61
%
 
100
%
 
 
 

(1)
Excludes 16 month-to-month leases for 37,054 RSF.
(2)
Represents 48,880 RSF at 10151 Barnes Canyon Road. We expect to commence redevelopment of the property into tech office space upon expiration of the acquired in-place lease in the fourth quarter of 2015.
(3)
Represents two leases at 3115/3215 Merryfield Row with contractual expirations in January and August 2016, respectively, at an average annualized base rent of $26.62 per square foot. We are in negotiations with a high-quality client tenant for approximately 155,000 RSF of build-to-suit space at the ARE Spectrum campus.
(4)
Includes 125,409 RSF leased to Eli Lilly and Company at 10300 Campus Point Drive with a contractual expiration in the fourth quarter of 2016. This client tenant will relocate and expand into 304,326 RSF at our recently acquired redevelopment project at 10290 Campus Point Drive project.

50



High-Quality Cash Flows from Innovative Client Tenants with
53% of Total ABR from Investment-Grade Client Tenants
High-Quality Client Tenant Base
 
Diverse Client Tenant Base
 
 
 
 
High-Quality Cash Flows from Class A Assets in AAA Locations
 
 
Focus in Key Locations
 
 
Class A Assets
in AAA Locations
 
75%
 
of ARE’s Total ABR
 
 
 
% of ARE’s Total ABR
Demand for Class A Assets in AAA Locations Drives Solid Occupancy
 
 
Occupancy Across Key Locations
as of September 30, 2015
 
 
Solid Occupancy (2)
 
95%
 
Over 10 Years
 
(1)    Traditional Office and Tech space comprises of 2.2% and 0.8% of ABR, respectively.
(2)    Average occupancy of operating properties in North America as of December 31 for the last 10 years.

51



Location of properties

The locations of our properties are diversified among a number of science and technology cluster markets. The following table sets forth, as of September 30, 2015, the total RSF, number of properties, and annualized base rent of our properties in each of our existing markets (dollars in thousands):
 
 
RSF
 
Number of Properties
 
Annualized Base Rent
 
ABR
Market
 
Operating
 
Development
 
Redevelopment
 
Total
 
% Total
 
 
 
per RSF (1)
Greater Boston
 
4,534,155

 
1,115,637

 
59,000

 
5,708,792

 
28
%
 
44

 
$
218,520

 
35
%
 
$
50.38

San Francisco
 
2,630,791

 
722,980

 
—

 
3,353,771

 
17

 
27

 
116,017

 
19

 
44.10

New York City
 
744,917

 
67,912

 
—

 
812,829

 
4

 
4

 
58,481

 
10

 
78.80

San Diego
 
3,065,910

 
358,609

 
466,482

 
3,891,001

 
19

 
50

 
99,565

 
16

 
34.22

Seattle
 
746,260

 
287,806

 
—

 
1,034,066

 
5

 
11

 
32,203

 
5

 
43.75

Maryland
 
2,156,196

 
—

 
—

 
2,156,196

 
11

 
29

 
50,249

 
8

 
24.37

Research Triangle Park
 
980,763

 
61,547

 
—

 
1,042,310

 
5

 
15

 
19,444

 
3

 
21.65

Canada
 
322,967

 
—

 
—

 
322,967

 
2

 
4

 
7,768

 
1

 
24.21

Non-cluster markets
 
105,033

 
—

 
—

 
105,033

 
1

 
3

 
1,444

 
—

 
19.12

North America
 
15,286,992

 
2,614,491

 
525,482

 
18,426,965

 
92

 
187

 
603,691

 
97

 
41.03

Asia
 
1,199,714

 
—

 
—

 
1,199,714

 
6

 
8

 
6,887

 
1

 
9.66

Subtotal
 
16,486,706

 
2,614,491

 
525,482

 
19,626,679

 
98

 
195

 
610,578

 
98

 
39.58

Properties “held for sale” (2)
 
317,060

 
—

 
—

 
317,060

 
2

 
3

 
9,271

 
2

 
31.63

Total
 
16,803,766

 
2,614,491

 
525,482

 
19,943,739

 
100
%
 
198

 
$
619,849

 
100
%
 
$
39.44


(1)
Represents ABR per occupied RSF as of September 30, 2015.
(2)
Refer to Note 12 – “Assets classified as held for sale” to our unaudited consolidated financial statements under Item 1 of this report for additional information regarding properties classified as “held for sale” as of September 30, 2015.

Summary of occupancy percentages in North America

The following table sets forth the occupancy percentages for our operating assets and our assets under redevelopment in each of our North America markets as of the following dates:
 
 
Operating Properties
 
Operating and Redevelopment Properties
Market
 
9/30/15
 
6/30/15
 
9/30/14
 
9/30/15
 
6/30/15
 
9/30/14
Greater Boston
 
95.7
%
(1) 
96.5
%
 
98.6
%
 
94.4
%
 
96.5
%
 
95.7
%
San Francisco
 
100.0

 
100.0

 
99.0

 
100.0

 
100.0

 
99.0

New York City
 
99.6

 
99.6

 
98.4

 
99.6

 
99.6

 
98.4

San Diego
 
94.9

(2) 
94.5

 
97.1

 
82.4

 
94.5

 
96.1

Seattle
 
98.6

 
96.0

 
94.7

 
98.6

 
96.0

 
94.7

Maryland
 
95.6

 
93.6

 
93.8

 
95.6

 
93.6

 
93.8

Research Triangle Park
 
91.6

(3) 
91.0

 
96.7

 
91.6

 
91.0

 
96.7

Subtotal
 
96.3

(4) 
96.0

 
97.3

 
93.1

 
96.0

 
96.3

Canada
 
99.3

 
99.3

 
97.6

 
99.3

 
99.3

 
97.6

Non-cluster markets
 
71.9

 
68.0

 
93.9

 
71.9

 
68.0

 
93.9

North America
 
96.2
%
(4) 
95.9
%
 
97.3
%
 
93.0
%
 
95.9
%
 
96.3
%

(1)
The decline from September 30, 2014 is primarily driven by a 128,325 RSF full-building lease that expired at 19 Presidential Way in our Route 128 submarket. We are in the process of marketing the property for multi-tenancy office/laboratory use.
(2)
The decline from September 30, 2014 is primarily driven by expirations of leases at 9363 and 9373 Towne Centre Drive in our University Towne Center submarket. We re-leased approximately 66% of these buildings.
(3)
The decline from September 30, 2014 is primarily driven by an 81,580 RSF full-building lease that expired at 2525 East NC Highway 54 in our Research Triangle Park submarket. We are in the process of marketing the property for multi-tenancy office/laboratory use.
(4)
See footnotes 1, 2, and 3 above.


52



Client tenants

Our properties are leased to a high-quality and diverse group of client tenants, with no individual client tenant accounting for more than 5.4% 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, 2015 (dollars in thousands):
 
 
 
 
Remaining Lease Term in Years (1)
 
Aggregate RSF
 
ABR
 
Percentage of Aggregate ABR
 
 
 
 
 
 
 
 
 
 
Investment-Grade Ratings
 
 
Client Tenant
 
 
 
 
 
Fitch
 
Moody’s
 
S&P
1

 
Novartis AG
 
 
2.2

 
 
693,480

 
$
33,524

 
5.4
%
 
AA
 
Aa3
 
AA-
2

 
ARIAD Pharmaceuticals, Inc.
 
 
14.5

 
 
386,111

(2) 
29,994

 
4.8

 
—
 
—
 
—
3

 
Illumina, Inc.
 
 
14.4

 
 
595,886

 
25,452

 
4.1

 
—
 
—
 
BBB
4

 
New York University
 
 
15.0

 
 
209,224

 
19,897

 
3.2

 
—
 
Aa3
 
AA-
5

 
Eli Lilly and Company
 
 
7.3

 
 
287,527

 
19,341

 
3.1

 
A
 
A2
 
AA-
6

 
Roche
 
 
5.0

 
 
343,472

 
16,490

 
2.7

 
AA
 
A1
 
AA
7

 
Dana-Farber Cancer Institute, Inc.
 
 
14.8

 
 
203,090

 
15,038

 
2.4

 
—
 
A1
 
—
8

 
United States Government
 
 
9.6

 
 
263,147

 
14,778

 
2.4

 
AAA
 
Aaa
 
AA+
9

 
Celgene Corporation
 
 
6.5

 
 
361,071

 
14,770

 
2.4

 
—
 
Baa2
 
BBB+
10

 
FibroGen, Inc.
 
 
8.1

 
 
234,249

 
14,278

 
2.3

 
—
 
—
 
—
11

 
Amgen Inc.
 
 
8.0

 
 
401,623

 
14,260

 
2.3

 
BBB
 
Baa1
 
A
12

 
Biogen Inc.
 
 
12.6

 
 
313,872

 
13,735

 
2.2

 
—
 
Baa1
 
A-
13

 
Massachusetts Institute of Technology
 
 
4.1

 
 
208,274

 
10,971

 
1.8

 
—
 
Aaa
 
AAA
14

 
Bristol-Myers Squibb Company
 
 
3.4

 
 
251,316

 
10,743

 
1.7

 
A-
 
A2
 
A+
15

 
The Regents of the University of California
 
 
8.0

 
 
230,633

 
10,354

 
1.7

 
AA
 
Aa2
 
AA
16

 
The Scripps Research Institute
 
 
2.4

 
 
218,031

 
10,023

 
1.6

 
AA-
 
Aa3
 
—
17

 
GlaxoSmithKline plc
 
 
3.8

 
 
208,394

 
9,510

 
1.5

 
A+
 
A2
 
A+
18

 
Sanofi
 
 
5.9

 
 
179,697

 
8,084

 
1.3

 
AA-
 
A1
 
AA
19

 
Alnylam Pharmaceuticals, Inc.
 
 
6.0

 
 
129,424

 
7,314

 
1.2

 
—
 
—
 
—
20

 
Sumitomo Dainippon Pharma Co., Ltd.
 
 
7.5

 
 
106,232

 
6,501

 
1.0

 
—
 
—
 
—
 
 
Total/weighted-average
 
 
8.6

 
 
5,824,753

 
$
305,057

 
49.1
%
 
 
 
 
 
 

(1)
Based on percentage of aggregate annualized base rent in effect as of September 30, 2015.
(2)
In August 2015, ARIAD Pharmaceuticals, Inc. (“ARIAD”) entered into a sublease with IBM Watson Health, a digital health venture of the International Business Machines Corporation (“IBM”) under which IBM will sublease approximately 163,186 RSF at 75 Binney Street for an initial lease term of 10 years. IBM holds investment-grade ratings of A+ (Fitch), Aa3 (Moody’s), and AA- (S&P) and has the option to extend the sublease term through the end of the ARIAD lease, in March 2030, at 75/125 Binney Street.



53



Value-creation projects and external growth

Key real estate metrics as of September 30, 2015
2015 Disciplined Allocation of Capital (1)
 
13% of Gross Investments in Real Estate in Value-Creation Pipeline
 
 
 
 
Highly Leased Development and Redevelopment Projects
 
Pre-Leased (3) Percentage of Ground-Up Developments Since January 1, 2009
80%
 
Single-Tenant

100%
Pre-leased

2.3M RSF

Multi-Tenant

38%
Pre-leased

2.5M RSF

Leased
 

(1)
Includes actual and projected construction and acquisitions for the year ending December 31, 2015. Refer to pages 64 and 65 for additional details.
(2)
Upon completion of our in-process LEED certification projects.
(3)
Represents average pre-leased percentage at the time development commenced.

54



LEED Sustainability


Focused on Excellence, Sustainability and Operational Efficiency

56%
ABR From
 
51
LEED®
LEED® Projects (1)
 
Projects (1)











(1)
Upon completion of 20 in-process LEED certification projects

55



Investments in real estate

Our investments in real estate consisted of the following as of September 30, 2015 (dollars in thousands, except per square foot amounts):
 
Investments in Real Estate
 
 
 
 
 
 
 
 
 
Consolidated
 
ARE
Share of Unconsolidated Joint Ventures 
 
Total
 
Square Feet
 
 
 
 
 
 
 
 
Unconsolidated Joint Ventures
 
 
 
Per SF (1)
 
 
 
Amount
 
%
 
Consolidated
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental properties
$
7,691,115

 
$
69,685

 
$
7,760,800

 
87
%
 
16,543,907

 
259,859

 
16,803,766

 
$
471

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Development and redevelopment projects under construction/construction in progress (CIP):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Development projects under construction
644,500

 
96,712

 
741,212

 
 
 
2,037,834

 
576,657

 
2,614,491

 
337

Redevelopment projects under construction
139,931

 
—

 
139,931

 
 
 
525,482

 
—

 
525,482

 
266

Development and redevelopment projects under construction /construction in progress (CIP)
784,431

 
96,712

 
881,143

 
10

 
2,563,316

 
576,657

 
3,139,973

 
325

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental properties and development and redevelopment projects under construction
8,475,546

 
166,397

 
8,641,943

 
 
 
19,107,223

 
836,516

 
19,943,739

 
448

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Near-term value-creation projects (CIP)
47,358

 
—

 
47,358

 
—

 
1,310,186

 
—

 
1,310,186

 
36

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future value-creation projects:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
187,313

 
—

 
187,313

 
2

 
3,797,375

 
—

 
3,797,375

 
49

Asia
77,261

 
—

 
77,261

 
1

 
6,419,707

 
—

 
6,419,707

 
12

 
264,574

 
—

 
264,574

 
 
 
10,217,082

 
—

 
10,217,082

 
26

Near-term and future value-creation projects
311,932

 
—

 
311,932

 
 
 
11,527,268

 
—

 
11,527,268

 
27

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Value-creation pipeline
1,096,363

 
96,712

 
1,193,075

 
13

 
14,090,584

 
576,657

 
14,667,241

 
91

Gross investments in real estate
8,787,478

 
166,397

 
$
8,953,875

 
100
%
 
30,634,491

 
836,516

 
31,471,007

 
$
294

Equity method of accounting – unconsolidated joint ventures
126,471

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
Gross investments in real estate – including unconsolidated joint ventures
8,913,949

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
Less: accumulated depreciation
(1,259,740
)
 
(1,289
)
 
 
 
 
 
 
 
 
 
 
 
 
Investments in real estate
$
7,654,209

 
$
165,108

 
 
 
 
 
 
 
 
 
 
 
 

(1)
Items that include our share of unconsolidated joint ventures are not calculated directly from amounts shown on this page. The per square foot amount represents the total cost of our rental properties and development and redevelopment projects under construction, including our partners’ share, divided by the total rentable or developable square feet of the respective property.


56



Development, redevelopment, and future value-creation projects

A key component of our business model is our disciplined allocation of capital to Class A development and redevelopment projects located in highly dynamic and collaborative science and technology campuses in AAA urban innovation cluster locations that inspire innovation. These projects are focused on providing high-quality, generic, and reusable space to meet the real estate requirements of, and that are reusable by, a wide range of client tenants. During the period of construction, these assets are non-income-producing assets. A significant number of our development and redevelopment projects under construction are highly leased and expected to be placed into service in the near term. Upon completion, each value-creation project is expected to generate significant increases in rental income, NOI, and cash flows. Our development and redevelopment projects are generally in locations that are highly desirable to high-quality science and technology entities, which we believe results in higher occupancy levels, longer lease terms, and higher rental income and returns.

Development projects consist of the ground-up development of generic and reusable facilities. Redevelopment projects consist of the permanent change in use of office, warehouse, and shell space into office/laboratory or tech office space. We generally will not commence new development projects for aboveground construction of Class A office/laboratory or tech office space without first securing significant pre-leasing for such space, except when there is solid market demand for high-quality Class A facilities. Predevelopment activities include entitlements, permitting, design, site work, and other activities preceding commencement of construction of aboveground building improvements. The advancement of predevelopment efforts is focused on reducing 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 and are expected to generate significant revenue and cash flows.

Our initial stabilized yield is calculated as the quotient of the estimated amounts of NOI upon stabilization and our investment in the property and 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 (cash basis). Our estimates for initial stabilized yields, initial stabilized yields (cash basis), 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 reflects rental income, including contractual rent escalations and any rent concessions over the term(s) of the lease(s), calculated on a straight-line basis. Initial stabilized yield (cash basis) reflects cash rents at the stabilization date after initial rental concessions, if any, have elapsed. Average cash yield reflects cash rents, including contractual rent escalations after initial rental concessions have elapsed, calculated on a straight-line basis. The stabilized occupancy date represents the estimated date on which the project is expected to reach occupancy of 95% or greater.



57



Overview of value-creation pipeline

A substantial portion of our value-creation pipeline is expected to be placed into service in the near term. The completion of these highly leased projects is expected to contribute additional rental income, NOI, and cash flows. The following table sets forth the expected year in which our projects under construction and near-term value-creation development projects are forecasted to contribute incremental NOI:
Visible Growth Pipeline: Highly Leased Projects to Be Placed into Service by December 31, 2016
1.5M
 
89%
 
$75M – $80M
RSF
 
Leased
 
Incremental Annual NOI (1)

 
 
ARE’s Ownership Interest
 
 
 
Total Project
 
 
Property
Market/Submarket
 
 
CIP
Square Feet
 
Square
Feet
 
Leased
 
Negotiating
 
Leased/Negotiating
 
Stabilization Date
Development and redevelopment projects under construction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
430 East 29th Street — New York City/Manhattan
 
 
100
%
 
 
67,912

 
418,639

 
87
%
 
11
%
 
98
%
 
4Q15
6040 George Watts Hill Drive — Research Triangle Park/RTP
 
 
100
%
 
 
61,547

 
61,547

 
100

 
—

 
100

 
1Q16
5200 Illumina Way, Building 6 — San Diego/University Town Center
 
 
100
%
 
 
295,609

 
295,609

 
100

 
—

 
100

 
3Q16
50/60 Binney Street — Greater Boston/Cambridge
 
 
100
%
 
 
530,477

 
530,477

 
98

 
—

 
98

 
4Q16
3013/3033 Science Park Road — San Diego/Torrey Pines
 
 
100
%
 
 
63,000

 
165,938

 
81

 
—

 
81

 
4Q16
360 Longwood Avenue — Greater Boston/Longwood Medical Area
 
 
27.5
%
 
 
153,677

 
413,536

 
63

 
1

 
64

 
4Q16
10290 Campus Point Drive — San Diego/University Town Center
 
 
100
%
 
 
304,326

 
304,326

 
100

 
—

 
100

 
Late 4Q16
 
 
 
 
 
 
1,476,548

 
2,190,072

 
89
%
 
2
%
 
91
%
 
 
Near-term development projects
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4796 Executive Drive — San Diego/University Town Center
 
 
100
%
 
 
61,755

 
61,755

 
100

 
—

 
100
%
 
4Q16
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total/weighted-average
 
 
 
 
 
1,538,303

 
2,251,827

 
89
%
 
2
%
 
91
%
 
 

(1)
Represents incremental annual NOI upon stabilization, including our 27.5% share of the incremental annual NOI from our 360 Longwood Avenue project.

58



Overview of value-creation pipeline (continued)
Visible Growth Pipeline: Highly Leased Projects to Be Placed into Service in 2017 and 2018
1.8M
 
71%
 
$105M to $110M
RSF
 
Leased
 
Incremental Annual NOI (1)


 
 
ARE’s Ownership Interest
 
Total Project
 
Forecast Year of NOI Initial Contribution
Property – Market/Submarket
 
 
Square
Feet
 
Leased
 
Negotiating
 
Leased/Negotiating
 
2017
2018
2019
Development and redevelopment projects under construction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
400 Dexter Avenue North — Seattle/Lake Union
 
 
100
%
 
 
287,806

 
56
%
 
23
%
 
79
%
 
510 Townsend Street — San Francisco/SoMa
 
 
100
%
 
 
300,000

 
100

 
—

 
100

 
100 Binney Street — Greater Boston/Cambridge
 
 
100
%
 
 
431,483

 
58

 
40

 
98

 
9625 Towne Centre Drive — San Diego/University Town Center
 
 
100
%
 
 
162,156

 
—

 
—

 
—

 
11 Hurley Street — Greater Boston/Cambridge
 
 
100
%
 
 
59,000

 
—

 
100

 
100

 
 
 
 
 
 
 
1,240,445

 
57
%
 
24
%
 
81
%
 
 
 
 
Near-term development projects
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
505 Brannan Street — San Francisco/SoMa
 
 
100
%
 
 
150,000

 
100

 
—

 
100

 
 
 
 
 
 
 
1,390,445

 
62
%
 
21
%
 
83
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Development projects under construction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1455/1515 Third Street — San Francisco/Mission Bay
 
 
51
%
 
 
422,980

 
100

 
—

 
100
%
 
 
 
 
 
 
 
1,813,425

 
71
%
 
16
%
 
87
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Near-term development projects
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5200 Illumina Way — San Diego/University Town Center
 
 
100
%
 
 
386,044

 
—

 
—

 
—

 
10300 Campus Point Drive, Building 2 — San Diego/University Town Center
 
 
100
%
 
 
292,387

 
—

 
—

 
—

 
East 29th Street — New York City/Manhattan
 
 
100
%
 
 
420,000

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total/weighted-average
 
 
 
 
 
2,911,856

 
44
%
 
10
%
 
54
%
 
Development project
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redevelopment project
(1)
Represents incremental annual NOI upon stabilization, including our 51% share of the incremental annual NOI from our 1455/1515 Third Street project.

59



Development projects under construction
    
The following table sets forth our consolidated development projects as of September 30, 2015 (dollars in thousands):
 
 
 
 
 
 
 
 
Leased Status
 
Project Start
Date
 
Initial Occupancy Date
 
Stabilized Occupancy Date
 
 
Project RSF
 
Leased
 
Negotiating
 
Total Leased/Negotiating
 
 
 
Property – Market/Submarket
 
In Service
 
CIP
 
Total
 
RSF
 
%
 
RSF
 
%
 
RSF
 
%
 
 
 
Consolidated development projects
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
430 East 29th Street – New York City/Manhattan
 
350,727

 
67,912

 
418,639

 
363,710

 
87
%
 
45,821

 
11
%
 
409,531

 
98
%
 
4Q12
 
4Q13
 
2015
50/60 Binney Street – Greater Boston/Cambridge
 
—

 
530,477

 
530,477

 
520,385

(1) 
98
%
 
—

 
—
%
 
520,385

 
98
%
 
1Q15
 
4Q16
 
2016
3013/3033 Science Park Road – San Diego/Torrey Pines
 
102,938

 
63,000

 
165,938

 
135,002

 
81
%
 
—

 
—
%
 
135,002

 
81
%
 
2Q14
 
4Q14
 
2016
5200 Illumina Way, Building 6 – San Diego/University Town Center
 
—

 
295,609

 
295,609

 
295,609

 
100
%
 
—

 
—
%
 
295,609

 
100
%
 
3Q14
 
3Q16
 
2016
6040 George Watts Hill Drive – Research Triangle Park/Research Triangle Park
 
—

 
61,547

 
61,547

 
61,547

 
100
%
 
—

 
—
%
 
61,547

 
100
%
 
4Q14
 
1Q16
 
2016
100 Binney Street – Greater Boston/Cambridge
 
—

 
431,483

 
431,483

 
252,022

 
58
%
 
171,853

 
40
%
 
423,875

 
98
%
 
3Q15
 
4Q17
 
2017
510 Townsend Street – San Francisco/SoMa
 
—

 
300,000

 
300,000

 
300,000

 
100
%
 
—

 
—
%
 
300,000

 
100
%
 
3Q15
 
3Q17
 
2017
400 Dexter Avenue North – Seattle/Lake Union
 
—

 
287,806

 
287,806

 
161,433

 
56
%
 
67,122

 
23
%
 
228,555

 
79
%
 
2Q15
 
1Q17
 
2018
Consolidated development projects
 
453,665

 
2,037,834

 
2,491,499

 
2,089,708

 
84
%
 
284,796

 
11
%
 
2,374,504

 
95
%
 
 
 
 
 
 
 
 
Investment
 
 
 
 
Property – Market/Submarket
 
 
 
Cost to Complete
 
 
 
 
Unlevered
 
 
 
 
 
 
2015
 
Thereafter
 
 
 
 
Average Cash
Yield
 
Initial Stabilized Yield
(Cash Basis)
 
Initial Stabilized Yield
 
 
In Service
 
CIP
 
Construction Financing
 
Internal Funding
 
Construction Financing
 
Internal Funding
 
Total at Completion
 
 
 
 
Consolidated development projects
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
430 East 29th Street – New York City/Manhattan
 
$
371,391

 
$
66,494

 
$
—

 
$
25,360

 
$
—

 
$
—

 
$
463,245

 
7.1%
 
6.6%
 
6.5%
 
50/60 Binney Street – Greater Boston/Cambridge
 
$
—

 
$
256,990

 
$
24,875

(2) 
$
—

 
$
218,135

(2) 
$
—

 
$
500,000

 
8.1%
 
7.3%
 
7.4%
 
3013/3033 Science Park Road – San Diego/Torrey Pines
 
$
54,098

 
$
7,980

 
$
—

 
$
7,768

 
$
—

 
$
34,944

 
$
104,790

 
7.7%
 
7.2%
 
7.1%
 
5200 Illumina Way, Building 6 – San Diego/University Town Center
 
$
—

 
$
32,937

 
$
—

 
$
16,765

 
$
—

 
$
20,198

 
$
69,900

 
8.6%
 
7.0%
 
8.4%
 
6040 George Watts Hill Drive – Research Triangle Park/Research Triangle Park
 
$
—

 
$
18,537

 
$
—

 
$
5,534

 
$
—

 
$
1,729

 
$
25,800

 
8.1%
 
7.3%
 
8.1%
 
100 Binney Street – Greater Boston/Cambridge
 
$
—

 
$
160,605

 
$
—

 
$
12,000

 
$
—

 
$
TBD

 
$
TBD

 
(3) 
 
(3) 
 
(3) 
 
510 Townsend Street – San Francisco/SoMa
 
$
—

 
$
63,542

 
$
—

 
$
6,120

 
$
—

 
 
168,338

 
 
238,000

 
7.9%
 
7.0%
 
7.2%
 
400 Dexter Avenue North – Seattle/Lake Union
 
$
—

 
$
37,415

 
$
—

 
$
21,578

 
$
—

 
$
TBD

 
$
TBD

 
(3) 
 
(3) 
 
(3) 
 
Consolidated development projects
 
$
425,489

 
$
644,500

 
$
24,875

 
$
95,125

 
$
218,135

 
$
TBD

 
$
TBD

 
 
 
 
 
 
 
 
 
 

(1)
bluebird bio, Inc. has temporarily leased 23,195 RSF at 215 First Street, and will relocate this space to 60 Binney Street upon completion of our development project under construction. Additionally, bluebird bio, Inc. occupies 53,455 RSF at 150 Second Street through December 2022.
(2)
Funding for this project will be provided primarily by a secured construction loan that we closed in October 2015, with aggregate commitments of $350.0 million at a rate of LIBOR+1.50%. We have two, one-year options to extend the stated maturity date to January 28, 2019, subject to certain conditions.
(3)
The design and budget of this project are in process, and the estimated project costs with related yields are expected to be disclosed in the near future.

60



Development projects under construction – unconsolidated joint ventures

The following table sets forth our unconsolidated joint venture development projects as of September 30, 2015 (dollars in thousands):
 
 
 
 
 
 
 
 
Leased Status
 
Project Start
Date
 
Initial Occupancy Date
 
Stabilized Occupancy Date
 
 
 
Project RSF
 
Leased
 
Negotiating
 
Total Leased/Negotiating
 
 
 
 
Property – Market/Submarket
 
In Service
 
CIP
 
Total
 
RSF
 
%
 
RSF
 
%
 
RSF
 
%
 
 
 
 
Unconsolidated joint venture development projects
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
360 Longwood Avenue –
Greater Boston/Longwood Medical Area
 
259,859

 
153,677

 
413,536

 
259,859

 
63
%
 
3,677

 
1
%
 
263,536

 
64
%
 
2Q12
 
3Q14
 
2016
 
1455/1515 Third Street –
San Francisco/Mission Bay
 
—

 
422,980

 
422,980

 
422,980

 
100
%
 
—

 
—
%
 
422,980

 
100
%
 
3Q14
 
2Q/3Q18
(1) 
2018
(1) 
Unconsolidated joint venture development projects
 
259,859

 
576,657

 
836,516

 
682,839

 
82
%
 
3,677

 
—
%
 
686,516

 
82
%
 
 
 
 
 
 
 

 
 
Investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost to Complete
 
 
 
 
Unlevered (2)
 
 
 
 
 
2015
 
Thereafter
 
 
 
 
Average Cash
Yield
 
Initial Stabilized Yield
(Cash Basis)
 
Initial Stabilized Yield
 
Property – Market/Submarket
 
 
Construction
Financing
 
Internal Funding
 
Construction
Financing
 
Internal Funding
 
Total at Completion
 
 
 
 
In Service
 
CIP
 
 
 
 
 
 
 
 
Unconsolidated joint venture development projects (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
100% of joint venture: 360 Longwood Avenue –
Greater Boston/Longwood Medical Area
 
$
194,617

 
$
115,486

 
$
11,996

 
$
—

 
$
27,901

 
$
—

 
$
350,000

 
 
 
 
 
 
 
 
 
 
100% of joint venture: 1455/1515 Third Street –
San Francisco/Mission Bay (3)
 
$
21,150

 
$
114,118

 
$
—

 
$
5,243

 
$
—

 
$
TBD

 
$
TBD

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ARE share of unconsolidated joint venture development projects (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
27.5% of joint venture: 360 Longwood Avenue –
Greater Boston/Longwood Medical Area
 
$
58,898

 
$
35,004

 
$
3,299

 
$
249

 
$
7,673

 
$
3,842

 
$
108,965

 
8.2%
 
7.3%
 
7.8%
 
51.0% of joint venture: 1455/1515 Third Street –
San Francisco/Mission Bay
 
$
10,787

 
$
61,708

 
$
—

 
$
3,751

 
$
—

 
$
TBD

 
$
TBD

 
(4) 
 
(4) 
 
(4) 
 
Total ARE share of unconsolidated joint venture
development projects
 
$
69,685

 
$
96,712

 
$
3,299

 
$
4,000

 
$
7,673

 
$
TBD

 
$
TBD

 
 
 
 
 
 
 
 
 
 

(1)
Pursuant to the terms of our lease with Uber Technologies, Inc. (“Uber”), contractual rental payments commence in the first quarter of 2017. Uber has redesigned the buildings and is in the process of obtaining regulatory approval of their design. As part of these modifications, Uber is expected to make a significant investment in the project. Despite rental payments commencing in in the first quarter of 2017, we do not expect to recognize rental revenue until we complete the project which is expected to occur around the second or third quarter of 2018. We expect to provide an update on our estimated cost at completion and targeted yields in the near future.
(2)
Our projected unlevered initial stabilized yield (cash basis) is based upon our share of the investment in real estate, including costs incurred directly by us outside of the joint venture. Development management fees earned from these development projects have been excluded from our estimate of unlevered yields.
(3)
Refer to page 69 and 70 for additional information regarding our unconsolidated joint ventures.
(4)
The design and budget of this project are in process, and the estimated project costs with related yields are expected to be disclosed in the near future.


61



Redevelopment projects under construction
    
The following table sets forth our consolidated redevelopment projects as of September 30, 2015 (dollars in thousands):

 
 
 
 
 
 
 
 
Leased Status
 
Project Start
Date
 
Initial Occupancy Date
 
Stabilized Occupancy Date
 
 
Project RSF
 
Leased
 
Negotiating
 
Total Leased/Negotiating
 
 
 
Property – Market/Submarket
 
In Service
 
CIP
 
Total
 
RSF
 
%
 
RSF
 
%
 
RSF
 
%
 
 
 
Consolidated redevelopment projects
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10290 Campus Point Drive – San Diego/University Town Center
 
—

 
304,326

 
304,326

 
304,326

 
100
%
 
—

 
—
%
 
304,326

 
100
%
 
3Q15
 
4Q16
 
2016
11 Hurley Street – Greater Boston/Cambridge
 
—

 
59,000

 
59,000

 
—

 
—
%
 
59,000

 
100
%
 
59,000

 
100
%
 
3Q15
 
1Q17
 
2017
9625 Towne Centre Drive – San Diego/University Town Center
 
—

 
162,156

 
162,156

 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
3Q15
 
1Q17
 
2017
Consolidated redevelopment projects
 
—

 
525,482

 
525,482

 
304,326

 
58
%
 
59,000

 
11
%
 
363,326

 
69
%
 
 
 
 
 
 


 
 
Investment
 
Unlevered
 
Property – Market/Submarket
 
 
 
Cost to Complete
 
 
 
 
Average Cash
Yield
 
Initial Stabilized Yield
(Cash Basis)
 
Initial Stabilized Yield
 
 
In Service
 
CIP
 
2015
 
Thereafter
 
Total at Completion
 
 
 
 
Consolidated redevelopment projects
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10290 Campus Point Drive – San Diego/University Town Center
 
$
—

 
$
110,570

 
$
7,504

 
$
122,926

 
$
241,000

 
7.6%
 
6.8%
 
7.0%
 
11 Hurley Street – Greater Boston/Cambridge
 
$
—

 
$
6,403

 
$
2,496

 
$
TBD

 
$
TBD

 
(1) 
 
(1) 
 
(1) 
 
9625 Towne Centre Drive – San Diego/University Town Center
 
$
—

 
$
22,958

 
$
1,000

 
$
TBD

 
$
TBD

 
(1) 
 
(1) 
 
(1) 
 
Consolidated redevelopment projects
 
$
—

 
$
139,931

 
$
11,000

 
$
122,926

 
$
241,000

 
 
 
 
 
 
 
 
 
 

(1)
The design and budget of this project are in process, and the estimated project costs with related yields are expected to be disclosed in the near future.

62



Near-term and future value-creation development projects in North America
The following table summarizes the components of the book value and square footage of our near-term and future value-creation development projects in North America as of September 30, 2015 (dollars in thousands, except per square foot amounts):
 
 
 
 
Square Feet
 
 
Property – Market/Submarket
 
Book Value
 
Value-Creation Project
 
Embedded Land (1)
 
Total
 
Cost Per
Square Foot
Near-Term Value-Creation Development Projects –
Land undergoing predevelopment activities (CIP)
 
 
 
 
 
 
 
 
 
 
505 Brannan Street, Phase I – San Francisco/SoMa
 
$
24,935

 
150,000

 
—

 
150,000

 
$
166

East 29th Street – New York City/Manhattan
 
—

 
—

 
420,000

(2) 
420,000

 
—

5200 Illumina Way – San Diego/University Town Center
 
9,926

 
386,044

 
—

 
386,044

 
26

10300 Campus Point Drive, Building 2 – San Diego/University Town Center
 
6,530

 
292,387

 
—

 
292,387

 
22

4796 Executive Drive – San Diego/University Town Center
 
5,967

 
61,755

 
—

 
61,755

 
97

Near-term value-creation development projects
 
47,358

 
890,186

 
420,000

 
1,310,186

 
36

 
 
 
 
 
 
 
 
 
 
 
Future Value-Creation Development Projects – Land held for development
 
 
 
 
 
Alexandria Technology Square® – Greater Boston/Cambridge
 
7,790

 
100,000

 
—

 
100,000

 
78

505 Brannan Street, Phase II – San Francisco/SoMa
 
12,744

 
165,000

 
—

 
165,000

 
77

Grand Avenue – San Francisco/South San Francisco (3)
 
45,056

 
397,132

 
—

 
397,132

 
113

560 Eccles Avenue – San Francisco/South San Francisco (4)
 
17,655

 
144,000

 
—

 
144,000

 
123

ARE Sunrise – San Diego/Torrey Pines
 
—

 
—

 
133,000

 
133,000

 
—

1150/1165/1166 Eastlake Avenue East – Seattle/Lake Union (5)
 
34,079

 
266,266

 
—

 
266,266

 
128

1818 Fairview Avenue East – Seattle/Lake Union
 
8,562

 
188,490

 
—

 
188,490

 
45

Other
 
61,427

 
1,967,487

 
436,000

 
2,403,487

 
26

Future value-creation development projects
 
187,313

 
3,228,375

 
569,000

 
3,797,375

 
49

 
 
 
 
 
 
 
 
 
 
 
Total near-term and future value-creation development projects in North America
 
$
234,671

 
4,118,561

 
989,000

 
5,107,561

 
$
46


(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 primarily classified in rental properties.
(2)
We hold a right to ground-lease a parcel supporting the future ground-up development of approximately 420,000 Square Feet at the Alexandria Center® for Life Science pursuant to an option under our ground lease. We have begun discussions regarding this option and the potential to increase the site density beyond 420,000 Square Feet.
(3)
Represents two additional land parcels located adjacent to/surrounding the recently developed 249/259/269 East Grand Avenue campus leased to Amgen Inc. in South San Francisco.
(4)
Represents an additional land parcel located nearby our 341/343 Oyster Point Boulevard properties and within walking distance of Roche’s campus in South San Francisco.
(5)
The cost per square foot for 1165 Eastlake Avenue East includes an existing structure that can substantially be incorporated into the development plans.

63



Summary of capital expenditures

The following table summarizes the total projected construction spending for the three months, and year ending December 31, 2015, which includes interest, property taxes, insurance, payroll, and other indirect project costs (in thousands):
Projected Construction Spending
 
Three Months Ending December 31, 2015
 
Development and redevelopment projects under construction:
 
 
 
 
 
 
 
 
Development (consolidated)
 
$
120,000

 
 
 
 
 
Development (unconsolidated joint venture)
 
 
4,000

 
 
 
 
 
Redevelopment
 
 
11,000

 
 
 
 
 
Developments/redevelopments recently transferred to rental properties
 
 
27,500

(1) 
 
 
 
Generic laboratory infrastructure/building improvement projects
 
 
21,000

(2) 
 
 
 
 
Development and redevelopment projects under construction
 
 
 
 
 
183,500
 
 
Near-term value-creation projects
 
 
 
 
 
15,000
 
(3) 
Value-creation projects
 
 
 
 
 
198,500
 
 
 
Non-revenue-enhancing capital expenditures and tenant improvements
 
 
 
 
 
3,500
 
 
Projected construction spending for the three months ending
December 31, 2015 (midpoint)
 
 
 
 
$
202,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Full-Year Construction Spending Guidance
 
 
 
 
Year Ending December 31, 2015
 
Projected construction spending for the three months ending
December 31, 2015 (range)
 
 
 
 
$
177,000

–
227,000

 
Actual construction spending for the nine months ended September 30, 2015
 
 
 
 
 
358,351
 
Guidance range for the year ending December 31, 2015
 
 
 
 
$
535,000

–
585,000

 

(1)
Includes spending for projects recently placed into service, including 11055/11065/11075 Roselle Street, 4757 Nexus Center Drive, and 1616 Eastlake Avenue East, that may require additional construction prior to occupancy, generally ranging from 15,000 to 30,000 RSF of the project, plus amounts related to 75/125 Binney Street.
(2)
Includes, among others, 3535 General Atomics Court, 9373 Towne Centre Drive, 5810/5820/6175 Nancy Ridge Drive, 44 Hartwell Avenue, 19 Presidential Way, and 2525 East NC Highway 54.
(3)
See the overview of our near-term value-creation projects on pages 58, 59 and 63.



64



Our construction spending for the nine months ended September 30, 2015, consisted of the following (in thousands):
Actual Construction Spending
 
Nine Months Ended September 30, 2015
 
Development
 
$
228,577

 
Redevelopment
 
32,833

 
Predevelopment
 
27,602

 
Generic laboratory infrastructure/building improvement projects (1)
 
66,061

 
Asia
 
7,816

 
Total construction spending
 
$
362,889

 
 
 
 
 
Total construction spending, consolidated
 
$
354,910

 
Total construction spending, unconsolidated joint ventures
 
7,979

(2) 
Total construction spending
 
$
362,889

 
 
 
 
 
 
 
 
 

(1)
Includes revenue-enhancing projects and non-revenue-enhancing capital expenditures shown in the table below.
(2)
Construction spending for unconsolidated joint ventures is reflected as investment in unconsolidated real estate joint ventures in our consolidated statements of cash flows.

The table below reconciles construction spending on an accrual basis to our additions to properties on a cash basis (in thousands):
Actual Construction Spending
 
Nine Months Ended September 30, 2015
Construction spending, consolidated real estate (accrual basis)
 
$
354,910

Change in accrued construction
 
7,305

Additions to real estate (cash basis)
 
$
362,215


The table below shows the average per RSF 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 RSF amounts):
Non-Revenue-Enhancing Capital Expenditures, Tenant Improvements, and Leasing Costs
 
Nine Months Ended September 30, 2015
 
Recent Average
Per RSF (1)
 
Amount
 
RSF
 
Per RSF
 
Non-revenue-enhancing capital expenditures
 
$
7,425

 
16,270,212

 
$
0.46

 
$
0.35

 
 
 
 
 
 
 
 
 
Tenant improvements and leasing costs:
 
 
 
 
 
 
 
 
Re-tenanted space
 
$
7,630

 
514,223

 
$
14.84

 
$
13.47

Renewal space
 
10,073

 
1,215,016

 
8.29

 
6.73

Total tenant improvements and leasing costs/weighted-average
 
$
17,703

 
1,729,239

 
$
10.24

 
$
8.38


(1)
Represents the average of the years ended December 31, 2011, through December 31, 2014, and the nine months ended September 30, 2015, annualized.

Value-creation projects – commencement of development projects in North America

During the nine months ended September 30, 2015, we commenced four ground-up development projects in North America, consisting of our development of (i) a 530,477 RSF project at 50/60 Binney Street in our Cambridge submarket, which is 98% leased to Sanofi and bluebird, bio, Inc., (ii) a 287,806 RSF project at 400 Dexter Avenue North in our Lake Union submarket, with 161,433 RSF, or 56% of the project, currently leased to Juno Therapeutics, Inc., excluding the expansion option it holds to lease an additional 67,122 RSF, (iii) a 431,483 RSF project at 100 Binney Street in our Cambridge submarket, which is 98% leased or under negotiation, including 252,022 RSF, or 58% of the project, leased to Bristol-Myers Squibb Company, and (iv) a 300,000 RSF project at 510 Townsend Street in our SoMa submarket, which is 100% leased to Stripe, Inc. Refer to “Development Projects Under Construction” appearing elsewhere in Item 2 of this report for further information.


65




External growth – development and redevelopment projects placed into service

The following table presents key development and redevelopment projects, including our unconsolidated joint ventures, placed into service during the nine months ended September 30, 2015 (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
%
of Project
in Service
 
 
 
 
 
Unlevered
 
 
 
 
RSF in Service
 
 
 
 
 
 
Average
Cash
Yield
 
Initial Stabilized Yield
(Cash Basis)
 
Initial Stabilized Yield
 
 
Date Placed into Service
 
Prior to 1/1/15
 
Placed into Service in 2015
 
Total
 
 
Total Project
 
 
 
Property – Market/Submarket
 
 
 
First Quarter
 
Second Quarter
 
Third Quarter
 
 
 
Leased/
Negotiating
 
Investment
 
 
 
Consolidated development projects
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
75/125 Binney Street – Greater Boston/Cambridge
 
March 2015
 
—

 
388,270

 
—

 
—

 
388,270

 
100%
 
100%
 
$
361,000

(1) 
9.3
%
(1) 
 
 
8.4
%
(1) 
 
 
8.3
%
(1) 
430 East 29th Street – New York City/Manhattan
 
Various
 
241,417

 
43,209

 
3,611

 
62,490

 
350,727

 
84%
 
98%
 
$
463,245

 
 
7.1
%
(2) 
 
 
6.6
%
(2) 
 
 
6.5
%
(2) 
3013/3033 Science Park Road – San Diego/Torrey Pines
 
Various
 
42,047

 
60,891

 
—

 
—

 
102,938

 
62%
 
81%
 
$
104,790

 
 
7.7
%
(2) 
 
 
7.2
%
(2) 
 
 
7.1
%
(2) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unconsolidated joint venture development project
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
360 Longwood Avenue –
Greater Boston/Longwood Medical Area
 
Various
 
155,524

 
2,107

 
51,997

 
50,231

 
259,859

 
63%
 
64%
 
$
108,965

(3) 
8.2
%
(2) 
 
 
7.3
%
(2) 
 
 
7.8
%
(2) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated redevelopment projects
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
225 Second Avenue – Greater Boston/Route 128
 
May 2015
 
—

 
—

 
112,500

 
—

 
112,500

 
100%
 
100%
 
$
47,172

 
 
9.0
%
(2) 
 
 
8.3
%
(2) 
 
 
8.4
%
(4) 
11055/11065/11075 Roselle Street –
San Diego/Sorrento Valley
 
Various
 
23,936

 
—

 
31,277

 
—

 
55,213

 
100%
 
75%
 
$
18,193

 
 
8.1
%
(5) 
 
 
7.9
%
(5) 
 
 
8.0
%
(5) 

(1)
Previously disclosed estimated yields were 9.1% average cash yield, 8.0% for initial stabilized yield (cash basis), and 8.2% for initial stabilized yield and cost of completion was $351.4 million.
(2)
Consistent with previously disclosed estimated yields.
(3)
Represents ARE’s investment at completion related to its 27.5% interest in this unconsolidated joint venture. See pages 61 and 70 for additional information.
(4)
Increased from previously disclosed estimated yield of 8.3% for initial stabilized yield. The increase in the initial stabilized yield and investment into the project reflect the final terms of our lease with the client tenant.
(5)
Increased from previously disclosed estimated yields of 8.0% for average cash yield, 7.8% for initial stabilized yield (cash basis), and 7.9% for initial stabilized yield. The increase in the yields reflects the final project costs.



66



External growth – acquisitions

The following table presents acquisitions completed during the nine months ended September 30, 2015 (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unlevered
Property – Market/Submarket
 
 
 
Date Acquired
 
Number of Properties
 
Gross Purchase Price
 
Loan Assumption
 
 
 
Percentage
 
Average
Cash Yield
 
Initial
Stabilized Yield (Cash)
 
Initial
Stabilized Yield
 
Type
 
 
 
 
 
RSF
 
Leased
 
Negotiating
 
 
 
640 Memorial Drive –
Greater Boston/Cambridge
 
Operating
 
1/21/15
 
1
 
$
176,500

 
$
82,000

(1) 
225,504

 
100%
 
—%
 
 
6.8%
 
 
 
6.4%
 
 
 
7.5%
 
Alexandria Technology Square® 
(10% noncontrolling interest) – Greater Boston/Cambridge
 
Operating
 
1/21/15
 
N/A
(2) 
108,250

(2) 
—

 
1,181,635

 
100%
 
—%
 
 
6.1%
(3) 
 
 
5.4%
(3) 
 
 
6.1%
(3) 
505 Brannan Street – San Francisco/SoMa
 
Land
 
4/30/15
 
—
 
34,000

 
—

 
315,000

 
100%
 
—%
 
 
TBD
 
 
 
TBD
 
 
 
TBD
 
1818 Fairview Avenue East – Seattle/Lake Union
 
Land
 
5/6/15
 
—
 
8,444

(4) 
—

 
188,490

 
—%
 
—%
 
 
TBD
 
 
 
TBD
 
 
 
TBD
 
10290 Campus Point Drive –
San Diego/
University Town Center
 
Redevelopment
 
7/1/15
 
1
 
105,000

 
—

 
304,326

 
100%
 
—%
 
 
7.6
%

 
 
6.8
%

 
 
7.0
%
 
11 Hurley Street –
Greater Boston/Cambridge
 
Redevelopment
 
9/15/15
 
1
 
5,908

(5) 
—

 
59,000

 
—%
 
100%
 
 
TBD
 
 
 
TBD
 
 
 
TBD
 
 
 
 
 
 
 
3
 
$
438,102

 
$
82,000

 
2,273,955

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(1)
Represents a secured note payable with a contractual rate of 3.93% and a maturity date in 2023.
(2)
During the three months ended March 31, 2015, we executed an agreement to purchase the outstanding 10% noncontrolling interest in our 1.2 million RSF campus at Alexandria Technology Square® for $108.3 million. Upon execution of the purchase agreement, we recognized a liability representing the fair value of the aggregate consideration, primarily consisting of the $108.3 million purchase price. The first installment of $54.3 million was paid on April 1, 2015, and the second installment of $54.0 million is due on April 1, 2016.
(3)
We believe there is further upside in our projected returns as we anticipate significant rent growth from 81% of the leases contractually ending in the five years following the date of acquisition. Additionally, we believe we can increase our 1.2 million RSF campus by an additional 100,000 RSF and further increase NOI. The campus is currently 100% occupied and subject to a long-term ground lease. After considering the $108.3 million purchase of the outstanding 10% noncontrolling interest in this flagship campus and the anticipated near- and medium-term upside in NOI from rental rate growth and campus expansion, we estimate that we can enhance our unlevered yields on our aggregate investment in the campus over the next five years to 8.5% and 8.1% (cash basis).
(4)
We acquired this site for future development and the land parcel is subject to a long-term ground lease. The land parcel is located adjacent to one of our existing campuses in the Lake Union submarket.
(5)
We acquired this project for redevelopment and the property is subject to a long-term ground lease.

67

Dispositions and other sources of capital

The following table presents real estate asset sales completed during the nine months ended September 30, 2015, and pending and projected remainder/asset sales for the balance of 2015 (dollars in thousands):
Property – Market/Submarket
 
Number of Operating Properties
 
Square Feet
 
Interest Sold/Subject to Sale
 
NOI (1)
 
Cash NOI (1)
 
Cash Capitalization Rate
 
Actual/Estimated Sales Price
Completed in the nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
661 University Avenue – Canada/Toronto
 
1
 
N/A

 
100%
 
$
(1,363
)
 
$
(135
)
 
N/A
 
$
54,104
270 Third Street – Greater Boston/Cambridge
 
—
 
N/A

 
100%
 
—

 
—

 
N/A
 
 
25,477
Other
 
2
 
196,859

 
100%
 
(595
)
 
(595
)
 
N/A
 
 
14,335
Completed in the nine months ended September 30, 2015
 
$
(1,958
)
 
$
(730
)
 
N/A
 
$
$93,916
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under contract
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
225 Binney Street – Greater Boston/Cambridge (2)
 
1
 
305,212

 
70%
 
$
9,320

 
$
8,650

 
4.5%
 
 
190,110
1500 Owens Street – San Francisco/South San Francisco (3)
 
1
 
158,267

 
49.9%
 
4,169

 
3,524

 
4.8
 
 
73,353
75/125 Shoreway Road – San Francisco/Palo Alto/Stanford Research Park
 
1
 
82,874

 
100%
 
2,616

 
2,231

 
5.8
 
 
38,500
Under contract
 
 
 
 
 
 
$
16,105

 
$
14,405

 
4.8%
 
$
301,963
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dispositions completed and under contract
 
 
 
 
 
 
 
$
395,879
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pending/targeted asset sales (4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partial interest in core property/core-like properties (4)
 
TBD
 
TBD
 
70% to 100%
 
TBD
 
TBD
 
4.5% to 6.0%
 
 
305,000 (4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total dispositions completed and other sources of capital for 2015
 
 
 
 
 
 
 
$
650,000
to
$
750,000


(1)
Annualized NOI for the quarter ended prior to the date of sale. Cash NOI excludes straight-line rent. NOI and sales price related to sale of less than 100% of the property represents the proportional interest of the total property.
(2)
In July 2015, we executed an agreement to sell an interest in 225 Binney Street to a high-quality institutional investor.
(3)
In October 2015, we executed an agreement to sell an interest in 1500 Owens Street to a high-quality institutional investor. Due diligence is expected to be completed by the buyer on or around November 4, 2015.
(4)
We have several properties targeted for sale, including the sale of a partial interest in one high-value core property that by itself will meet the remainder/asset sales goal of $305 million. We also continue to pursue the sale of 500 Forbes Boulevard located in our South San Francisco submarket.

68



Investments in unconsolidated joint ventures

360 Longwood Avenue

We are currently developing a building aggregating 413,536 RSF in the Longwood Medical Area submarket of the Greater Boston market through an unconsolidated joint venture. We expect to earn unlevered yields on our share of the gross real estate in the joint venture as follows: (i) an initial stabilized yield of 7.8%, (ii) an initial stabilized yield (cash basis) of 7.3%, and (iii) an average cash yield during the term of the initial leases of 8.2%. Our projected unlevered yields are based upon our share of the investment in real estate of the joint venture at completion of approximately $109.0 million, including costs incurred directly by us outside the joint venture. In addition to these yields, we will receive recurring monthly property management fees thereafter from this project. Construction management and other fees have been excluded from our estimate of unlevered yields. Refer to Note 3 – “Investments in Real Estate” to our unaudited consolidated financial statements under Item 1 of this report.

1455/1515 Third Street

Alexandria and Uber entered into a joint venture agreement and acquired two land parcels supporting the development of two buildings aggregating 422,980 RSF at 1455/1515 Third Street in the Mission Bay submarket in San Francisco for a total purchase price of $125.0 million. We are in the process of finalizing the design and construction budget with Uber, and we expect to provide the total estimated cost at completion and estimated yields in the near future. Refer to Note 3 – “Investments in Real Estate” to our unaudited consolidated financial statements under Item 1 of this report.


69



The following table sets forth the information related to our unconsolidated joint ventures as of September 30, 2015 (dollars in thousands):
Three months ended September 30, 2015
 
 
360 Longwood Avenue
 
1455/1515 Third Street
 
Total ARE
Share
 
 
100%
 
ARE’s 27.5%
Share
 
100%
 
ARE’s 51%
Share
 
Revenue
 
$
6,148

 
$
1,770

(1) 
$
208

 
$
105

 
$
1,875

Rental operations
 
(1,474
)
 
(407
)
 
(142
)
 
(71
)
 
(478
)
 
 
4,674

 
1,363

 
66

 
34

 
1,397

Interest
 
(877
)
 
(242
)
 
—

 
—

 
(242
)
Depreciation and amortization
 
(1,092
)
 
(377
)
 
(133
)
 
(68
)
 
(445
)
Net income (loss)
 
$
2,705

 
$
744

 
$
(67
)
 
$
(34
)
 
$
710

Nine months ended September 30, 2015
 
 
360 Longwood Avenue
 
1455/1515 Third Street
 
Total ARE
Share
 
 
100%
 
ARE’s 27.5%
Share
 
100%
 
ARE’s 51%
Share
 
Revenue
 
$
14,624

 
$
4,244

(1) 
$
346

 
$
176

 
$
4,420

Rental operations
 
(3,704
)
 
(1,022
)
 
(414
)
 
(210
)
 
(1,232
)
 
 
10,920

 
3,222

 
(68
)
 
(34
)
 
3,188

Interest
 
(1,027
)
 
(284
)
 
—

 
—

 
(284
)
Depreciation and amortization
 
(2,502
)
 
(876
)
 
(397
)
 
(203
)
 
(1,079
)
Net income (loss)
 
$
7,391

 
$
2,062

 
$
(465
)
 
$
(237
)
 
$
1,825

As of September 30, 2015
 
 
360 Longwood Avenue
 
1455/1515 Third Street
 
Total ARE
   Share (2)
 
 
100%
 
ARE’s 27.5%
Share (2)
 
100%
 
ARE’s 51%
  Share (2)
 
Rental properties
 
$
194,617

 
$
58,898

 
$
21,150

 
$
10,787

 
$
69,685

Construction in progress
 
115,486

 
35,004

 
114,118

 
61,708

 
96,712

Gross investments in real estate
 
310,103

 
93,902

 
135,268

 
72,495

 
166,397

Less: accumulated depreciation
 
(2,960
)
 
(997
)
 
(573
)
 
(292
)
 
(1,289
)
Investments in real estate
 
307,143

 
92,905

 
134,695

 
72,203

 
165,108

Other assets
 
21,316

 
6,775

 
13,639

 
7,102

 
13,877

Total assets
 
$
328,459

 
$
99,680

 
$
148,334

 
$
79,305

 
$
178,985

 
 
 
 
 
 
 
 
 
 
 
Secured notes payable
 
$
175,326

(3) 
$
48,215

 
$
—

 
$
—

 
$
48,215

Other liabilities
 
3,878

 
1,065

 
6,327

 
3,234

 
4,299

Total liabilities
 
179,204

 
49,280

 
6,327

 
3,234

 
52,514

Equity
 
149,255

 
50,400

 
142,007

 
76,071

 
126,471

Total liabilities and equity
 
$
328,459

 
$
99,680

 
$
148,334

 
$
79,305

 
$
178,985

 
 
 
 
 
 
 
 
 
 
 
 
 
RSF
 
 
 
RSF
 
 
 
 
Rental properties
 
259,859

 
 
 
—

 
 
 
 
Active development (CIP) (4)
 
153,677

 
 
 
422,980

 
 
 
 
Total
 
413,536

 
 
 
422,980

 
 
 
 

(1)
Included development and property management fees earned.
(2)
Amounts include costs incurred directly by us outside of the joint ventures. We believe the information on our share of investments in unconsolidated joint ventures is useful information for investors as it provides our proportional share of the investments in real estate from all properties, including our share of the assets and liabilities of our unconsolidated joint ventures. This information also allows investors to estimate the impact of real estate investments and debt financing at the joint venture level.
(3)
Secured construction loan with aggregate commitments of $213.2 million; borrowings outstanding bear interest at LIBOR+3.75%, with a floor of 5.25%. The maturity date of the loan is April 1, 2017, with two, one-year options to extend the stated maturity date to April 1, 2019, subject to certain conditions.
(4)
Refer to page 61 for further detail of our unconsolidated joint venture development projects.

70



Real estate investments in Asia

Our investments in real estate in Asia consisted of the following as of September 30, 2015 (dollars in thousands):
 
Number of Properties
 
ABR
 
Occupancy Percentage
 
Book Value (1) 
 
Square Feet
Rental properties in China
2
 
$
1,217

 
53.6
%
 
$
78,652

 
634,328

Rental properties in India
6
 
5,670

 
66.0

 
69,167

 
565,386

Rental properties in Asia
8
 
$
6,887

 
59.4
%
 
147,819

 
1,199,714

 
 
 
 
 
 
 
 
 
 
Land held for future development in India
 
77,261

 
6,419,707

Total investments in real estate in Asia
 
$
225,080

(1) 
7,619,421


(1) Includes cumulative unrealized foreign currency translation losses of approximately $47.4 million as of September 30, 2015.


71



Results of operations

Key operating metrics
Occupancy of Operating Properties
North America (1)
 
Annualized Based Rent (1) by Market
 
 
 
% of ARE’s Total ABR
 
 
 
Rental Rate Increases:
Renewed/Re-leased Space
 
Same Property NOI Increase
 
 
 
 
 
 
 
 
Favorable Lease Structure
 
Adjusted EBITDA Margin (2)
 
 
65%
Percentage of
triple net leases
96%
 
Stable cash flow
 
Percentage of leases
containing annual
rent escalations
95%
 
Increasing cash flows
 
Percentage of leases
providing for
the recapture of
capital expenditures
94%
 
Lower capex burden
 
 
 
 
(1)
As of the end of each respective period.
(2)
Represents the three months ended September 30, 2015, annualized.

72



Same Properties

As a result of changes within our total property portfolio, the financial data presented in the tables in “Comparison of the Three Months Ended September 30, 2015, to the Three Months Ended September 30, 2014,” and “Comparison of the Nine Months Ended September 30, 2015, to the Nine Months Ended September 30, 2014,” show significant changes in revenue and expenses from period to period. In order to supplement an evaluation of our results of operations, we analyze the operating performance for all properties that were operating for the periods presented (“Same Properties”) separate from properties acquired subsequent to the beginning of the earliest period presented, properties currently undergoing development or redevelopment, and corporate entities (legal entities performing general and administrative functions), which are excluded from Same Properties’ results (“Non-Same Properties”). Additionally, rental revenues from lease termination fees, if any, are excluded from the results of Same Properties.

The following table presents information regarding our Same Properties for the three and nine months ended September 30, 2015:
 
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
Percentage change in NOI over comparable period from prior year
 
1.1%

 
1.2%
Percentage change in NOI (cash basis) over comparable period from prior year
 
4.8%

 
5.6%

Operating margin
 
68%

 
70%
Number of Same Properties
 
168

 
163

RSF
 
14,410,625

 
13,917,359

Occupancy – current-period average
 
93.3%
 
95.7%
Occupancy – same-period prior year average
 
94.4%
 
95.8%


73



The following table reconciles the number of Same Properties to total properties for the nine months ended September 30, 2015:
Development – under construction
 
Properties
50/60 Binney Street
 
2

100 Binney Street
 
1

510 Townsend Street
 
1

430 East 29th Street
 
1

5200 Illumina Way, Building 6
 
1

3013/3033 Science Park Road
 
2

400 Dexter Avenue North
 
1

6040 George Watts Hill Drive
 
1

360 Longwood Avenue (unconsolidated joint venture)
 
1

1455/1515 Third Street (unconsolidated joint venture)
 
2

 
 
13

 
 
 
Development – placed into service after January 1, 2014
 
Properties
75/125 Binney Street
 
1

499 Illinois Street
 
1

269 East Grand Avenue
 
1

 
 
3

 
 
 
Redevelopment – under construction
 
Properties
11 Hurley Street
 
1

10290 Campus Point Drive
 
1

9625 Towne Centre Drive
 
1

 
 
3

 
 
 
Redevelopment – placed into service after January 1, 2014
 
Properties
225 Second Avenue
 
1

11055/11065/11075 Roselle Street
 
3

10121 Barnes Canyon Road
 
1

 
 
5

Summary
 
Properties
Projects under construction:
 
 
Development
 
13

Redevelopment
 
3

Projects placed into service after
January 1, 2014:
 
 
Development
 
3

Development – Asia
 
2

Redevelopment
 
5

 
 
 
Acquisitions after January 1, 2014:
3545 Cray Court
 
1

4025/4031/4045/Sorrento Valley Boulevard
 
3

640 Memorial Drive
 
1

 
 
 
Properties “held for sale” in current or
preceding periods
 
4

Total properties excluded from Same Properties
 
35

 
 
 
Same Properties
 
163

 
 
 
Total properties for the
 
 
nine months ended September 30, 2015
 
198

 
 
 

74



Comparison of the three months ended September 30, 2015, to the three months ended September 30, 2014

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, 2015, compared to the three months ended September 30, 2014, and a reconciliation of NOI to income from continuing operations, the most directly comparable financial measure (dollars in thousands):
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
$ Change
 
% Change
Revenues:
 
 
 
 
 
 
 
 
Rental – Same Properties
 
$
124,947

 
$
125,795

 
$
(848
)
 
(0.7
)%
Rental – Non-Same Properties
 
30,364

 
11,923

 
18,441

 
154.7

Total rental
 
155,311

 
137,718

 
17,593

 
12.8

 
 
 
 
 
 
 
 
 
Tenant recoveries – Same Properties
 
48,395

 
43,121

 
5,274

 
12.2

Tenant recoveries – Non-Same Properties
 
7,724

 
2,451

 
5,273

 
215.1

Total tenant recoveries
 
56,119

 
45,572

 
10,547

 
23.1

 
 
 
 
 
 
 
 
 
Other income – Same Properties
 
304

 
18

 
286

 
1,588.9

Other income – Non-Same Properties
 
6,876

 
2,307

 
4,569

 
198.0

Total other income
 
7,180

 
2,325

 
4,855

 
208.8

 
 
 
 
 
 
 
 
 
Total revenues – Same Properties
 
173,646

 
168,934

 
4,712

 
2.8

Total revenues – Non-Same Properties
 
44,964

 
16,681

 
28,283

 
169.6

Total revenues
 
218,610

 
185,615

 
32,995

 
17.8

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Rental operations – Same Properties
 
55,278

 
51,846

 
3,432

 
6.6

Rental operations – Non-Same Properties
 
13,568

 
5,577

 
7,991

 
143.3

Total rental operations
 
68,846

 
57,423

 
11,423

 
19.9

 
 
 
 
 
 
 
 
 
Our share of NOI from unconsolidated joint ventures:
 
 
 
 
 
 
 
 
Joint venture NOI – Same Properties
 
—

 
—

 
—

 
—

Joint venture NOI – Non-Same Properties
 
1,397

 
—

 
1,397

 
100.0

Our share of NOI from unconsolidated joint ventures
 
1,397

 
—

 
1,397

 
100.0

 
 
 
 
 
 
 
 
 
NOI from continuing operations:
 
 
 
 
 
 
 
 
NOI – Same Properties
 
118,368

 
117,088

 
1,280

 
1.1

NOI – Non-Same Properties
 
32,793

 
11,104

 
21,689

 
195.3

Total NOI from continuing operations
 
151,161

 
128,192

 
22,969

 
17.9

 
 
 
 
 
 
 
 
 
Other expenses:
 
 
 
 
 
 
 
 
General and administrative
 
15,143

 
12,609

 
2,534

 
20.1

Interest
 
27,679

 
20,555

 
7,124

 
34.7

Depreciation and amortization
 
67,953

 
58,388

 
9,565

 
16.4

Loss on early extinguishment of debt
 
—

 
525

 
(525
)
 
(100.0
)
 
 
110,775

 
92,077

 
18,698

 
20.3

Less: our share of NOI from unconsolidated joint ventures
 
(1,397
)
 
—

 
(1,397
)
 
(100.0
)
Equity in earnings of unconsolidated joint ventures
 
710

 
—

 
710

 
100.0

Income from continuing operations
 
$
39,699

 
$
36,115

 
$
3,584

 
9.9
 %
 
 
 
 
 
 
 
 
 
NOI – Same Properties
 
$
118,368

 
$
117,088

 
$
1,280

 
1.1
 %
Less: straight-line rent revenue
 
(2,306
)
 
(6,369
)
 
4,063

 
(63.8
)
NOI (cash basis) – Same Properties
 
$
116,062

 
$
110,719

 
$
5,343

 
4.8
 %

75



Rental revenues

Total rental revenues for the three months ended September 30, 2015, increased by $17.6 million, or 12.8%, to $155.3 million, compared to $137.7 million for the three months ended September 30, 2014. The increase was primarily due to rental revenues from our Non-Same Properties, including highly leased development and redevelopment projects aggregating 1,066,878 RSF that were placed into service subsequent to July 1, 2014, and operating properties aggregating 225,504 RSF that were acquired subsequent to July 1, 2014, and consisted of the following (in thousands):
 
 
Three Months Ended September 30,
 
 
 
 
2015
 
2014
 
Change
Development
 
$
19,492

 
$
6,815

 
$
12,677

Redevelopment
 
4,246

 
201

 
4,045

Acquisitions
 
3,442

 
—

 
3,442

“Held for sale”
 
2,906

 
4,655

 
(1,749
)
Other
 
278

 
252

 
26

Rental revenues – Non-Same Properties
 
30,364

 
11,923

 
18,441

Rental revenues – Same Properties
 
124,947

 
125,795

 
(848
)
Total rental revenues
 
$
155,311

 
$
137,718

 
$
17,593


Rental revenues from our Same Properties for the three months ended September 30, 2015, decreased by $848 thousand, or 0.7%, to $124.9 million, compared to $125.8 million for the three months ended September 30, 2014. The decrease was primarily due to the temporary decrease in occupancy for these properties to 93.3% as of September 30, 2015, from 94.4% as of September 30, 2014.

Tenant recoveries

Tenant recoveries for the three months ended September 30, 2015, increased by $10.5 million, or 23.1%, to $56.1 million, compared to $45.6 million for the three months ended September 30, 2014. This increase is relatively consistent with the increase in our rental operating expenses of $11.4 million, or 19.9%. Same Properties’ tenant recoveries increased by $5.3 million, or 12.2%, primarily as a result of an increase in Same Properties’ rental operating expenses of $3.4 million, or 6.6%, and an increase in one of our Top 20 client tenants converting from a gross lease to a triple net lease. Same Properties’ rental operating expenses increased during the three months ended September 30, 2015, compared to the three months ended September 30, 2014, primarily related to (i) higher utility costs, and (ii) higher property taxes resulting from annual property tax reassessments. Utility costs increased primarily due to higher utility rates for properties in the San Francisco, San Diego, and Greater Boston markets. Non-Same Properties’ tenant recoveries increased by $5.3 million as a result of a Non-Same Properties’ rental operating expense increase of $8.0 million, primarily related to development and redevelopment projects placed into service subsequent to July 1, 2014, and operating properties acquired subsequent to July 1, 2014, as noted above.

Other income

Other income for the three months ended September 30, 2015 and 2014, consisted of the following (in thousands):
 
 
Three Months Ended September 30,
 
 
 
 
2015
 
2014
 
Change
Management fee income
 
$
530

 
$
560

 
$
(30
)
Interest and other income
 
1,272

 
1,994

 
(722
)
Investment income (loss)
 
5,378

 
(229
)
 
5,607

Total other income
 
$
7,180

 
$
2,325

 
$
4,855


Total investment income (loss) for the three months ended September 30, 2015, aggregated to a net gain of $5.4 million primarily due to gains from the sale of two publicly traded investments.

76



Rental operating expenses

Total rental operating expenses for the three months ended September 30, 2015, increased by $11.4 million, or 19.9%, to $68.8 million, compared to $57.4 million for the three months ended September 30, 2014. Approximately $8.0 million of the increase was due to an increase in rental operating expenses from our Non-Same Properties, primarily related to development and redevelopment projects placed into service subsequent to July 1, 2014, and one operating property acquired subsequent to July 1, 2014, as mentioned above. The increase in Same Properties rental operating expenses of $3.4 million was primarily due to higher utility costs and higher property taxes as described in “Tenant Recoveries” above.

General and administrative expenses

General and administrative expenses for the three months ended September 30, 2015, increased by $2.5 million, or 20.1%, to $15.1 million, compared to $12.6 million for the three months ended September 30, 2014. General and administrative expenses increased primarily due to the continued growth in both the depth and breadth of our operations in multiple markets. As a percentage of total assets, our general and administrative expenses were consistent at 0.7% and 0.7% for the 12 months ended September 30, 2015 and 2014, respectively.

Interest expense

Interest expense for the three months ended September 30, 2015 and 2014, consisted of the following (in thousands):
 
 
Three Months Ended September 30,
 
 
Component
 
2015
 
2014
 
Change
Secured notes payable
 
$
7,979

 
$
7,132

 
$
847

Unsecured senior notes payable
 
17,407

 
16,239

 
1,168

Unsecured senior line of credit
 
3,424

 
1,581

 
1,843

Unsecured senior bank term loans
 
3,260

 
3,455

 
(195
)
Interest rate swaps
 
727

 
1,129

 
(402
)
Amortization of loan fees and other interest
 
3,318

 
3,144

 
174

Total interest incurred
 
36,115

 
32,680

 
3,435

Capitalized interest
 
(8,436
)
 
(12,125
)
 
3,689

Total interest expense
 
$
27,679

 
$
20,555

 
$
7,124


Total interest expense increased by $7.1 million during the three months ended September 30, 2015, compared to the three months ended September 30, 2014, as a result of a $3.4 million increase in interest incurred and a $3.7 million decrease in the amount of interest capitalized as a result of our highly leased development and redevelopment projects placed into service subsequent to July 1, 2014, as noted above. The increase of $3.4 million in total interest incurred was primarily due to an approximate $813.1 million increase in outstanding debt used to partially fund our recent real estate acquisitions and the construction of our development and redevelopment projects since September 30, 2014.

Depreciation and amortization

Depreciation and amortization for the three months ended September 30, 2015, increased by $9.6 million, or 16.4%, to $68.0 million, compared to $58.4 million for the three months ended September 30, 2014. Depreciation increased primarily due to additional depreciation from development and redevelopment projects placed into service subsequent to July 1, 2014, and one operating property acquired subsequent to July 1, 2014, as noted above.

Loss on early extinguishment of debt

During the three months ended September 30, 2014, we recognized a loss on early extinguishment of debt related to the write-off of a portion of unamortized loan fees totaling $525 thousand, upon our $125 million partial repayment of the outstanding principal balance of our 2021 Unsecured Senior Bank Term Loan.


77



Equity in earnings of unconsolidated joint ventures

Equity in earnings of unconsolidated joint ventures of $710 thousand for the three months ended September 30, 2015, primarily includes the operating results of our property at 360 Longwood Avenue in Greater Boston that was placed into service at various dates beginning in the three months ended December 31, 2014. As of September 30, 2015, we had 259,859 RSF, or 63% of this property, in service at 100% occupancy, and 153,677 RSF, or 37% of this project, under development.



78



Comparison of the nine months ended September 30, 2015, to the nine months ended September 30, 2014

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, 2015, compared to the nine months ended September 30, 2014, and a reconciliation of NOI to income from continuing operations, the most directly comparable financial measure (dollars in thousands):
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
$ Change
 
% Change
Revenues:
 
 
 
 
 
 
 
 
Rental – Same Properties
 
$
369,994

 
$
369,100

 
$
894

 
0.2
 %
Rental – Non-Same Properties
 
80,730

 
34,180

 
46,550

 
136.2

Total rental
 
450,724

 
403,280

 
47,444

 
11.8

 
 
 
 
 
 
 
 
 
Tenant recoveries – Same Properties
 
133,114

 
121,860

 
11,254

 
9.2

Tenant recoveries – Non-Same Properties
 
20,993

 
6,338

 
14,655

 
231.2

Total tenant recoveries
 
154,107

 
128,198

 
25,909

 
20.2

 
 
 
 
 
 
 
 
 
Other income – Same Properties
 
337

 
285

 
52

 
18.2

Other income – Non-Same Properties
 
14,351

 
6,440

 
7,911

 
122.8

Total other income
 
14,688

 
6,725

 
7,963

 
118.4

 
 
 
 
 
 
 
 
 
Total revenues – Same Properties
 
503,445

 
491,245

 
12,200

 
2.5

Total revenues – Non-Same Properties
 
116,074

 
46,958

 
69,116

 
147.2

Total revenues
 
619,519

 
538,203

 
81,316

 
15.1

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Rental operations – Same Properties
 
153,411

 
145,410

 
8,001

 
5.5

Rental operations – Non-Same Properties
 
38,908

 
16,873

 
22,035

 
130.6

Total rental operations
 
192,319

 
162,283

 
30,036

 
18.5

 
 
 
 
 
 
 
 
 
Our share of NOI from unconsolidated joint ventures:
 
 
 
 
 
 
 
 
Joint venture NOI – Same Properties
 
—

 
—

 
—

 
—

Joint venture NOI – Non-Same Properties
 
3,188

 
—

 
3,188

 
100.0

Our share of NOI from unconsolidated joint ventures
 
3,188

 
—

 
3,188

 
100.0

 
 
 
 
 
 
 
 
 
NOI from continuing operations:
 
 
 
 
 
 
 
 
NOI – Same Properties
 
350,034

 
345,835

 
4,199

 
1.2

NOI – Non-Same Properties
 
80,354

 
30,085

 
50,269

 
167.1

Total NOI from continuing operations
 
430,388

 
375,920

 
54,468

 
14.5

 
 
 
 
 
 
 
 
 
Other expenses:
 
 
 
 
 
 
 
 
General and administrative
 
44,519

 
39,669

 
4,850

 
12.2

Interest
 
77,583

 
57,111

 
20,472

 
35.8

Depreciation and amortization
 
189,044

 
166,123

 
22,921

 
13.8

Impairment of real estate
 
14,510

 
—

 
14,510

 
100.0

Loss on early extinguishment of debt
 
189

 
525

 
(336
)
 
(64.0
)
 
 
325,845

 
263,428

 
62,417

 
23.7

Less: our share of NOI from unconsolidated joint ventures
 
(3,188
)
 
—

 
(3,188
)
 
(100.0
)
Equity in earnings of unconsolidated joint ventures
 
1,825

 
—

 
1,825

 
100.0

Income from continuing operations
 
$
103,180

 
$
112,492

 
$
(9,312
)
 
(8.3
)%
 
 
 
 
 
 
 
 
 
NOI – Same Properties
 
$
350,034

 
$
345,835

 
$
4,199

 
1.2
 %
Less: straight-line rent revenue
 
(8,834
)
 
(22,751
)
 
13,917

 
(61.2
)
NOI (cash basis) – Same Properties
 
$
341,200

 
$
323,084

 
$
18,116

 
5.6
 %

79



Rental revenues

Total rental revenues for the nine months ended September 30, 2015, increased by $47.4 million, or 11.8%, to $450.7 million, compared to $403.3 million for the nine months ended September 30, 2014. The increase was primarily due to rental revenues from our Non-Same Properties, including highly leased development and redevelopment projects aggregating 1,200,973 RSF that were placed into service subsequent to January 1, 2014, and operating properties aggregating 384,626 RSF that were acquired subsequent to January 1, 2014, and consisted of the following (in thousands):
 
 
Nine Months Ended September 30,
 
 
 
 
2015
 
2014
 
Change
Development related
 
$
50,290

 
$
16,637

 
$
33,653

Redevelopment related
 
7,164

 
253

 
6,911

Acquisitions related
 
13,886

 
3,748

 
10,138

“Held for sale”
 
10,569

 
12,714

 
(2,145
)
Other
 
(1,179
)
 
828

 
(2,007
)
Rental revenues – Non-Same Properties
 
80,730

 
34,180

 
46,550

Rental revenues – Same Properties
 
369,994

 
369,100

 
894

Total rental revenues
 
$
450,724

 
$
403,280

 
$
47,444


In addition, rental revenues from our Same Properties were $370.0 million and $369.1 million for the nine months ended September 30, 2015 and 2014, respectively, primarily due to rental rate increases on renewed/re-leased space since September 30, 2014.

Tenant recoveries

Tenant recoveries for the nine months ended September 30, 2015, increased by $25.9 million, or 20.2%, to $154.1 million, compared to $128.2 million for the nine months ended September 30, 2014. This increase is relatively consistent with the increase in our rental operating expenses of $30.0 million, or 18.5%. Same Properties’ tenant recoveries increased by $11.3 million, or 9.2%, primarily as a result of an increase in Same Properties’ rental operating expenses of $8.0 million, or 5.5%, and an increase in one of our Top 20 client tenants converting from a gross lease to a triple net lease. Same Properties’ rental operating expenses increased during the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, primarily related to (i) higher utility costs, (ii) snow removal costs, and (iii) higher property taxes resulting from annual property tax reassessments. Utilities costs increased primarily due to higher utility rates for properties in the San Francisco, San Diego, and Greater Boston markets. Snow removal costs increased due to a more severe winter in 2015 compared to 2014. Non-Same Properties’ tenant recoveries increased by $14.7 million as a result of a Non-Same Properties’ rental operating expense increase of $22.0 million primarily related to development and redevelopment projects placed into service subsequent to January 1, 2014, and operating properties acquired subsequent to January 1, 2014, as noted above.

Other income

Other income for the nine months ended September 30, 2015 and 2014, consisted of the following (in thousands):
 
 
Nine Months Ended September 30,
 
 
 
 
2015
 
2014
 
Change
Management fee income
 
$
1,341

 
$
2,202

 
$
(861
)
Interest and other income
 
2,136

 
3,767

 
(1,631
)
Investment income
 
11,211

 
756

 
10,455

Total other income
 
$
14,688

 
$
6,725

 
$
7,963


Total investment income for the nine months ended September 30, 2015, increased by $10.5 million to $11.2 million compared to $756 thousand for the nine months ended September 30, 2014. Investment income increased primarily due to gains from the sale of two publicly traded investments during the nine months ended September 30, 2015.


80



Rental operating expenses

Total rental operating expenses for the nine months ended September 30, 2015, increased by $30.0 million, or 18.5%, to $192.3 million, compared to $162.3 million for the nine months ended September 30, 2014. Approximately $22.0 million of the increase was due to an increase in rental operating expenses from our Non-Same Properties, primarily related to development and redevelopment projects placed into service subsequent to January 1, 2014, and operating properties acquired subsequent to January 1, 2014, as mentioned above. The increase in Same Properties rental operating expenses of $8.0 million was primarily due to higher utility costs, higher snow removal costs, and higher property taxes, as described in “Tenant Recoveries” above.

General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2015, increased by $4.9 million, or 12.2%, to $44.5 million, compared to $39.7 million for the nine months ended September 30, 2014. General and administrative expenses increased primarily due the continued growth in both the depth and breadth of our operations in multiple markets. As a percentage of total assets, our general and administrative expenses were consistent at 0.7% and 0.7% for the 12 months ended September 30, 2015 and 2014, respectively.

Interest expense

Interest expense for the nine months ended September 30, 2015 and 2014, consisted of the following (in thousands):
 
 
Nine Months Ended September 30,
 
 
Component
 
2015
 
2014
 
Change
Secured notes payable
 
$
23,599

 
$
22,190

 
$
1,409

Unsecured senior notes payable
 
52,218

 
38,720

 
13,498

Unsecured senior line of credit
 
8,148

 
6,318

 
1,830

Unsecured senior bank term loans
 
10,036

 
10,954

 
(918
)
Interest rate swaps
 
1,942

 
5,742

 
(3,800
)
Amortization of loan fees and other interest
 
9,484

 
8,627

 
857

Total interest incurred
 
105,427

 
92,551

 
12,876

Capitalized interest
 
(27,844
)
 
(35,440
)
 
7,596

Total interest expense
 
$
77,583

 
$
57,111

 
$
20,472


Total interest expense increased by $20.5 million during the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, as a result of a $12.9 million increase in interest incurred and a $7.6 million decrease in the amount of interest capitalized as a result of our highly leased development and redevelopment projects placed into service subsequent to January 1, 2014, as noted above.

The increase of $12.9 million in total interest incurred was primarily due to an approximate $813.1 million increase in outstanding debt, including the offering of $700 million of unsecured senior notes payable in July 2014, used to partially fund our real estate acquisitions and the construction of our development and redevelopment projects since September 30, 2014. In July 2014, we completed an offering of $700 million of unsecured senior notes payable with a weighted-average interest rate of 3.50% and a maturity of 9.6 years. Proceeds from our July 2014 offering were used to repay $125 million under our unsecured senior bank term loans and to reduce amounts outstanding under our unsecured senior line of credit. Interest from our unsecured senior bank term loans and interest rate swaps decreased by an aggregate $4.7 million, as we continued to transition from variable-rate bank debt to long-term unsecured fixed-rate debt.

Depreciation and amortization

Depreciation and amortization for the nine months ended September 30, 2015, increased by $22.9 million, or 13.8%, to $189.0 million, compared to $166.1 million for the nine months ended September 30, 2014. Depreciation increased primarily due to additional depreciation from development and redevelopment projects placed into service subsequent to January 1, 2014, and the one operating property acquired subsequent to January 1, 2014, as noted above.



81



Impairment of real estate

In March 2015, we determined that a 175,000 RSF life science building in Hyderabad, India, met the criteria for classification as “held for sale” and consequently recognized an impairment charge of $14.5 million to lower the carrying costs of the real estate to its estimated fair value less cost to sell, including an estimated $4.2 million foreign currency exchange translation loss. On March 26, 2015, we completed the sale of the vacant building for $12.4 million. For additional information, refer to the section titled “Sales of Real Estate Assets and Related Impairment Charges” in Note 3 – “Investments in Real Estate” to our accompanying unaudited consolidated financial statements under Item 1 of this report.

Loss on early extinguishment of debt

During the nine months ended September 30, 2015, we recognized a loss on early extinguishment of debt to expense a portion of unamortized loan fees aggregating $189 thousand upon our $25.0 million partial principal repayment under our Unsecured Senior Bank Term Loan. During the nine months ended September 30, 2014, we recognized a loss on early extinguishment of debt related to the write-off of a portion of unamortized loan fees totaling $525 thousand, upon our $125 million partial repayment of the outstanding principal balance of our 2021 Unsecured Senior Bank Term Loan.

Equity in earnings of unconsolidated joint ventures

Equity in earnings of unconsolidated joint ventures of $1.8 million for the nine months ended September 30, 2015, primarily includes the operating results of our property at 360 Longwood Avenue in Greater Boston that was placed into service at various dates beginning in the three months ended December 31, 2014. As of September 30, 2015, we had 259,859 RSF, or 63% of this property, in service at 100% occupancy and 153,677 RSF, or 37% of this project, under development.

Gain on sales of real estate – land parcels

During the nine months ended September 30, 2014, we completed the sale of four land parcels, aggregating 412,950 RSF for an aggregate sales price of $29.4 million, and recognized an aggregate gain on sales of $805 thousand. These gains are classified in gain on sales of real estate – land parcel below income from discontinued operations in the accompanying consolidated statements of income.

The land parcels sold did not meet the criteria for classification as discontinued operations since the parcels did not have any significant operations prior to disposition. Pursuant to the presentation and disclosure literature on gains/losses on sales or disposals by REITs required by the SEC, 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 income statement. Accordingly, we classified the gain on sales of real estate-land parcel below income from discontinued operations, in the 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 the computation of EPS.


82



Projected results

Based on our current view of existing market conditions and certain current assumptions, we have updated guidance for EPS attributable to Alexandria’s common stockholders – diluted and FFO per share attributable to Alexandria’s common stockholders – diluted, each for the year ending December 31, 2015, as set forth in the table below. The table below provides a reconciliation of FFO per share attributable to Alexandria’s common stockholders – diluted, a non-GAAP measure, to EPS, the most directly comparable GAAP measure, and other key assumptions included in our guidance for the year ending December 31, 2015.
Summary of Key
Changes in Guidance
 
 
Description
FFO per share – diluted
+ $0.01

 
Ÿ
Midpoint of range increased by $0.01 to $5.25 and narrowed range from six cents to two cents. Projected FFO per share up $0.05 over initial 2015 guidance, representing aggregate growth of 9.4% over 2014 FFO per share.
 
 
 
 
(in thousands)
 
 
 
Sources of capital:
Midpoint
 
 
 
Incremental debt
$
(36,000
)
 
 
 
Remainder/asset sales
(70,000
)
 
Ÿ
Reduction in projected asset sales resulting from reduction in 2015 projected construction spending, described below.
Net decrease in sources of capital
$
(106,000
)
 
 
 
 
 
 
 
Uses of capital:
 
 
 
 
Construction
$
(90,000
)
 
Ÿ
Reduction in projected construction spending for 2015 since initial guidance in December 2014 primarily due to conservative forecasting on the timing of lease-up and commencement of construction related to over 2.3 million RSF of development and redevelopment projects.
Other
(16,000
)
 
 
Decrease in uses of capital
$
(106,000
)
 
 
EPS and FFO Per Share Attributable to Alexandria’s Common Stockholders – Diluted
Earnings per share
 
$1.46 to $1.48
Add: depreciation and amortization
 
3.68
Add: impairment of real estate
 
0.20
Other
 
(0.02)
FFO per share
 
$5.32 to $5.34
Less: investment income for the three months ended September 30, 2015 (1)
 
(0.08)
FFO per share, as adjusted
 
$5.24 to $5.26
(1)
Investment income for the three months ended September 30, 2015, of $5.4 million, or $0.08 per share, included gross investment gains of $8.7 million, primarily from the sale of two publicly traded securities.
(2)
2015 guidance range reflects a reduction in incremental debt from asset sales.
 
 
2015 Guidance
Key Assumptions (Dollars in thousands)
 
Low
 
High
Occupancy percentage for operating properties in North America as of December 31, 2015
 
96.9%

 
97.4%

 
 
 
 
 
Same Property performance:
 
 
 
 
NOI increase
 
0.5%

 
2.5%

NOI increase (cash basis)
 
5.0%

 
7.0%

 
 
 
 
 
Lease renewals and re-leasing of space:
 
 
 
 
Rental rate increases
 
14.0%

 
17.0%

Rental rate increases (cash basis)
 
8.0%

 
10.0%

 
 
 
 
 
Straight-line rent revenue
 
$
47,000

 
$
52,000

General and administrative expenses
 
$
55,000

 
$
59,000

Capitalization of interest
 
$
35,000

 
$
45,000

Interest expense
 
$
106,000

 
$
116,000


83



 
 
Actual
 
Guidance
Key Credit Metrics
 
3Q15
 
2015
Net debt to Adjusted EBITDA – fourth quarter annualized
 
7.4x
 
less than 7.0x
Fixed-charge coverage ratio – fourth quarter annualized
 
3.5x
 
3.0x to 3.5x
Value-creation pipeline as a percentage of gross investments in real estate as of December 31
 
13%
 
12% to 15%

Net Debt to Adjusted EBITDA (1)
 
Unencumbered NOI (2)
 
 
 
79%
 
 
Fixed-Charge Coverage Ratio (1)
 
Liquidity (In millions)
 

(1)
Quarter annualized.
(2)
For the three months ended September 30, 2015.
(3)
Represents pro forma liquidity as of September 30, 2015, aggregating $1.2 billion, including a secured construction loan with aggregate commitments available for borrowing of $350.0 million that we closed in October 2015.
(4)
Total liquidity as of September 30, 2015, aggregating $855 million consisted of $76 million of cash and cash equivalents, $122 million of remaining construction loan commitments and $657 million available under our $1.5 billion Unsecured Senior Line of Credit.
(5)
See page 87 for assumptions on remainder asset sales and issuance of unsecured senior and other notes payable, which includes the secured construction loan in footnote (3) above.


84



As of September 30, 2015, we had construction in progress related to our ten development projects in North America. The completion of these projects, along with projects recently placed into service, certain future projects, and operations from Same Properties, is expected to contribute significant increases in rental income, NOI, and cash flows. Operating performance assumptions related to the completion of our development projects in North America, including the timing of initial occupancy, stabilization dates, and initial stabilized yield, are included in the “Value-Creation Projects and External Growth” section in Item 2 of this report. Certain key assumptions regarding our projections, including the impact of various development and redevelopment projects, are included in the “Projected Construction Spending” table in the “Summary of Capital Expenditures” subsection of the “Value-Creation Projects and External Growth” section in Item 2 of this report.

The completion of our development and redevelopment projects will result in an increase in interest expense and other project costs, because these project costs will no longer qualify for capitalization and will therefore be expensed as incurred. Our projection assumptions for occupancy, Same Properties performance, rental rate increases, straight-line rent revenue, general and administrative expenses, capitalization of interest, interest expense, and key credit metrics are included in the tables and charts above and 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, 2014. To the extent our full-year earnings guidance is updated during the year, we will provide additional disclosure supporting reasons for any significant changes to such guidance.

Liquidity and capital resources

Overview

We expect to meet certain long-term liquidity requirements, such as requirements for development, redevelopment, other construction projects, capital improvements, tenant improvements, property acquisitions, leasing costs, non-revenue-enhancing capital expenditures, and scheduled debt maturities, through net cash provided by operating activities, periodic asset sales, strategic joint venture capital, 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.

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

•
Retain positive cash flows from operating activities after payment of dividends for reinvestment in acquisitions and/or development and redevelopment projects;
•
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 and available commitments under our secured construction loans;
•
Reduce the amount of our unsecured bank debt;
•
Maintain diverse sources of capital, including sources from net cash provided by operating activities, unsecured debt, secured debt, selective asset sales, joint venture capital, preferred stock, and common stock;
•
Manage the amount of debt maturing in a single year;
•
Mitigate unhedged variable-rate debt through the reduction of short-term and medium-term variable-rate bank debt;
•
Maintain a large unencumbered asset pool to provide financial flexibility;
•
Fund preferred stock and common stock dividends from net cash provided by operating activities;
•
Manage a disciplined level of value-creation projects as a percentage of our gross investments in real estate;
•
Maintain high levels of pre-leasing in value-creation projects; and
•
Maintain solid key credit metrics, including net debt to Adjusted EBITDA and fixed-charge coverage ratio, with some variation from quarter to quarter and from year to year.


85



Unsecured senior line of credit and unsecured senior bank term loans
    
The table below reflects the outstanding balances, maturity dates, applicable rates, and facility fees for each of these facilities.
 
 
As of September 30, 2015
Facility
 
Balance
 
Maturity Date (1)
 
Applicable Margin
 
Facility Fee
$1.5 billion unsecured senior line of credit
 
$
843
 million
 
January 2019
 
L+1.10%
 
0.20%
2019 Unsecured Senior Bank Term Loan
 
$
600
 million
 
January 2019
 
L+1.20%
 
N/A
2021 Unsecured Senior Bank Term Loan
 
$
350
 million
 
January 2021
 
L+1.10%
 
N/A

(1)
Includes any extension options that we control.

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 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 (“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. Our unsecured senior line of credit contains a feature that allows lenders to competitively bid on the interest rate for borrowings under the facility. This may result in an interest rate that is below the Applicable Margin of LIBOR+1.10%. In addition to the Applicable Margin, our unsecured senior line of credit is subject to an annual facility fee of 0.20% based upon aggregate outstanding commitments.

The requirements of, and our actual performance with respect to, the key financial covenants under our unsecured senior line of credit and unsecured senior bank term loans as of September 30, 2015, were as follows:
Covenant Ratios (1)
 
Requirement
 
Actual (2)
Leverage Ratio
 
Less than or equal to 60.0%
 
39.5%
Secured Debt Ratio
 
Less than or equal to 45.0%
 
7.0%
Fixed-Charge Coverage Ratio
 
Greater than or equal to 1.50x
 
3.21x
Unsecured Leverage Ratio
 
Less than or equal to 60.0%
 
45.4%
Unsecured Interest Coverage Ratio
 
Greater than or equal to 1.50x
 
6.56x

(1)
For definitions of the ratios, refer to the amended unsecured senior line of credit and unsecured senior bank term loan agreements, including (i) the agreement dated as of August 30, 2013, which was filed as an exhibit to our quarterly report on Form 10-Q filed with the SEC on November 7, 2013, and (ii) the agreement dated June 30, 2015, which was filed as an exhibit to our quarterly report on Form 10-Q filed with the SEC on July 29, 2015.
(2)
Actual covenants are calculated pursuant to the specific terms of our unsecured senior line of credit and unsecured senior bank term loan agreements.

Unsecured senior notes payable

The requirements of, and our actual performance with respect to, the key financial covenants under our 2.75% unsecured senior notes (“2.75% Unsecured Senior Notes”), 3.90% unsecured senior notes (“3.90% Unsecured Senior Notes”), 4.60% unsecured senior notes (“4.60% Unsecured Senior Notes”), and 4.50% unsecured senior notes (“4.50% Unsecured Senior Notes”) as of September 30, 2015, were as follows:
Covenant Ratios (1)
 
Requirement
 
Actual
Total Debt to Total Assets
Less than or equal to 60%
 
44%
Secured Debt to Total Assets
Less than or equal to 40%
 
8%
Consolidated EBITDA to Interest Expense
Greater than or equal to 1.5x
 
5.6x
Unencumbered Total Asset Value to Unsecured Debt
Greater than or equal to 150%
 
219%

(1)
For definitions of the ratios, refer to the indenture at Exhibit 4.3 and related supplemental indentures at Exhibits 4.4, 4.7, 4.9, and 4.11, which are each listed in Item 6 of this report.

In addition, the terms of the indentures, 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.

86



Sources and uses of capital

We expect that our principal liquidity needs for the year ending December 31, 2015, 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 (in thousands).
Key Sources and Uses of Capital
 
Completed During the Nine Months Ended September 30, 2015
 
2015 Guidance
 
 
Low
 
High
Sources of capital:
 
 
 
 
 
 
Net cash provided by operating activities after dividends
 
$
95,000

 
$
115,000

 
$
135,000

Incremental debt (1)
 
553,000

 
154,000

 
84,000

Remainder/asset sales (2)
 
94,000

 
650,000

 
750,000

Total sources of capital
 
$
742,000

 
$
919,000

 
$
969,000

 
 
 
 
 
 
 
Uses of capital:
 
 
 
 
 
 
Construction
 
$
358,000

 
$
535,000

 
$
585,000

Acquisitions 
 
384,000

 
384,000

 
384,000

Total uses of capital
 
$
742,000

 
$
919,000

 
$
969,000

 
 
 
 
 
 
 
Incremental debt:
 
 
 
 
 
 
Issuance of unsecured senior and other notes payable
 
$
82,000

 
$
370,000

 
$
450,000

Borrowings under existing secured construction loans
 
47,000

 
80,000

 
130,000

Repayments of secured notes payable
 
(12,000
)
 
(61,000
)
 
(137,000
)
Activity on unsecured senior line of credit/other
 
436,000

 
(235,000
)
 
(359,000
)
Incremental debt
 
$
553,000

 
$
154,000

 
$
84,000


(1)
2015 guidance range reflects a reduction in incremental debt from asset sales.
(2)
Refer to page 68 for discussion on dispositions and other sources of capital.

The key assumptions behind the sources and uses of capital in the table above are a favorable capital market environment, performance of our core operating properties, lease-up and completion of development and redevelopment projects under construction and future development and redevelopment projects, and leasing activity. 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, 2014. We expect to update our forecast of sources and uses of capital on a quarterly basis.

Sources of capital

Net cash provided by operating activities after dividends

We expect to retain $115.0 million to $135.0 million of net cash flows from operating activities after payment of common stock and preferred stock dividends. For the year ending December 31, 2015, we expect that our highly leased value-creation projects, along with projects recently placed into service, certain future projects, and operations from Same Properties, will contribute significant increases compared to the year ended December 31, 2014, in rental income, NOI, and cash flows. Refer to “Cash Flows” appearing elsewhere in this section of this quarterly report on Form 10-Q for a discussion of net cash provided by operating activities for the nine months ended September 30, 2015.

Asset sales

We expect to continue to sell land, non-core operating assets, high-value “core-like” operating properties, and joint venture interests in high-value core operating properties located in high-barrier-to-entry submarkets. The amount of asset sales necessary to meet our forecasted sources of capital will vary depending upon the amount of EBITDA associated with the assets sold.


87



For additional information, refer to the section titled “Sales of Real Estate Assets and Related Impairment Charges” in Note 3 – “Investments in Real Estate” to our unaudited consolidated financial statements under Item 1 of this report and the “Dispositions and Other Sources of Capital” subsection of the “Value-Creation Projects and External Growth” section in Item 2 of this report. The sale of partial interests in core real estate assets, non-strategic assets in our value-creation pipeline, and non-core/“core-like” operating asset provides a significant source of capital to fund our highly pre-leased value-creation development and redevelopment projects described above.

Liquidity

The following table presents the availability under our unsecured senior line of credit, secured construction loans, and cash and cash equivalents as of September 30, 2015 (dollars in thousands):
Description
 
Stated
Rate
 
Total
Commitments
 
Outstanding
Balance
 
Remaining Commitments
$1.5 billion unsecured senior line of credit
 
LIBOR+1.10%
 
$
1,500,000

 
$
843,000

 
$
657,000

Secured construction loan
 
LIBOR+1.40%
 
36,000

 
20,714

 
15,286

Secured construction loan
 
LIBOR+1.50%
 
55,000

 
47,385

 
7,615

Secured construction loan
 
LIBOR+1.35%
 
250,400

 
151,504

 
98,896

 
 
 
 
$
1,841,400

 
$
1,062,603

 
778,797

Cash and cash equivalents
 
 
 
 
 
 
 
76,383

Total liquidity as of September 30, 2015
 
 
 
 
 
 
 
$
855,180

 
 
 
 
 
 
 
 
 
Commitments subsequent to September 30, 2015 (1)
 
LIBOR+1.50%
 
$
350,000


$
—


$
350,000

 
 
 
 
 
 
 
 
$
1,205,180

 
 
 
 
 
 
 
 
 
Target liquidity by December 31, 2015
 
 
 
 
 
 
 
$
1,800,000

(1)
In October 2015, closed a secured construction loan with aggregate commitments available for borrowing aggregating $350.0 million, for our 98% leased development project at 50/60 Binney Street in our Cambridge submarket, which bears interest at a rate of LIBOR+150 bps

Refer to Note 6 – “Secured and Unsecured Senior Debt” to our unaudited consolidated financial statements under Item 1 of this report for a discussion of our secured construction loans.

We use our unsecured senior line of credit to fund working capital, construction activities, and, from time to time, acquisition of properties. 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, 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 LIBOR or a successor rate thereto as approved by the administrative agent for loans denominated in a LIBOR quoted currency (i.e., U.S. dollars, euro, sterling, or yen), (ii) the average annual yield rates applicable to Canadian dollar bankers’ 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 means, for any day, a fluctuating rate per annum equal to the highest of (i) the federal funds rate plus 1/2 of 1.00%, (ii) 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 (iii) the Eurocurrency Rate plus 1.00%. Our unsecured senior line of credit contains a feature that allows lenders to competitively bid on the interest rate for borrowings under the facility. This may result in an interest rate that is below the applicable margin of LIBOR+1.10%. In addition to the cost of borrowing, the facility is subject to an annual facility fee of 0.20% based on the aggregate commitments outstanding.

Debt

We expect to fund a significant portion of our capital needs in 2015 from the issuance of unsecured senior notes payable, borrowings available under existing secured construction loans, an unsecured senior line of credit, new secured construction loans, and acquired secured notes payable.


88



In October 2015, we completed the repayment of a $76 million secured note payable. The note had a weighted-average interest rates of 5.73% and was scheduled to mature in January 2016.
    
In June 2015, we completed a partial principal repayment of $25 million and extended the maturity of the remaining $350 million 2021 Unsecured Senior Bank Term Loan from July 31, 2015, to June 30, 2019, subject to our option to extend the maturity up to three times upon the satisfaction of certain conditions, for an additional term of six months for the first and second extensions and for an additional term ending on January 15, 2021, for the third extension. In addition, we reduced the applicable margin with respect to borrowings outstanding under the loan to LIBOR+1.10% from LIBOR+1.20%. In conjunction with the amendment of our 2021 Unsecured Senior Bank Term Loan and the principal repayment, we recognized a loss on early extinguishment of debt aggregating $189 thousand related to the write-off of a portion of unamortized loan fees.

In July 2014, we completed public offerings of $400 million in aggregate principal amount and $300 million in aggregate principal amount of unsecured senior notes payable at stated interest rates of 2.75% and 4.50%, respectively, at a weighted-average interest rate of 3.50% and a weighted-average maturity of 9.6 years. The 2.75% Unsecured Senior Notes were priced at 99.793% of the principal amount with a yield to maturity of 2.791% and are due January 15, 2020. The 4.50% Unsecured Senior Notes were priced at 99.912% of the principal amount with a yield to maturity of 4.508% and are due July 30, 2029. All of these notes 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. These notes rank equally in right of payment with all other senior unsecured indebtedness. However, these notes are 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. Net proceeds of $694 million from the offering were used to reduce variable-rate debt, consisting of the partial repayment of $125 million of our unsecured senior bank term loan and the reduction of $569 million of borrowings that were outstanding on our unsecured senior line of credit. In connection with the partial repayment of $125 million of our unsecured senior bank term loan, we recognized a loss on the early extinguishment of debt related to the write-off of a portion of unamortized loan fees aggregating $525 thousand.
    
Cash and cash equivalents

As of September 30, 2015, and December 31, 2014, we had $76.4 million and $86.0 million, respectively, of cash and cash equivalents. We expect existing cash and cash equivalents, cash flows from operating activities, proceeds from asset sales, borrowings under our unsecured senior line of credit, 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 certain capital expenditures, including expenditures
related to construction activities.

Restricted cash

Restricted cash consisted of the following as of September 30, 2015, and December 31, 2014 (in thousands):
 
September 30, 2015
 
December 31, 2014
Funds held in trust under the terms of certain secured notes payable
$
24,485

 
$
19,350

Funds held in escrow related to construction projects and investing activities
9,540

 
4,539

Other restricted funds
2,968

 
2,995

Total
$
36,993

 
$
26,884


Other sources

We may issue and publicly offer common stock, preferred stock, debt, and other securities 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-related and financing-related activities.


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We also hold interests, together with certain third parties, in joint ventures that are not consolidated in our financial statements. The following table presents information related to debt held by one of our unconsolidated joint ventures (dollars in thousands):
Loan Collateral
 
Total Commitments
 
Total Outstanding
 
Partners’ Share
 
ARE’s
27.5% Share
 
Maturity Date
 
Interest Rate
360 Longwood Avenue
 
$
213,200

 
$
175,326

 
$
127,111

 
$
48,215
 
 
 
4/1/17
(1) 
 
 
5.25
%
(2) 

(1)
We have two, one-year options to extend the stated maturity date to April 1, 2019, subject to certain conditions.
(2)
Secured construction loan bears interest at LIBOR+3.75%, with a floor of 5.25%.

Uses of capital

Summary of capital expenditures

Our primary use of capital relates to the development, redevelopment, predevelopment, and construction of properties. In North America, we currently have development projects under construction aggregating 3.3 million RSF, with 2.6 million RSF of office/laboratory and tech office space, including two unconsolidated joint venture development projects. We incur capitalized construction costs related to development, redevelopment, predevelopment, and other construction activities. We also incur additional capitalized project costs, including interest, property taxes, insurance, and other costs directly related and essential to the development or construction of a project. Refer to “Summary of Capital Expenditures” in Item 2 of this report for more information on our capital expenditures.

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, 2015 and 2014, of $27.8 million and $35.4 million, respectively, is classified in investments in real estate. 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 $9.8 million and $12.7 million for the nine months ended September 30, 2015 and 2014, 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 classified as rental property. Also, if vertical aboveground construction is not initiated at completion of predevelopment activities, the land parcel is classified as land held for future development. Expenditures for repairs and maintenance are expensed as incurred.

Fluctuations in our development, redevelopment, predevelopment, 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 $4.7 million for the nine months ended September 30, 2015.

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 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 lease transaction not occurred. The initial direct costs capitalized and deferred also include the portion of our employees’ total compensation and payroll-related 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, 2015 and 2014, were $50.5 million and $27.9 million, respectively, of which $9.7 million and $8.5 million, respectively, represented capitalized and deferred payroll costs directly related and essential to our leasing activities during such periods. The increase in direct leasing costs in 2015 was driven by the highest leasing volume for a nine month period in Alexandria’s history, totaling approximately 4.0 million RSF.

Acquisitions

Refer to “External Growth – Acquisitions” in Item 2 of this report.


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Contractual obligations and commitments

Contractual obligations as of September 30, 2015, consisted of the following (in thousands):
 
 
 
Payments by Period
 
Total
 
2015
 
2016-2017
 
2018-2019
 
Thereafter
Secured and unsecured debt (1) (2)
$
4,312,098

 
$
2,181

 
$
540,695

 
$
1,453,064

 
$
2,316,158

Estimated interest payments on fixed-rate and hedged variable-rate debt (3)
658,614

 
28,253

 
193,802

 
166,409

 
270,150

Estimated interest payments on variable-rate debt (4)
38,124

 
1,279

 
15,547

 
16,770

 
4,528

Ground lease obligations
680,176

 
2,516

 
25,002

 
23,869

 
628,789

Other obligations
7,417

 
383

 
3,176

 
3,336

 
522

Total
$
5,696,429

 
$
34,612

 
$
778,222

 
$
1,663,448

 
$
3,220,147


(1)
Amounts represent principal amounts due and exclude unamortized premiums/discounts reflected on the consolidated balance sheets.
(2)
Payment dates include any extension options that we control.
(3)
Estimated interest payments on our fixed-rate and hedged variable-rate debt are based upon contractual interest rates, including the impact of interest rate swap agreements, interest payment dates, and scheduled maturity dates.
(4)
The interest payments on variable-rate debt are based on the interest rates in effect as of September 30, 2015.

Secured notes payable

Secured notes payable as of September 30, 2015, consisted of 13 notes secured by 33 properties. Our secured notes payable typically require monthly payments of principal and interest and had a weighted-average interest rate of approximately 4.23% as of September 30, 2015. As of September 30, 2015, the total book values of rental properties, land held for future development, and CIP securing debt were approximately $1.4 billion. As of September 30, 2015, our secured notes payable, including unamortized discounts, were composed of approximately $478.0 million and $295.6 million of fixed- and variable-rate debt, respectively.

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, 2015, approximately 76% of our debt was fixed-rate debt or variable-rate debt subject to interest rate swap agreements. Refer to Note 7 – “Interest Rate Swap Agreements” to our unaudited consolidated financial statements appearing under Item 1 of this report for further information. The remaining 24% of our debt as of September 30, 2015, was 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, 2015. Refer to additional information regarding our debt under Note 6 – “Secured and Unsecured Senior Debt” to our unaudited consolidated financial statements appearing under Item 1 of this report.

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, unsecured senior bank term loans, and variable-rate construction loans. These agreements involve the receipt of variable-rate amounts from a counterparty in exchange for our payment of fixed-rate amounts to the counterparty over the life of the agreement without the exchange of the underlying notional amount. Interest received under all 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 in our consolidated statements of income.


91



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 us and each of our counterparties 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, these agreements are spread among various counterparties. As of September 30, 2015, the largest aggregate notional amount in effect at any single point in time with an individual counterparty under our interest rate swap agreements was $250 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. We have not posted any collateral related to our interest rate swap agreements.

Ground lease obligations

Ground lease obligations as of September 30, 2015, included leases for 28 of our properties, which accounted for approximately 14% of our total number of 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 $9.7 million as of September 30, 2015, our ground lease obligations have remaining lease terms ranging from approximately 40 to 100 years, including extension options.

Commitments

As of September 30, 2015, remaining aggregate costs under contract for the construction of properties undergoing development, redevelopment, and improvements under the terms of leases approximated $656.8 million. We expect payments for these obligations to occur over one to three years, subject to capital planning adjustments from time to time. We may have the ability to cease the construction of certain properties, which would result in the reduction of our commitments. We are also committed to funding approximately $84.9 million for certain investments over the next several years. We have one unconsolidated joint venture with a commitment to contribute our share of equity into this joint venture to complete the project. The additional funding commitment as of September 30, 2015, for this joint venture was pending completion of the final design of the building. Our other unconsolidated joint venture does not have a commitment to contribute additional equity. In addition, we have letters of credit and performance obligations of $28.4 million.

We have minimum development requirements under project development agreements with government entities in India for some of our future value-creation projects. As of September 30, 2015, we had investments in real estate projects with an aggregate book value of $43.3 million for which we had construction commitment obligations to develop buildings aggregating approximately 300,000 RSF and 100,000 RSF by 2016 and 2017, respectively. The estimated cost to develop these projects is approximately $125 to $175 per square foot. If we do not meet, extend, or eliminate these commitments, we may default under our existing agreements. The government entities, in turn, have certain obligations to us under those project development agreements. We are working with these entities to fulfill or amend certain existing obligations in a mutually beneficial manner.

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.

Cash flows

We report and analyze our cash flows based on operating activities, investing activities, and financing activities. The following table summarizes changes in our cash flows (in thousands):
 
Nine Months Ended September 30,
 
 
 
2015
 
2014
 
Change
Net cash provided by operating activities
$
246,411

 
$
255,124

 
$
(8,713
)
Net cash used in investing activities
$
(557,490
)
 
$
(474,339
)
 
$
(83,151
)
Net cash provided by financing activities
$
301,638

 
$
229,980

 
$
71,658



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Operating activities

Cash flows provided by operating activities for the nine months ended September 30, 2015 and 2014, consisted of the following amounts (in thousands):
 
Nine Months Ended September 30,
 
 
 
2015
 
2014
 
Change
Net cash provided by operating activities
$
246,411

 
$
255,124

 
$
(8,713
)
Add: changes in operating assets and liabilities
29,619

 
2,631

 
26,988

Net cash provided by operating activities before changes in operating assets and liabilities
$
276,030

 
$
257,755

 
$
18,275


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 client tenants, the timing of completion of development projects, the timing of completion of redevelopment projects, and the timing of acquisitions of operating properties. Net cash provided by operating activities for the nine months ended September 30, 2015, decreased to $246.4 million, compared to $255.1 million for the nine months ended September 30, 2014, due to the timing of payments for operating assets and liabilities. Net cash provided by operating activities before changes in operating assets and liabilities for the nine months ended September 30, 2015, increased by $18.3 million, or 7.1%, to $276.0 million, compared to $257.8 million for the nine months ended September 30, 2014. This increase was primarily attributable to an increase in our total NOI from continuing operations of $54.5 million, or 14.5%, to $430.4 million for the nine months ended September 30, 2015, compared to $375.9 million for the nine months ended September 30, 2014, as a result of our highly leased development and redevelopment projects placed into service subsequent to January 1, 2014, partially offset by an increase in interest expense, reflecting a decrease in the amount of interest capitalized as a result of our development and redevelopment projects placed into service, as noted above.

Investing activities

Cash flows used in investing activities for the nine months ended September 30, 2015 and 2014, consisted of the following (in thousands):
 
Nine Months Ended September 30,
 
 
 
2015
 
2014
 
Change
Proceeds from sales of real estate
$
92,455

 
$
28,378

 
$
64,077

Additions to real estate
(362,215
)
 
(345,074
)
 
(17,141
)
Purchase of real estate
(248,933
)
 
(97,785
)
 
(151,148
)
Deposits for investing activities
(6,707
)
 
(7,292
)
 
585

Investment in unconsolidated real estate joint ventures
(7,979
)
 
(67,525
)
 
59,546

Additions to investments
(67,965
)
 
(35,484
)
 
(32,481
)
Sales of investments
39,590

 
13,883

 
25,707

Repayment of notes receivable
4,264

 
29,866

 
(25,602
)
Other
—

 
6,694

 
(6,694
)
Net cash used in investing activities
$
(557,490
)
 
$
(474,339
)
 
$
(83,151
)

The change in net cash used in investing activities for the nine months ended September 30, 2015, is primarily due to a higher use of cash for property acquisitions partially offset by a higher source of cash from asset sales.

Value-creation opportunities and external growth

For information on our key development and redevelopment projects for the nine months ended September 30, 2015, refer to “Development, Redevelopment, and Future Value-Creation Projects” located earlier within Item 2 of this report.


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Financing activities

Cash flows provided by financing activities for the nine months ended September 30, 2015 and 2014, consisted of the following (in thousands):
 
Nine Months Ended September 30,
 
 
 
2015
 
2014
 
Change
Borrowings from secured notes payable
$
47,375

 
$
108,626

 
$
(61,251
)
Repayments of borrowings from secured notes payable
(12,217
)
 
(228,909
)
 
216,692

Proceeds from issuance of unsecured senior notes payable
—

 
698,908

 
(698,908
)
Borrowings from unsecured senior line of credit
1,432,000

 
890,000

 
542,000

Repayments of borrowings from unsecured senior line of credit
(893,000
)
 
(952,000
)
 
59,000

Repayments of borrowings from unsecured senior bank term loans
(25,000
)
 
(125,000
)
 
100,000

Total changes related to debt
549,158

 
391,625

 
157,533

 
 
 
 
 
 
Dividend payments
(181,020
)
 
(169,954
)
 
(11,066
)
Contributions by noncontrolling interests
340

 
19,410

 
(19,070
)
Distributions to and purchases of noncontrolling interests
(62,973
)
 
(3,487
)
 
(59,486
)
Other
(3,867
)
 
(7,614
)
 
3,747

Net cash provided by financing activities
$
301,638

 
$
229,980

 
$
71,658


Dividends

During the nine months ended September 30, 2015 and 2014, we paid the following dividends (in thousands):
 
Nine Months Ended September 30,
 
 
 
2015
 
2014
 
Change
Common stock dividends
$
162,280

 
$
150,540

 
$
11,740

Series D preferred stock dividends
12,451

 
13,125

 
(674
)
Series E preferred stock dividends
6,289

 
6,289

 
—

 
$
181,020

 
$
169,954

 
$
11,066


The increase in dividends paid on our common stock was primarily due to an increase in the related dividends to $2.25 per common share for the nine months ended September 30, 2015, from $2.10 per common share for the nine months ended September 30, 2014.

Inflation

As of September 30, 2015, approximately 96% of our leases (on an RSF basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses, and other operating expenses (including increases thereto) in addition to base rent. Approximately 95% of our leases (on an RSF 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 other indices. Accordingly, we do not believe that our cash flows or earnings from real estate operations are subject to significant risks 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.


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Critical accounting policies

Refer to our annual report on Form 10-K for the year ended December 31, 2014, for a discussion of our critical accounting policies, which include rental properties; land held for future development; CIP; impairment of long-lived assets; capitalization of costs; accounting for investments; interest rate swap agreements; recognition of rental income and tenant recoveries; and monitoring of client tenant credit quality. There were no significant changes to these policies during the nine months ended September 30, 2015.

Non-GAAP measures

FFO and FFO, 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 the 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, allows investors to compare our performance to the performance of other real estate companies 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 April 2002 White Paper and related implementation guidance (“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 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 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 less/plus significant gains/losses on the sale of investments, plus losses on early extinguishment of debt, preferred stock redemption charges, impairments of non-depreciable real estate, land parcels, impairments of investments, and the amount of such items that is allocable to our unvested restricted stock awards. Our calculations of both FFO and FFO, as adjusted, 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.

AFFO

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 building improvements (excluding amounts recoverable from our client tenants), non-revenue-enhancing tenant improvements and leasing commissions (excluding revenue-enhancing and development and redevelopment expenditures); (ii) effects of straight-line rent revenue and straight-line rent expense 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) stock 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 FFO 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 items that are not indicative of our core operations and that do not actually reduce the amount of cash generated by our operations. We believe that eliminating the effect of 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 GAAP financial measure most

95



comparable 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.

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. Amounts in the table below include our share of unconsolidated joint venture amounts (in thousands).
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income attributable to Alexandria’s common stockholders
 
$
32,659

 
$
27,626

 
$
81,736

 
$
88,267

Depreciation and amortization
 
68,398

 
58,388

 
190,123

 
166,123

Impairment of real estate – rental properties
 
—

 
—

 
14,510

 
—

Gain on sales of real estate – land parcels
 
—

 
(8
)
 
—

 
(805
)
Amount attributable to noncontrolling interests/
unvested restricted stock awards:
 
 
 
 
 
 
 
 
Net income
 
793

 
1,846

 
2,661

 
5,127

FFO
 
(1,491
)
 
(2,278
)
 
(3,892
)
 
(5,570
)
FFO attributable to Alexandria’s common stockholders – basic and diluted (1)
 
100,359

 
85,574

 
285,138

 
253,142

Investment income (2)
 
(5,378
)
 
—

 
(5,378
)
 
—

Loss on early extinguishment of debt
 
—

 
525

 
189

 
525

Allocation to unvested restricted stock awards
 
67

 
(4
)
 
53

 
(4
)
FFO attributable to Alexandria’s common stockholders – diluted, as adjusted
 
95,048

 
86,095

 
280,002

 
253,663

Non-revenue-enhancing capital expenditures:
 
 
 
 
 
 
 
 
Building improvements
 
(2,404
)
 
(2,405
)
 
(7,425
)
 
(5,440
)
Tenant improvements and leasing commissions
 
(5,499
)
 
(1,693
)
 
(17,703
)
 
(9,680
)
Straight-line rent revenue
 
(12,006
)
 
(10,892
)
 
(36,862
)
 
(35,511
)
Straight-line rent expense on ground leases (3)
 
(1,245
)
 
723

 
(372
)
 
2,131

Amortization of acquired below-market leases (4)
 
(3,182
)
 
(757
)
 
(5,121
)
 
(2,191
)
Amortization of loan fees
 
2,657

 
2,786

 
8,413

 
8,090

Amortization of debt (premiums) discounts
 
(100
)
 
(36
)
 
(282
)
 
100

Stock compensation expense
 
5,178

 
3,068

 
12,922

 
9,372

Allocation to unvested restricted stock awards
 
207

 
71

 
476

 
261

AFFO attributable to Alexandria’s common stockholders – diluted
 
$
78,654

 
$
76,960

 
$
234,048

 
$
220,795


(1)
Calculated in accordance with standards established by the Board of Governors of the NAREIT in its April 2002 White Paper and related implementation guidance.
(2)
Investment income for the three months ended September 30, 2015, of $5.4 million, or $0.08 per share, included gross investment gains of $8.7 million, primarily from the sale of two publicly traded securities.
(3)
Increase in the three months ended September 30, 2015, due to the timing of an annual cash payment for one ground lease. Straight-line rent expense related to ground leases is expected to decrease in the three months ended December 31, 2015, to a quarterly run rate generally consistent with quarters prior to the three months ended September 30, 2015.
(4)
Increase in the three months ended September 30, 2015, is primarily related to a below-market lease assumed with the acquisition of 10290 Campus Point Drive in our University Town Center submarket in July 2015. This acquired lease expired in September 2015. We expect amortization of acquired below-market leases to decrease in the three months ended December 31, 2015, to a quarterly run rate of approximately $1.0 million.


96



The following table presents a reconciliation of earnings 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. Amounts allocable to unvested restricted stock awards of approximately one cent per share are not presented separately within the table below (in thousands, except per share amounts). Per share amounts may not add due to rounding.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Earnings per share attributable to Alexandria’s common stockholders – basic and diluted
 
$
0.46

 
$
0.39

 
$
1.14

 
$
1.24

Depreciation and amortization 
 
0.95

 
0.81

 
2.65

 
2.33

Impairment of real estate – rental properties
 
—

 
—

 
0.20

 
—

Gain on sales of real estate – land parcels
 
—

 
—

 
—

 
(0.01
)
FFO per share attributable to Alexandria’s common stockholders – basic and diluted (1)
 
1.40

 
1.20

 
3.99

 
3.56

Investment income (2)
 
(0.08
)
 
—

 
(0.08
)
 
—

Loss on early extinguishment of debt
 
—

 
0.01

 
—

 
0.01

FFO per share attributable to Alexandria’s common stockholders – diluted, as adjusted
 
1.33

 
1.21

 
3.92

 
3.57

Non-revenue-enhancing capital expenditures:
 
 
 
 
 
 
 
 
Building improvements
 
(0.03
)
 
(0.03
)
 
(0.10
)
 
(0.08
)
Tenant improvements and leasing commissions
 
(0.08
)
 
(0.02
)
 
(0.25
)
 
(0.14
)
Straight-line rent revenue 
 
(0.17
)
 
(0.15
)
 
(0.52
)
 
(0.50
)
Straight-line rent expense on ground leases
 
(0.02
)
 
0.01

 
—

 
0.03

Amortization of acquired below-market leases
 
(0.04
)
 
(0.01
)
 
(0.06
)
 
(0.02
)
Amortization of loan fees 
 
0.04

 
0.03

 
0.12

 
0.11

Stock compensation expense
 
0.07

 
0.04

 
0.18

 
0.13

AFFO per share attributable to Alexandria’s common stockholders – diluted
 
$
1.10

 
$
1.08

 
$
3.28

 
$
3.10

 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding for calculating FFO, FFO, as adjusted, and AFFO per share attributable to Alexandria’s common stockholders – basic and diluted
 
71,500

 
71,195

 
71,426

 
71,121


(1)
Calculated in accordance with standards established by the Board of Governors of the NAREIT in its April 2002 White Paper and related implementation guidance.
(2)
Investment income for the three months ended September 30, 2015, of $5.4 million, or $0.08 per share, included gross investment gains of $8.7 million, primarily from the sale of two publicly traded securities.

97



Adjusted EBITDA

EBITDA represents earnings before interest, taxes, depreciation, and amortization. EBITDA is a non-GAAP financial measure and is used by us and others as a supplemental measure of performance. We use Adjusted EBITDA 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 stock compensation expense, gains or losses on early extinguishment of debt, gains or losses on sales of real estate, and impairments (“Adjusted EBITDA”). We believe Adjusted EBITDA provides investors relevant and useful information because it permits investors to view income from our operations on an unleveraged basis before the effects of taxes, depreciation and amortization, stock compensation expense, gains or losses on early extinguishment of debt, gains or losses on sales of real estate, and impairments, including our share from our unconsolidated joint ventures. By excluding interest expense and gains or losses on early extinguishment of debt, EBITDA and Adjusted EBITDA 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 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 and land parcels, and impairments 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 and Adjusted EBITDA have limitations as measures of our performance. EBITDA and Adjusted EBITDA do not reflect our historical cash expenditures or future cash requirements for capital expenditures or contractual commitments. While EBITDA and Adjusted EBITDA 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 and Adjusted EBITDA 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 and Adjusted EBITDA (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
39,699

 
$
35,943

 
$
103,137

 
$
112,808

Interest expense:
 
 
 
 
 
 
 
Consolidated
27,679

 
20,555

 
77,583

 
57,111

Our share of unconsolidated joint ventures
242

 
—

 
284

 
—

Interest expense
27,921

 
20,555

 
77,867

 
57,111

Income taxes
1,392

 
—

 
3,838

 
—

Depreciation and amortization:
 
 
 
 
 
 
 
Consolidated
67,953

 
58,388

 
189,044

 
166,123

Our share of unconsolidated joint ventures
445

 
—

 
1,079

 
—

Depreciation and amortization
68,398

 
58,388

 
190,123

 
166,123

EBITDA
137,410

 
114,886

 
374,965

 
336,042

Stock compensation expense
5,178

 
3,068

 
12,922

 
9,372

Loss on early extinguishment of debt
—

 
525

 
189

 
525

Gain on sales of real estate – land parcels
—

 
(8
)
 
—

 
(805
)
Impairment of real estate
—

 
—

 
14,510

 
—

Adjusted EBITDA
$
142,588

 
$
118,471

 
$
402,586

 
$
345,134



98



Adjusted EBITDA margins
 
We calculate Adjusted EBITDA margins by dividing Adjusted EBITDA by total revenues. Because our total revenues exclude revenues from discontinued operations, for the purposes of calculating the margin ratio, we exclude the Adjusted EBITDA generated by our discontinued operations for each period presented. We believe excluding Adjusted EBITDA for discontinued operations improves the consistency and comparability of the Adjusted EBITDA margins from period to period. The following table reconciles Adjusted EBITDA to Adjusted EBITDA – excluding discontinued operations (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Adjusted EBITDA
$
142,588

 
$
118,471

 
$
402,586

 
$
345,134

Add back: operating loss from discontinued operations
—

 
180

 
43

 
489

Adjusted EBITDA – excluding discontinued operations
$
142,588

 
$
118,651

 
$
402,629

 
$
345,623

 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Consolidated
$
218,610

 
$
185,615

 
$
619,519

 
$
538,203

Our share of unconsolidated joint ventures
1,875

 
—

 
3,199

 
—

Revenues
$
220,485

 
$
185,615

 
$
622,718

 
$
538,203

 
 
 
 
 
 
 
 
Adjusted EBITDA margins
65%

 
64%

 
65%

 
64%



99



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 our ability to satisfy financing obligations and preferred stock dividends. Cash interest is equal to interest expense calculated in accordance with GAAP, plus capitalized interest and unconsolidated joint venture cash 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 this quarterly report on Form 10-Q for the nine months ended September 30, 2015, and on our annual report on Form 10-K for the year ended December 31, 2014.

The following table presents a reconciliation of interest expense, the most directly comparable GAAP financial measure to cash interest and fixed charges (dollars in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Adjusted EBITDA
 
$
142,588

 
$
118,471

 
$
402,586

 
$
345,134

 
 
 
 
 
 
 
 
 
Interest expense
 
$
27,921

 
$
20,555

 
$
77,867

 
$
57,111

Capitalized interest:
 
 
 
 
 
 
 
 
Consolidated
 
8,436

 
12,125

 
27,844

 
35,440

Our share of unconsolidated joint ventures
 
641

 
—

 
1,846

 
—

Capitalized interest
 
9,077

 
12,125

 
29,690

 
35,440

Amortization of loan fees:
 
 
 
 
 
 
 
 
Consolidated
 
(2,625
)
 
(2,786
)
 
(8,348
)
 
(8,090
)
Our share of unconsolidated joint ventures
 
(32
)
 
—

 
(65
)
 
—

Amortization of loan fees
 
(2,657
)
 
(2,786
)
 
(8,413
)
 
(8,090
)
Amortization of debt premiums (discounts)
 
100

 
36

 
282

 
(100
)
Cash interest
 
34,441

 
29,930

 
99,426

 
84,361

Dividends on preferred stock
 
6,247

 
6,471

 
18,740

 
19,414

Fixed charges
 
$
40,688

 
$
36,401

 
$
118,166

 
$
103,775

 
 
 
 
 
 
 
 
 
Fixed-charge coverage ratio:
 
 
 
 
 
 
 
 
– period annualized
 
3.5x

 
3.3x

 
3.4x

 
3.3x

– trailing 12 months
 
3.4x

 
3.3x

 
3.4x

 
3.3x



100



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 balance sheet leverage. Net debt is equal to the sum of total consolidated and unconsolidated 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, 2015, and December 31, 2014 (dollars in thousands):
 
September 30, 2015
 
December 31, 2014
Secured notes payable:
 
 
 
Consolidated
$
773,619

 
$
652,209

Our share of unconsolidated joint ventures
48,215

 
—

Secured notes payable
821,834

 
652,209

Unsecured senior notes payable
1,747,613

 
1,747,370

Unsecured senior line of credit
843,000

 
304,000

Unsecured senior bank term loans
950,000

 
975,000

Cash and cash equivalents:
 
 
 
Consolidated
(76,383
)
 
(86,011
)
Our share of unconsolidated joint ventures
(7,231
)
 
—

Cash and cash equivalents
(83,614
)
 
(86,011
)
Less: restricted cash
(36,993
)
 
(26,884
)
Net debt
$
4,241,840

 
$
3,565,684

 
 
 
 
Adjusted EBITDA:
 
 
 
– quarter annualized
$
570,352

 
$
493,432

– trailing 12 months
$
525,944

 
$
468,492

 
 
 
 
Net debt to Adjusted EBITDA:
 
 
 
– quarter annualized
7.4
x
 
7.2
x
– trailing 12 months
8.1
x
 
7.6
x

NOI

NOI is a non-GAAP financial measure equal to income from continuing operations, the most directly comparable GAAP financial measure, excluding loss on early extinguishment of debt, impairment of real estate, depreciation and amortization, interest expense, and general and administrative expense, including our share of our unconsolidated joint ventures. We believe NOI provides useful information to investors regarding our financial condition and results of operations because it primarily reflects 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, adjusted to exclude the effect of straight-line rent adjustments required by GAAP. We believe that NOI on a cash basis is helpful to investors as an additional measure of operating performance because it eliminates straight-line rent adjustments to rental revenue.


101



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, which provides perspective not immediately apparent from income from continuing operations. NOI can be used to measure the initial stabilized yields of our properties by calculating the quotient of NOI generated by a property on a straight-line basis, and our investment in the property, excluding the impact of leverage. 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. Impairments of real estate have been excluded in deriving NOI because we do not consider impairments of real estate to be property-level operating expenses. Impairments of real estate 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 impairments of real estate 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, nor as an alternative to cash flows as a measure of liquidity or our ability to make distributions.

Same Properties’ NOI

Refer to the discussion of Same Properties and the reconciliation of NOI to income from continuing operations in the “Results of Operations” section earlier in Item 2 of this report.

Unencumbered NOI as a percentage of total NOI from continuing operations
 
Unencumbered NOI as a percentage of total NOI from continuing operations is a non-GAAP financial measure that we believe is useful to investors as a performance measure of the results of operations of our unencumbered real estate assets, as it primarily reflects those income and expense items that are incurred at the unencumbered property level. We use unencumbered NOI as a percentage of total NOI from continuing operations, including our share of unconsolidated joint ventures, 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, including our share from unconsolidated joint ventures, that are not subject to any mortgage, deed of trust, lien, or other security interest as of the period for which income is presented. Refer to the reconciliation of NOI to income from continuing operations in the “Results of Operations” section earlier in Item 2 of this report.

The following table summarizes unencumbered NOI as a percentage of total NOI for the three and nine months ended September 30, 2015 and 2014 (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Unencumbered NOI
$
118,889

 
$
108,155

 
$
341,666

 
$
315,202

Encumbered NOI
32,272

 
20,037

 
88,722

 
60,718

NOI from continuing operations
$
151,161

 
$
128,192

 
$
430,388

 
$
375,920

Unencumbered NOI as a percentage of total NOI
79%

 
84%

 
79%

 
84%




102



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 governmental 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% change 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, and unsecured senior notes payable as of September 30, 2015 (in thousands):

Annualized impact to future earnings due to variable-rate debt:
 
Rate increase of 1%
$
(7,920
)
Rate decrease of 1%
$
1,529

 
 
Effect on fair value of total consolidated debt and interest rate swap agreements:
 
Rate increase of 1%
$
(151,947
)
Rate decrease of 1%
$
144,303


These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate swap agreements in existence on September 30, 2015. 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 (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 as of September 30, 2015 (in thousands):

Equity price risk:
 
Fair value increase of 10%
$
33,057

Fair value decrease of 10%
$
(33,057
)


103



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 (loss) 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% change in foreign currency rates relative to the U.S. dollar would have on our potential future earnings, and the fair value of our net investment in foreign subsidiaries based on our current operating assets outside the U.S. as of September 30, 2015 (in thousands):

Impact of potential future earnings due to foreign currency exchange rate:
 
Rate increase of 10%
$
(161
)
Rate decrease of 10%
$
161

 
 
Effect on the fair value of net investment in foreign subsidiaries due to foreign currency exchange rate:
 
Rate increase of 10%
$
24,469

Rate decrease of 10%
$
(24,469
)

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.

Our exposure to market risk elements for the nine months ended September 30, 2015, was consistent with the risk elements presented above, including the effects of changes in interest rates, equity prices, and foreign currency exchange rates.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

As of September 30, 2015, 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, 2015.

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, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



104



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, 2014. 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.



105



ITEM 6. EXHIBITS

Exhibit
Number
 
Exhibit Title
 
 
 
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 May 7, 2015), filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on May 11, 2015.
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 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.
4.4*
 
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.
4.5*
 
Form of 4.60% Senior Note due 2022 (included in Exhibit 4.4 above).
4.6*
 
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.
4.7*
 
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.
4.8*
 
Form of 3.90% Senior Note due 2023 (included in Exhibit 4.7 above).
4.9*
 
Supplemental Indenture No. 3, dated as of July 18, 2014, 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 July 18, 2014.
4.10*
 
Form of 2.750% Senior Note due 2020 (included in Exhibit 4.9 above).
4.11*
 
Supplemental Indenture No. 4, dated as of July 18, 2014, 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 July 18, 2014.
4.12*
 
Form of 4.500% Senior Note due 2029 (included in Exhibit 4.11 above).

106



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, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2015, and December 31, 2014 (unaudited), (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014 (unaudited), (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014 (unaudited), (iv) Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests for the nine months ended September 30, 2015 (unaudited), (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited).

(*) Incorporated by reference.

107



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 3, 2015.

 
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)



108