UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172020
OR
☐oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-12993
ALEXANDRIA REAL ESTATE EQUITIES, INC.
(Exact name of registrant as specified in its charter)
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| | | | | | | |
Maryland | | 95-4502084 |
(State or other jurisdiction of incorporation or organization)
| | (I.R.S. Employer Identification Number) |
385 East Colorado Boulevard, Suite 299,26 North Euclid Avenue, 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)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | ARE | New York Stock Exchange |
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☒x 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 ☒x 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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| | | | | | | | | | | | | |
Large accelerated filer☒ | Accelerated filer ☐
|
Non-accelerated filer ☐ (Do not check if a smaller reporting company) x | | Smaller reporting company ☐ | o |
Accelerated filer | o | | Emerging growth company ☐ | o |
Non-accelerated filer | o | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐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 ☒x
As of October 16, 2017, 95,717,826July 15, 2020, 126,114,573 shares of common stock, par value $0.01 per share, were outstanding.
TABLE OF CONTENTS
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| Consolidated Balance Sheets as of June 30, 2020, and December 31, 2019 | |
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| Consolidated Financial Statements for the Three and Six Months Ended June 30, 2020 and 2019: | |
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| Consolidated Balance Sheets as of September 30, 2017, and December 31, 2016 | |
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| Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016Operations | |
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| Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 | |
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| Consolidated StatementStatements of Changes in Stockholders’ Equity and Noncontrolling Interests for the Nine Months Ended September 30, 2017 | |
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| Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20172020 and 20162019 | |
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GLOSSARY
The following abbreviations or acronyms that may be used in this document shall have the adjacent meanings set forth below:
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ASU | Accounting Standards Update |
ATM | At the Market |
CIP | Construction in Progress |
EPS | Earnings per Share |
FASB | Financial Accounting Standards Board |
FFO | Funds fromFrom Operations |
GAAP | U.S. Generally Accepted Accounting Principles |
HVACJV | Heating, Ventilation, and Air Conditioning |
JV | Joint Venture |
LEED® | Leadership in Energy and Environmental Design |
LIBOR | London Interbank Offered Rate |
NAREITNareit | National Association of Real Estate Investment Trusts |
NAV | Net Asset Value |
NYSEREIT | New York Stock Exchange |
REIT | Real Estate Investment Trust |
RSF | Rentable Square Feet/Foot |
SEC | Securities and Exchange Commission |
SF | Square Feet/Foot |
SoMaSOFR | Secured Overnight Financing Rate |
SoMa | South of Market (submarket of the San Francisco market) |
U.S. | United States |
VIE | Variable Interest Entity |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Alexandria Real Estate Equities, Inc.
Consolidated Balance Sheets
(In thousands)
(Unaudited)
| | | September 30, 2017 | | December 31, 2016 | | June 30, 2020 | | December 31, 2019 |
Assets | | | | Assets | | | |
Investments in real estate | $ | 10,046,521 |
| | $ | 9,077,972 |
| Investments in real estate | $ | 16,281,125 | | | $ | 14,844,038 | |
Investments in unconsolidated real estate joint ventures | 33,692 |
| | 50,221 |
| Investments in unconsolidated real estate joint ventures | 326,858 | | | 346,890 | |
Cash and cash equivalents | 118,562 |
| | 125,032 |
| Cash and cash equivalents | 206,860 | | | 189,681 | |
Restricted cash | 27,713 |
| | 16,334 |
| Restricted cash | 34,680 | | | 53,008 | |
Tenant receivables | 9,899 |
| | 9,744 |
| Tenant receivables | 7,208 | | | 10,691 | |
Deferred rent | 402,353 |
| | 335,974 |
| Deferred rent | 688,749 | | | 641,844 | |
Deferred leasing costs | 208,265 |
| | 195,937 |
| Deferred leasing costs | 274,483 | | | 270,043 | |
Investments | 485,262 |
| | 342,477 |
| Investments | 1,318,465 | | | 1,140,594 | |
Other assets | 213,056 |
| | 201,197 |
| Other assets | 930,680 | | | 893,714 | |
Total assets | $ | 11,545,323 |
| | $ | 10,354,888 |
| Total assets | $ | 20,069,108 | | | $ | 18,390,503 | |
| | | | | | | |
Liabilities, Noncontrolling Interests, and Equity | | | | Liabilities, Noncontrolling Interests, and Equity | |
Secured notes payable | $ | 1,153,890 |
| | $ | 1,011,292 |
| Secured notes payable | $ | 344,784 | | | $ | 349,352 | |
Unsecured senior notes payable | 2,801,290 |
| | 2,378,262 |
| Unsecured senior notes payable | 6,738,486 | | | 6,044,127 | |
Unsecured senior line of credit | 314,000 |
| | 28,000 |
| |
Unsecured senior bank term loans | 547,860 |
| | 746,471 |
| |
Accounts payable, accrued expenses, and tenant security deposits | 740,070 |
| | 731,671 |
| |
Unsecured senior lines of credit | | Unsecured senior lines of credit | 440,000 | | | 384,000 | |
Accounts payable, accrued expenses, and other liabilities | | Accounts payable, accrued expenses, and other liabilities | 1,343,181 | | | 1,320,268 | |
Dividends payable | 83,402 |
| | 76,914 |
| Dividends payable | 133,681 | | | 126,278 | |
Total liabilities | 5,640,512 |
| | 4,972,610 |
| Total liabilities | 9,000,132 | | | 8,224,025 | |
| | | | |
Commitments and contingencies |
|
| |
|
| Commitments and contingencies | |
| | | | |
Redeemable noncontrolling interests | 11,418 |
| | 11,307 |
| Redeemable noncontrolling interests | 12,122 | | | 12,300 | |
| | | | |
Alexandria Real Estate Equities, Inc.’s stockholders’ equity: | | | | Alexandria Real Estate Equities, Inc.’s stockholders’ equity: | |
7.00% Series D cumulative convertible preferred stock | 74,386 |
| | 86,914 |
| |
6.45% Series E cumulative redeemable preferred stock | — |
| | 130,000 |
| |
Common stock | 943 |
| | 877 |
| Common stock | 1,246 | | | 1,208 | |
Additional paid-in capital | 5,287,777 |
| | 4,672,650 |
| Additional paid-in capital | 9,443,274 | | | 8,874,367 | |
Accumulated other comprehensive income | 43,864 |
| | 5,355 |
| |
Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (13,080) | | | (9,749) | |
Alexandria Real Estate Equities, Inc.’s stockholders’ equity | 5,406,970 |
| | 4,895,796 |
| Alexandria Real Estate Equities, Inc.’s stockholders’ equity | 9,431,440 | | | 8,865,826 | |
Noncontrolling interests | 486,423 |
| | 475,175 |
| Noncontrolling interests | 1,625,414 | | | 1,288,352 | |
Total equity | 5,893,393 |
| | 5,370,971 |
| Total equity | 11,056,854 | | | 10,154,178 | |
Total liabilities, noncontrolling interests, and equity | $ | 11,545,323 |
| | $ | 10,354,888 |
| Total liabilities, noncontrolling interests, and equity | $ | 20,069,108 | | | $ | 18,390,503 | |
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Consolidated Statements of IncomeOperations
(In thousands, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Revenues: | | | | | | | |
Income from rentals | $ | 435,856 | | | $ | 371,618 | | | $ | 873,461 | | | $ | 726,367 | |
Other income | 1,100 | | | 2,238 | | | 3,414 | | | 6,331 | |
Total revenues | 436,956 | | | 373,856 | | | 876,875 | | | 732,698 | |
| | | | | | | |
Expenses: | | | | | | | |
Rental operations | 123,911 | | | 105,689 | | | 253,014 | | | 207,190 | |
General and administrative | 31,775 | | | 26,434 | | | 63,738 | | | 51,111 | |
Interest | 45,014 | | | 42,879 | | | 90,753 | | | 81,979 | |
Depreciation and amortization | 168,027 | | | 134,437 | | | 343,523 | | | 268,524 | |
Impairment of real estate | 13,218 | | | — | | | 15,221 | | | — | |
Loss on early extinguishment of debt | — | | | — | | | — | | | 7,361 | |
Total expenses | 381,945 | | | 309,439 | | | 766,249 | | | 616,165 | |
| | | | | | | |
Equity in earnings of unconsolidated real estate joint ventures | 3,893 | | | 1,262 | | | 777 | | | 2,408 | |
Investment income | 184,657 | | | 21,500 | | | 162,836 | | | 105,056 | |
Net income | 243,561 | | | 87,179 | | | 274,239 | | | 223,997 | |
Net income attributable to noncontrolling interests | (13,907) | | | (8,412) | | | (25,820) | | | (16,071) | |
Net income attributable to Alexandria Real Estate Equities, Inc.’s stockholders | 229,654 | | | 78,767 | | | 248,419 | | | 207,926 | |
Dividends on preferred stock | — | | | (1,005) | | | — | | | (2,031) | |
Preferred stock redemption charge | — | | | — | | | — | | | (2,580) | |
Net income attributable to unvested restricted stock awards | (3,054) | | | (1,432) | | | (3,574) | | | (3,134) | |
Net income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | 226,600 | | | $ | 76,330 | | | $ | 244,845 | | | $ | 200,181 | |
| | | | | | | |
Net income per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders: | | | | | | | |
Basic | $ | 1.82 | | | $ | 0.68 | | | $ | 1.99 | | | $ | 1.80 | |
Diluted | $ | 1.82 | | | $ | 0.68 | | | $ | 1.99 | | | $ | 1.80 | |
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues: | | | | | | | |
Rental | $ | 216,021 |
| | $ | 166,591 |
| | $ | 635,156 |
| | $ | 486,505 |
|
Tenant recoveries | 67,058 |
| | 58,681 |
| | 188,874 |
| | 165,385 |
|
Other income | 2,291 |
| | 5,107 |
| | 5,276 |
| | 20,654 |
|
Total revenues | 285,370 |
| | 230,379 |
| | 829,306 |
| | 672,544 |
|
| | | | | | | |
Expenses: | | | | | | | |
Rental operations | 83,469 |
| | 72,002 |
| | 237,536 |
| | 205,164 |
|
General and administrative | 17,636 |
| | 15,854 |
| | 56,099 |
| | 46,426 |
|
Interest | 31,031 |
| | 25,850 |
| | 92,563 |
| | 75,730 |
|
Depreciation and amortization | 107,788 |
| | 77,133 |
| | 309,069 |
| | 218,168 |
|
Impairment of real estate | — |
| | 8,114 |
| | 203 |
| | 193,237 |
|
Loss on early extinguishment of debt | — |
| | 3,230 |
| | 670 |
| | 3,230 |
|
Total expenses | 239,924 |
| | 202,183 |
| | 696,140 |
| | 741,955 |
|
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Equity in earnings (losses) of unconsolidated real estate joint ventures | 14,100 |
| | 273 |
| | 15,050 |
| | (270 | ) |
Gain on sales of real estate – rental properties | — |
| | — |
| | 270 |
| | — |
|
Gain on sales of real estate – land parcels | — |
| | 90 |
| | 111 |
| | 90 |
|
Net income (loss) | 59,546 |
| | 28,559 |
| | 148,597 |
| | (69,591 | ) |
Net income attributable to noncontrolling interests | (5,773 | ) |
| (4,084 | ) |
| (18,892 | ) |
| (11,614 | ) |
Net income (loss) attributable to Alexandria Real Estate Equities, Inc.’s stockholders | 53,773 |
| | 24,475 |
| | 129,705 |
| | (81,205 | ) |
Dividends on preferred stock | (1,302 | ) | | (5,007 | ) | | (6,364 | ) | | (16,388 | ) |
Preferred stock redemption charge | — |
| | (13,095 | ) | | (11,279 | ) | | (25,614 | ) |
Net income attributable to unvested restricted stock awards | (1,198 | ) | | (921 | ) | | (3,498 | ) | | (2,807 | ) |
Net income (loss) attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | 51,273 |
| | $ | 5,452 |
| | $ | 108,564 |
| | $ | (126,014 | ) |
| | | | | | | |
Net income (loss) per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – basic and diluted | $ | 0.55 |
| | $ | 0.07 |
| | $ | 1.20 |
| | $ | (1.69 | ) |
| | | | | | | |
Dividends declared per share of common stock | $ | 0.86 |
| | $ | 0.80 |
| | $ | 2.55 |
| | $ | 2.40 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Net income | $ | 243,561 | | | $ | 87,179 | | | $ | 274,239 | | | $ | 223,997 | |
Other comprehensive income (loss) | | | | | | | |
Unrealized losses on interest rate hedge agreements: | | | | | | | |
Unrealized interest rate hedge losses arising during the period | — | | | (1,126) | | | — | | | (1,684) | |
Reclassification adjustment for amortization to interest expense included in net income | — | | | 114 | | | — | | | (1,815) | |
| | | | | | | |
Unrealized losses on interest rate hedge agreements, net | — | | | (1,012) | | | — | | | (3,499) | |
| | | | | | | |
Unrealized gains (losses) on foreign currency translation: | | | | | | | |
Unrealized foreign currency translation gains (losses) arising during the period | 2,526 | | | 590 | | | (3,331) | | | 2,800 | |
Unrealized gains (losses) on foreign currency translation, net | 2,526 | | | 590 | | | (3,331) | | | 2,800 | |
| | | | | | | |
Total other comprehensive income (loss) | 2,526 | | | (422) | | | (3,331) | | | (699) | |
Comprehensive income | 246,087 | | | 86,757 | | | 270,908 | | | 223,298 | |
Less: comprehensive income attributable to noncontrolling interests | (13,907) | | | (8,412) | | | (25,820) | | | (16,071) | |
Comprehensive income attributable to Alexandria Real Estate Equities, Inc.’s stockholders | $ | 232,180 | | | $ | 78,345 | | | $ | 245,088 | | | $ | 207,227 | |
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) | $ | 59,546 |
| | $ | 28,559 |
| | $ | 148,597 |
| | $ | (69,591 | ) |
Other comprehensive income (loss) | | | | | | | |
Unrealized gains (losses) on available-for-sale equity securities: | | | | | | | |
Unrealized holding gains (losses) arising during the period | 17,018 |
| | (38,621 | ) | | 23,414 |
| | (70,055 | ) |
Reclassification adjustment for (gains) losses included in net income (loss) | — |
| | (8,540 | ) | | 2,482 |
| | (18,627 | ) |
Unrealized gains (losses) on available-for-sale equity securities, net | 17,018 |
| | (47,161 | ) | | 25,896 |
| | (88,682 | ) |
| | | | | | | |
Unrealized gains (losses) on interest rate hedge agreements: | | | | | | | |
Unrealized interest rate hedge gains (losses) arising during the period | 145 |
| | 2,982 |
| | 812 |
| | (7,655 | ) |
Reclassification adjustment for amortization of interest expense included in net income (loss) | 198 |
| | 1,702 |
| | 1,810 |
| | 3,725 |
|
Unrealized gains (losses) on interest rate hedge agreements, net | 343 |
| | 4,684 |
| | 2,622 |
| | (3,930 | ) |
| | | | | | | |
Unrealized gains on foreign currency translation: | | | | | | | |
Unrealized foreign currency translation gains (losses) arising during the period | 3,836 |
| | (1,322 | ) | | 7,592 |
| | 842 |
|
Reclassification adjustment for cumulative foreign currency translation losses included in net income (loss) upon sale or liquidation | — |
| | 3,779 |
| | 2,421 |
| | 10,807 |
|
Unrealized gains on foreign currency translation, net | 3,836 |
| | 2,457 |
| | 10,013 |
| | 11,649 |
|
| | | | | | | |
Total other comprehensive income (loss) | 21,197 |
| | (40,020 | ) | | 38,531 |
| | (80,963 | ) |
Comprehensive income (loss) | 80,743 |
| | (11,461 | ) | | 187,128 |
| | (150,554 | ) |
Less: comprehensive income attributable to noncontrolling interests | (5,783 | ) | | (4,081 | ) | | (18,914 | ) | | (11,587 | ) |
Comprehensive income (loss) attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | 74,960 |
| | $ | (15,542 | ) | | $ | 168,214 |
| | $ | (162,141 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests
(Dollars in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Alexandria Real Estate Equities, Inc.’s Stockholders’ Equity | | | | | | | | | | | | | | |
| | Number of Common Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests |
Balance as of March 31, 2020 | | 124,325,684 | | | $ | 1,243 | | | $ | 9,336,949 | | | $ | — | | | $ | (15,606) | | | $ | 1,579,666 | | | $ | 10,902,252 | | | $ | 12,013 | |
Net income | | — | | | — | | | — | | | 229,654 | | | — | | | 13,690 | | | 243,344 | | | 217 | |
Total other comprehensive income | | — | | | — | | | — | | | — | | | 2,526 | | | — | | | 2,526 | | | — | |
Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (21,295) | | | (21,295) | | | (201) | |
Contributions from and sales of noncontrolling interests | | — | | | — | | | 155 | | | — | | | — | | | 53,353 | | | 53,508 | | | 93 | |
Issuance pursuant to stock plan | | 289,361 | | | 3 | | | 19,351 | | | — | | | — | | | — | | | 19,354 | | | — | |
Taxes related to net settlement of equity awards | | (56,426) | | | — | | | (9,154) | | | — | | | — | | | — | | | (9,154) | | | — | |
Dividends declared on common stock ($1.06 per share) | | — | | | — | | | — | | | (133,681) | | | — | | | — | | | (133,681) | | | — | |
Reclassification of earnings in excess of distributions | | — | | | — | | | 95,973 | | | (95,973) | | | — | | | — | | | — | | | — | |
Balance as of June 30, 2020 | | 124,558,619 | | | $ | 1,246 | | | $ | 9,443,274 | | | $ | — | | | $ | (13,080) | | | $ | 1,625,414 | | | $ | 11,056,854 | | | $ | 12,122 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Alexandria Real Estate Equities, Inc.’s Stockholders’ Equity | | | | | | |
| | 7.00% Series D Cumulative Convertible Preferred Stock | | 6.45% Series E Cumulative Redeemable Preferred Stock | | Number of Common Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests |
Balance as of December 31, 2016 | | $ | 86,914 |
| | $ | 130,000 |
| | 87,665,880 |
| | $ | 877 |
| | $ | 4,672,650 |
| | $ | — |
| | $ | 5,355 |
| | $ | 475,175 |
| | $ | 5,370,971 |
| | $ | 11,307 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 129,705 |
| | — |
| | 18,139 |
| | 147,844 |
| | 753 |
|
Total other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 38,509 |
| | 22 |
| | 38,531 |
| | — |
|
Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (16,790 | ) | | (16,790 | ) | | (642 | ) |
Contributions from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,877 |
| | 9,877 |
| | — |
|
Issuances of common stock | | — |
| | — |
| | 6,249,309 |
| | 62 |
| | 705,329 |
| | — |
| | — |
| | — |
| | 705,391 |
| | — |
|
Issuances pursuant to stock plan | | — |
| | — |
| | 409,360 |
| | 4 |
| | 30,638 |
| | — |
| | — |
| | — |
| | 30,642 |
| | — |
|
Repurchase of 7.00% Series D preferred stock | | (12,528 | ) | | — |
| | — |
| | — |
| | 391 |
| | (5,797 | ) | | — |
| | — |
| | (17,934 | ) | | — |
|
Redemption of 6.45% Series E preferred stock | | — |
| | (130,000 | ) | | — |
| | — |
| | 5,132 |
| | (5,482 | ) | | — |
| | — |
| | (130,350 | ) | | — |
|
Dividends declared on common stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (238,425 | ) | | — |
| | — |
| | (238,425 | ) | | — |
|
Dividends declared on preferred stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (6,364 | ) | | — |
| | — |
| | (6,364 | ) | | — |
|
Distributions in excess of earnings | | — |
| | — |
| | — |
| | — |
| | (126,363 | ) | | 126,363 |
| | — |
| | — |
| | — |
| | — |
|
Balance as of September 30, 2017 | | $ | 74,386 |
| | $ | — |
| | 94,324,549 |
| | $ | 943 |
| | $ | 5,287,777 |
| | $ | — |
| | $ | 43,864 |
| | $ | 486,423 |
| | $ | 5,893,393 |
| | $ | 11,418 |
|
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | |
Alexandria Real Estate Equities, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
|
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Operating Activities | | | |
Net income (loss) | $ | 148,597 |
| | $ | (69,591 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 309,069 |
| | 218,168 |
|
Loss on early extinguishment of debt | 670 |
| | 3,230 |
|
Gain on sales of real estate – rental properties | (270 | ) | | — |
|
Impairment of real estate | 203 |
| | 193,237 |
|
Gain on sales of real estate – land parcels | (111 | ) | | (90 | ) |
Equity in (earnings) losses of unconsolidated real estate joint ventures | (15,050 | ) | | 270 |
|
Distributions of earnings from unconsolidated real estate joint ventures | 249 |
| | 286 |
|
Amortization of loan fees | 8,578 |
| | 8,792 |
|
Amortization of debt premiums | (1,873 | ) | | (117 | ) |
Amortization of acquired below-market leases | (14,908 | ) | | (2,905 | ) |
Deferred rent | (74,362 | ) | | (30,679 | ) |
Stock compensation expense | 18,649 |
| | 19,007 |
|
Investment gains | (8,425 | ) | | (28,721 | ) |
Investment losses | 6,418 |
| | 10,670 |
|
Changes in operating assets and liabilities: | | | |
Restricted cash | (912 | ) | | (278 | ) |
Tenant receivables | (224 | ) | | 843 |
|
Deferred leasing costs | (39,925 | ) | | (21,621 | ) |
Other assets | (10,662 | ) | | (14,813 | ) |
Accounts payable, accrued expenses, and tenant security deposits | 30,619 |
| | 6,163 |
|
Net cash provided by operating activities | 356,330 |
| | 291,851 |
|
| | | |
Investing Activities | | | |
Proceeds from sales of real estate | 4,263 |
| | 27,332 |
|
Additions to real estate | (660,877 | ) | | (638,568 | ) |
Purchases of real estate | (590,884 | ) | | (18,108 | ) |
Deposits for investing activities | 4,700 |
| | (54,998 | ) |
Investments in unconsolidated real estate joint ventures | (248 | ) | | (6,924 | ) |
Return of capital from unconsolidated real estate joint ventures | 38,576 |
| | — |
|
Additions to investments | (128,190 | ) | | (68,384 | ) |
Sales of investments | 18,896 |
| | 35,295 |
|
Repayment of notes receivable | — |
| | 9,054 |
|
Net cash used in investing activities | $ | (1,313,764 | ) | | $ | (715,301 | ) |
Alexandria Real Estate Equities, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests
|
| | | | | | | |
Alexandria Real Estate Equities, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
|
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Financing Activities | | | |
Borrowings from secured notes payable | $ | 145,272 |
| | $ | 215,330 |
|
Repayments of borrowings from secured notes payable | (2,882 | ) | | (234,096 | ) |
Proceeds from issuance of unsecured senior notes payable | 424,384 |
| | 348,604 |
|
Borrowings from unsecured senior line of credit | 2,634,000 |
| | 2,349,000 |
|
Repayments of borrowings from unsecured senior line of credit | (2,348,000 | ) | | (2,084,000 | ) |
Repayments of borrowings from unsecured senior bank term loans | (200,000 | ) | | (200,000 | ) |
Change in restricted cash related to financing activities | (10,467 | ) | | 7,742 |
|
Payment of loan fees | (4,343 | ) | | (16,499 | ) |
Repurchase of 7.00% Series D cumulative convertible preferred stock | (17,934 | ) | | (98,633 | ) |
Redemption of 6.45% Series E cumulative redeemable preferred stock | (130,350 | ) | | — |
|
Proceeds from the issuance of common stock | 705,391 |
| | 367,802 |
|
Dividends on common stock | (229,814 | ) | | (177,966 | ) |
Dividends on preferred stock | (8,317 | ) | | (17,487 | ) |
Financing costs paid for sale of noncontrolling interests | — |
| | (8,093 | ) |
Contributions from and sale of noncontrolling interests | 9,877 |
| | 68,621 |
|
Distributions to and purchase of noncontrolling interests | (17,432 | ) | | (62,605 | ) |
Net cash provided by financing activities | 949,385 |
| | 457,720 |
|
| | | |
Effect of foreign exchange rate changes on cash and cash equivalents | 1,579 |
| | (1,440 | ) |
| | | |
Net (decrease) increase in cash and cash equivalents | (6,470 | ) | | 32,830 |
|
Cash and cash equivalents as of the beginning of period | 125,032 |
| | 125,098 |
|
Cash and cash equivalents as of the end of period | $ | 118,562 |
| | $ | 157,928 |
|
| | | |
Supplemental Disclosure of Cash Flow Information: | | | |
Cash paid during the period for interest, net of interest capitalized | $ | 86,232 |
| | $ | 58,820 |
|
| | | |
Non-Cash Investing Activities: | | | |
Change in accrued construction | $ | (38,767 | ) | | $ | 23,023 |
|
Contribution of real estate to an unconsolidated real estate joint venture | $ | 6,998 |
| | $ | — |
|
| | | |
Non-Cash Financing Activities: | | | |
Redemption of redeemable noncontrolling interests | $ | — |
| | $ | (5,000 | ) |
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Alexandria Real Estate Equities, Inc.’s Stockholders’ Equity | | | | | | | | | | | | | | | | |
| | 7.00% Series D Cumulative Convertible Preferred Stock | | Number of Common Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests |
Balance as of March 31, 2019 | | $ | 57,461 | | | 111,180,659 | | | $ | 1,112 | | | $ | 7,518,716 | | | $ | — | | | $ | (10,712) | | | $ | 777,448 | | | $ | 8,344,025 | | | $ | 10,889 | |
Net income | | — | | | — | | | — | | | — | | | 78,767 | | | — | | | 8,194 | | | 86,961 | | | 218 | |
Total other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | (422) | | | — | | | (422) | | | — | |
Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (14,674) | | | (14,674) | | | (207) | |
Contributions from and sales of noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | 487 | | | 487 | | | 94 | |
Issuance of common stock | | — | | | 602,484 | | | 6 | | | 85,388 | | | — | | | — | | | — | | | 85,394 | | | — | |
Issuance pursuant to stock plan | | — | | | 327,699 | | | 3 | | | 17,244 | | | — | | | — | | | — | | | 17,247 | | | — | |
Taxes related to net settlement of equity awards | | — | | | (125,274) | | | (1) | | | (3,996) | | | — | | | — | | | — | | | (3,997) | | | — | |
Dividends declared on common stock ($1.00 per share) | | — | | | — | | | — | | | — | | | (113,541) | | | — | | | — | | | (113,541) | | | — | |
Dividends declared on preferred stock ($0.4375 per share) | | — | | | — | | | — | | | — | | | (1,005) | | | — | | | — | | | (1,005) | | | — | |
| | | | | | | | | | | | | | | | | | |
Reclassification of distributions in excess of earnings | | — | | | — | | | — | | | (35,779) | | | 35,779 | | | — | | | — | | | — | | | — | |
Balance as of June 30, 2019 | | $ | 57,461 | | | 111,985,568 | | | $ | 1,120 | | | $ | 7,581,573 | | | $ | — | | | $ | (11,134) | | | $ | 771,455 | | | $ | 8,400,475 | | | $ | 10,994 | |
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests
(Dollars in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Alexandria Real Estate Equities, Inc.’s Stockholders’ Equity | | | | | | | | | | | | | | |
| | Number of Common Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests |
Balance as of December 31, 2019 | | 120,800,315 | | | $ | 1,208 | | | $ | 8,874,367 | | | $ | — | | | $ | (9,749) | | | $ | 1,288,352 | | | $ | 10,154,178 | | | $ | 12,300 | |
Net income | | — | | | — | | | — | | | 248,419 | | | — | | | 25,385 | | | 273,804 | | | 435 | |
Total other comprehensive loss | | — | | | — | | | — | | | — | | | (3,331) | | | — | | | (3,331) | | | — | |
Redemption of noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (300) | |
Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (37,776) | | | (37,776) | | | (406) | |
Contributions from and sales of noncontrolling interests | | — | | | — | | | 56,011 | | | — | | | — | | | 349,453 | | | 405,464 | | | 93 | |
Issuance of common stock | | 3,392,622 | | | 34 | | | 504,304 | | | — | | | — | | | — | | | 504,338 | | | — | |
Issuance pursuant to stock plan | | 471,289 | | | 5 | | | 42,337 | | | — | | | — | | | — | | | 42,342 | | | — | |
Taxes related to net settlement of equity awards | | (105,607) | | | (1) | | | (16,018) | | | — | | | — | | | — | | | (16,019) | | | — | |
Dividends declared on common stock ($2.09 per share) | | — | | | — | | | — | | | (263,662) | | | — | | | — | | | (263,662) | | | — | |
Cumulative effect of adjustment upon adoption of credit loss ASU on January 1, 2020 | | — | | | — | | | — | | | (2,484) | | | — | | | — | | | (2,484) | | | — | |
Reclassification of distributions in excess of earnings | | — | | | — | | | (17,727) | | | 17,727 | | | — | | | — | | | — | | | — | |
Balance as of June 30, 2020 | | 124,558,619 | | | $ | 1,246 | | | $ | 9,443,274 | | | $ | — | | | $ | (13,080) | | | $ | 1,625,414 | | | $ | 11,056,854 | | | $ | 12,122 | |
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests
(Dollars in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Alexandria Real Estate Equities, Inc.’s Stockholders’ Equity | | | | | | | | | | | | | | | | |
| | 7.00% Series D Cumulative Convertible Preferred Stock | | Number of Common Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interests |
Balance as of December 31, 2018 | | $ | 64,336 | | | 111,011,816 | | | $ | 1,110 | | | $ | 7,286,954 | | | $ | — | | | $ | (10,435) | | | $ | 541,963 | | | $ | 7,883,928 | | | $ | 10,786 | |
Net income | | — | | | — | | | — | | | — | | | 207,926 | | | — | | | 15,636 | | | 223,562 | | | 435 | |
Total other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | (699) | | | — | | | (699) | | | — | |
Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (24,175) | | | (24,175) | | | (415) | |
Contributions from noncontrolling interests | | — | | | — | | | — | | | 202,246 | | | — | | | — | | | 238,031 | | | 440,277 | | | 188 | |
Issuance of common stock | | — | | | 602,484 | | | 6 | | | 85,388 | | | — | | | — | | | — | | | 85,394 | | | — | |
Issuance pursuant to stock plan | | — | | | 523,691 | | | 5 | | | 34,180 | | | — | | | — | | | — | | | 34,185 | | | — | |
Taxes related to net settlement of equity awards | | — | | | (152,423) | | | (1) | | | (4,085) | | | — | | | — | | | — | | | (4,086) | | | — | |
Repurchases of 7.00% Series D preferred stock | | (6,875) | | | — | | | — | | | 215 | | | (2,580) | | | — | | | — | | | (9,240) | | | |
Dividends declared on common stock ($1.97 per share) | | — | | | — | | | — | | | — | | | (223,115) | | | — | | | — | | | (223,115) | | | — | |
Dividends declared on preferred stock ($0.8750 per share) | | — | | | — | | | — | | | — | | | (2,031) | | | — | | | — | | | (2,031) | | | — | |
Cumulative effect of adjustment upon adoption of lease ASUs on January 1, 2019 | | — | | | — | | | — | | | — | | | (3,525) | | | — | | | — | | | (3,525) | | | — | |
Reclassification of distributions in excess of earnings | | — | | | — | | | — | | | (23,325) | | | 23,325 | | | — | | | — | | | — | | | — | |
Balance as of June 30, 2019 | | $ | 57,461 | | | 111,985,568 | | | $ | 1,120 | | | $ | 7,581,573 | | | $ | — | | | $ | (11,134) | | | $ | 771,455 | | | $ | 8,400,475 | | | $ | 10,994 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | |
Alexandria Real Estate Equities, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
| | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
Operating Activities: | | | |
Net income | $ | 274,239 | | | $ | 223,997 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 343,523 | | | 268,524 | |
Impairment of real estate | 15,221 | | | — | |
Loss on early extinguishment of debt | — | | | 7,361 | |
Equity in earnings of unconsolidated real estate joint ventures | (777) | | | (2,408) | |
Distributions of earnings from unconsolidated real estate joint ventures | 3,438 | | | 1,679 | |
Amortization of loan fees | 4,984 | | | 4,613 | |
Amortization of debt premiums | (1,776) | | | (1,583) | |
Amortization of acquired below-market leases | (29,751) | | | (15,202) | |
Deferred rent | (43,964) | | | (52,441) | |
Stock compensation expense | 19,114 | | | 22,466 | |
Investment income | (162,836) | | | (105,056) | |
Changes in operating assets and liabilities: | | | |
Tenant receivables | 2,900 | | | 573 | |
Deferred leasing costs | (22,621) | | | (23,471) | |
Other assets | (1,187) | | | 560 | |
Accounts payable, accrued expenses, and other liabilities | (6,850) | | | (21,272) | |
Net cash provided by operating activities | 393,657 | | | 308,340 | |
| | | |
Investing Activities: | | | |
Additions to real estate | (725,742) | | | (577,322) | |
Purchases of real estate | (699,901) | | | (715,030) | |
Change in escrow deposits | 18,719 | | | (9,000) | |
Investments in unconsolidated real estate joint ventures | (2,861) | | | (95,950) | |
Return of capital from unconsolidated real estate joint ventures | 20,225 | | | — | |
Additions to non-real estate investments | (75,968) | | | (104,902) | |
Sales of non-real estate investments | 68,468 | | | 49,967 | |
Net cash used in investing activities | $ | (1,397,060) | | | $ | (1,452,237) | |
| | | | | | | | | | | |
Alexandria Real Estate Equities, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
| | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
Financing Activities: | | | |
Repayments of borrowings from secured notes payable | $ | (3,088) | | | $ | (302,878) | |
Proceeds from issuance of unsecured senior notes payable | 699,532 | | | 854,209 | |
Borrowings from unsecured senior lines of credit | 1,470,000 | | | 2,114,000 | |
Repayments of borrowings from unsecured senior lines of credit | (1,414,000) | | | (1,808,000) | |
Proceeds from issuance of commercial paper notes | 8,179,900 | | | — | |
Repayments of borrowings from commercial paper program | (8,179,900) | | | — | |
Payments of loan fees | (7,957) | | | (15,796) | |
Taxes paid related to net settlement of equity awards | (6,890) | | | (4,086) | |
Repurchase of 7.00% Series D cumulative convertible preferred stock | — | | | (9,240) | |
Proceeds from issuance of common stock | 504,338 | | | 85,394 | |
Dividends on common stock | (256,259) | | | (218,914) | |
Dividends on preferred stock | — | | | (2,132) | |
Contributions from and sales of noncontrolling interests | 55,775 | | | 441,251 | |
Distributions to and redemption of noncontrolling interests | (38,482) | | | (24,590) | |
Net cash provided by financing activities | 1,002,969 | | | 1,109,218 | |
| | | |
Effect of foreign exchange rate changes on cash and cash equivalents | (715) | | | 774 | |
| | | |
Net decrease in cash, cash equivalents, and restricted cash | (1,149) | | | (33,905) | |
Cash, cash equivalents, and restricted cash as of the beginning of period | 242,689 | | | 272,130 | |
Cash, cash equivalents, and restricted cash as of the end of period | $ | 241,540 | | | $ | 238,225 | |
| | | |
Supplemental Disclosures and Non-Cash Investing and Financing Activities: | | | |
Cash paid during the period for interest, net of interest capitalized | $ | 90,717 | | | $ | 71,338 | |
Accrued construction for current-period additions to real estate | $ | 148,431 | | | $ | 181,922 | |
Assumption of secured notes payable in connection with purchase of properties | $ | — | | | $ | (28,200) | |
Right-of-use asset | $ | 32,700 | | | $ | 239,653 | |
Lease liability | $ | (32,700) | | | $ | (245,638) | |
Contribution of assets from real estate joint venture partner | $ | 350,000 | | | $ | — | |
Issuance of noncontrolling interest to joint venture partner | $ | (292,930) | | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
Alexandria Real Estate Equities, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
| |
1. | Organization and basis of presentation |
1. ORGANIZATION AND BASIS OF PRESENTATION
Alexandria Real Estate Equities, Inc. (NYSE:ARE), an S&P 500® company, is an urban office REIT, is the first, longest-tenured, and pioneering owner, operator, and developer uniquely focused on collaborative life science, technology, and technologyagtech campuses in AAA innovation cluster locations. As used in this quarterly report on Form 10‑Q,10-Q, references to the “Company,” “Alexandria,” “ARE,” “we,” “us,” and “our” refer to Alexandria Real Estate Equities, Inc. and its consolidated subsidiaries. The accompanying unaudited consolidated financial statements include the accounts of Alexandria Real Estate Equities, Inc. and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated.
We 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, of a normal recurring nature, 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, 2017.2020. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10‑K10-K for the year ended December 31, 2016.2019. Any references to our market capitalization, number or quality of buildings or tenants, quality of location, square footage, number of leases, or occupancy percentage, and any amounts derived from these values in these notes to consolidated financial statements, are outside the scope of our independent registered public accounting firm’s review.
| |
2. | Summary of significant accounting policies |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
On an ongoing basis, as circumstances indicate the need for reconsideration, we evaluate each legal entity that is not wholly owned by us in accordance with the consolidation guidance. Our evaluation considers all of our variable interests, including equity ownership, as well as fees paid to us for our involvement in the management of each partially owned entity. To fall within the scope of the consolidation guidance, an entity must meet both of the following criteria:
•The entity has a legal structure that has been established to conduct business activities and to hold assets; such entity can be in the form of a partnership, limited liability company, or corporation, among others; and
•We have a variable interest in the legal entity – i.e., variable interests that are contractual, such as equity ownership, or other financial interests that change with changes in the fair value of the entity’s net assets.
If an entity does not meet both criteria above, we apply other accounting literature, such as the cost or equity method of accounting. If an entity does meet both criteria above, we evaluate such entity for consolidation under either the variable interest model if the legal entity meets any of the following characteristics to qualify as a VIE, or under the voting model for all other legal entities that are not VIEs.
A legal entity is determined to be a VIE if it has any of the following three characteristics:
| |
1) | The entity does not have sufficient equity to finance its activities without additional subordinated financial support; |
| |
2) | The entity is established with non-substantive voting rights (i.e., where the entity deprives the majority economic interest holder(s) of voting rights); or |
| |
3) | The equity holders, as a group, lack the characteristics of a controlling financial interest. Equity holders meet this criterion if they lack any of the following: |
1)The entity does not have sufficient equity to finance its activities without additional subordinated financial support;
2)The entity is established with non-substantive voting rights (i.e., the entity deprives the majority economic interest holder(s) of voting rights); or
3)The equity holders, as a group, lack the characteristics of a controlling financial interest. Equity holders meet this criterion if they lack any of the following:
•The power, through voting rights or similar rights, to direct the activities of the entity that most significantly influence the entity’s economic performance, as evidenced by:
•Substantive participating rights in day-to-day management of the entity’s activities; or
•Substantive kick-out rights over the party responsible for significant decisions;
•The obligation to absorb the entity’s expected losses; or
•The right to receive the entity’s expected residual returns.
| |
2. | Summary of significant accounting policies (continued) |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Once we consider the sufficiency of equity and voting rights of each legal entity, we then evaluate the characteristics of the equity holders’ interests, as a group, to see if they qualify as controlling financial interests.
Our real estate joint ventures consist of limited partnerships or limited liability companies. For an entity structured as a limited partnership or a limited liability company, our evaluation of whether the equity holders (equity partners other than us in eachthe general partner or the managing member of oura joint ventures)venture) lack the characteristics of a controlling financial interest includes the evaluation of whether the limited partners or non-managing members (the noncontrolling equity holders) lack both substantive participating rights and substantive kick-out rights, defined as follows:
•Participating rights provide the noncontrolling equity holders the ability to direct significant financial and operating decisions made in the ordinary course of business that most significantly influence the entity’s economic performance.
•Kick-out rights allow the noncontrolling equity holders to remove the general partner or managing member without cause.
If we conclude that any of the three characteristics of a VIE are met, including that the equity holders lack the characteristics of a controlling financial interest because they lack both substantive participating rights and substantive kick-out rights, we conclude that the entity is a VIE and evaluate it for consolidation under the variable interest model.
Variable interest model
If an entity is determined to be a VIE, we evaluate whether we are the primary beneficiary. The primary beneficiary analysis is a qualitative analysis based on power and benefits. We consolidate a VIE if we have both power and benefits –— that is, (i) we have the power to direct the activities of a VIE that most significantly influence the VIE’s economic performance (power), and (ii) we have the obligation to absorb losses of the VIE that could potentially be significant to the VIE, or the right to receive benefits from the VIE that could potentially could be significant to the VIE (benefits). We consolidate VIEs whenever we determine that we are the primary beneficiary. Refer to Note 34 – “Investments in Real Estate”“Consolidated and unconsolidated real estate joint ventures” to these unaudited consolidated financial statements for information on specific joint ventures that qualify as VIEs. If we have a variable interest in a VIE but we are not the primary beneficiary, we account for our investment using the equity method of accounting.
Voting model
If a legal entity fails to meet any of the three characteristics of a VIE (due to(i.e., insufficiency of equity, existence of non-substantive voting rights, or lack of a controlling financial interest), we then evaluate such entity under the voting model. Under the voting model, we consolidate the entity if we determine that we, directly or indirectly, have greater than 50% of the voting shares and that other equity holders do not have substantive participating rights. Refer to Note 4 – “Investments in Unconsolidated Real Estate Joint Ventures”“Consolidated and unconsolidated real estate joint ventures” to these unaudited consolidated financial statements for further information on one of our unconsolidated real estate joint ventures that qualifiesqualify for evaluation under the voting model.
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.
Investments in real estate and properties classified as held for sale
In January 2017, the FASB issued an ASU that clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer real estate transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. We early adopted this accounting standard effective October 1, 2016, and since then have evaluated all of our acquisitions under the new framework.
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2. | Summary of significant accounting policies (continued) |
Evaluation of business combination or asset acquisition
We evaluate each acquisition of real estate or in-substance real estate (including equity interests in entities that predominantly hold real estate assets) to determine whether the integrated set of assets and activities acquired meets the definition of a business and needs to be accounted for as a business combination. An acquisition of an integrated set of assets and activities that does not meet the definition of a business and need to beis accounted for as a business combination.an asset acquisition. If either of the following criteria is met, the integrated set of assets and activities acquired would not qualify as a business:
•Substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets; or
•The integrated set of assets and activities is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e., revenue generated before and after the transaction).
An acquired process is considered substantive if:
•The process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce) that is skilled, knowledgeable, and experienced in performing the process;
•The process cannot be replaced without significant cost, effort, or delay; or
•The process is considered unique or scarce.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Generally, we expect thatour acquisitions of real estate or in-substance real estate willdo not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings, and related intangible assets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort, or delay. When evaluating acquired service or management contracts, we consider the nature of the services performed, the terms of the contract relative to similar arm’s lengtharm’s-length contracts, and the availability of comparable vendors in evaluating whether the acquired contract constitutes a substantive process.
Recognition of real estate acquired
We evaluate each acquisition of real estate or in-substance real estate (including equity interests in entities that predominantly hold real estate assets) to determine whether the integrated set of assets and activities acquired meets the definition of a business and needs to be accounted for as a business combination. An acquisition of an integrated set of assets and activities that does not meet the definition of a business is accounted for as an asset acquisition.
For acquisitions of real estate or in-substance real estate that are accounted for as business combinations, we recognizeallocate the acquisition consideration (excluding acquisition costs) to the assets acquired, (including the intangible value of acquired above- or below-market leases, acquired in-place leases, tenant relationships, and other intangible assets or liabilities), liabilities assumed, noncontrolling interests, and previously existing ownership interests at fair value as of the acquisition date. Assets include intangible assets such as tenant relationships, acquired in-place leases, and favorable intangibles associated with in-place leases in which we are the lessor. Liabilities include unfavorable intangibles associated with in-place leases in which we are the lessor. In addition, for acquired in-place finance or operating leases in which we are the lessee, acquisition consideration is allocated to lease liabilities and related right-of-use assets, adjusted to reflect favorable or unfavorable terms of the lease when compared with market terms. Any excess (deficit) of the consideration transferred relative to the fair value of the net assets acquired is accounted for as goodwill (bargain purchase gain). Acquisition costs related to business combinations are expensed as incurred.
AcquisitionsGenerally, we expect that acquisitions of real estate andor in-substance real estate that dowill not meet the definition of a business are accounted for asbecause substantially all of the fair value is concentrated in a single identifiable asset acquisitions.or group of similar identifiable assets (i.e., land, buildings, and related intangible assets). The accounting model for asset acquisitions is similar to the accounting model for business combinations, except that the acquisition consideration (including acquisition costs) is allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. Any excess (deficit) of the consideration transferred relative to the sum of the fair value of the assets acquired and liabilities assumed is allocated to the individual assets and liabilities based on their relative fair values. As a result, asset acquisitions do not result in the recognition of goodwill or a bargain purchase gain. Additionally, becauseIncremental and external direct acquisition costs (such as legal and other third-party services) are capitalized.
We exercise judgment to determine the accounting model for asset acquisitions is a cost accumulation model, preexisting interests in the acquired assets, if any, are not remeasured to fair value but continue to be accounted for at their historical cost.
The relative fair valueskey assumptions used to allocate the costpurchase price of an asset acquisition are determined by the same methodologies and assumptions we utilize to determine fair value in a business combination.
If a real estate property is acquired withamong its components. The allocation of the consideration to the various components of properties acquired during the year can have an in-place leaseeffect on our net income due to the useful depreciable and amortizable lives applicable to each component and the recognition of the related depreciation and amortization expense in our consolidated statements of operations. We apply judgment in utilizing available comparable market information to assess relative fair value. We assess the relative fair values of tangible and intangible assets and liabilities based on available comparable market information, including estimated replacement costs, rental rates, and recent market transactions. In addition, we may use estimated cash flow projections that containsutilize appropriate discount and capitalization rates. Estimates of future cash flows are based on a bargain fixed-rate renewal option fornumber of factors, including the period beyond the non-cancelable lease term, we evaluate factors, such as the business conditions in the industry in which the lessee operates, the historical operating results, known and anticipated trends, and market/economic conditions inthat may affect the area in which the property is located, and the ability of the lessee to sublease its space 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 renewal option will be exercised, we consider the option in determining the intangible value of such lease and its related amortization period. property.
The value of tangible assets acquired is based upon our estimation of fair 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 under the market conditions at the acquisition date of the acquired in-place lease. We assessIf there is a bargain fixed-rate renewal option for the fairperiod beyond the non-cancelable lease term of an in-place lease, we evaluate intangible 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 the option in determining the intangible value of tangiblesuch lease and intangibleits related amortization period. We also recognize the relative fair values of assets based on numerous factors, including estimated cash flow projections that utilize appropriate discountacquired, the liabilities assumed, and capitalization rates and available market information. Estimatesany noncontrolling interest in acquisitions of future cash flows are based onless than a number100% interest when the acquisition constitutes a change in control of factors, including the historical operating results, known trends, and market/economic conditions, that may affect the property.acquired entity.
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2. | Summary of significant accounting policies (continued) |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 andterm, estimated useful life, or up to 40 years, for buildings and building improvements, animprovements; estimated life, ofor up to 20 years, for land improvements,improvements; the respective lease term or estimated useful life for tenant improvements,improvements; and the shorter of the lease term or estimated useful life for equipment. The values of acquired above- and below-market leases are amortized over the terms of the relatedin-place leases and recognized as either increases (for below-market leases) or decreases (forassociated favorable intangibles (i.e., acquired above-market leases) to rental revenue. The values of acquired above- and below-market ground leases are amortized over the terms of the related ground leases and recognized as either increases (for below-market ground leases) or decreases (for above-market ground leases) to rental operating expense. The values of acquired in-place leases are classified in other assets in the accompanyingour consolidated balance sheets and are amortized over the remaining terms of the related leases.leases as a reduction of income from rentals in our consolidated statements of operations. The values of unfavorable intangibles (i.e., acquired below-market leases) associated with acquired in-place leases are classified in accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets and are amortized over the remaining terms of the related leases as an increase in income from rentals in our consolidated statements of operations.
Capitalized project costs
We capitalize project costs, including pre-construction costs, interest, property taxes, insurance, and other costs directly related and essential to the development, redevelopment, pre-construction, or construction of a project. Capitalization of development, redevelopment, pre-construction, and construction costs is required while activities are ongoing to prepare an asset for its intended use. Fluctuations in our development, redevelopment, pre-construction, 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, pre-construction, 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.
Real estate sales
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.
If the disposal of a 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, including any interest expense directly attributable to it, are classified as discontinued operations in our consolidated statements of income,operations, 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 a discontinued operation.
We recognize gains/losses on real estate sales in accordance with the accounting standard on the derecognition of nonfinancial assets arising from contracts with noncustomers. Our ordinary output activities consist of the leasing of space to our tenants in our operating properties, not the sales of real estate. Therefore, sales of real estate (in which we are the seller) qualify as contracts with noncustomers. In our transactions with noncustomers, we apply certain recognition and measurement principles consistent with our method of recognizing revenue arising from contracts with customers. Derecognition of the asset is based on the transfer of control. If a real estate sales contract includes our ongoing involvement with the property, then we evaluate each promised good or service under the contract to determine whether it represents a separate performance obligation, constitutes a guarantee, or prevents the transfer of control. If a good or service is considered a separate performance obligation, an allocated portion of the transaction price is recognized as revenue as we transfer the related good or service to the buyer.
The recognition of gain or loss on the sale of a partial interest also depends on whether we retain a controlling or noncontrolling interest. If we retain a controlling interest upon completion of the sale, we continue to reflect the asset at its book value, record a noncontrolling interest for the book value of the partial interest sold, and recognize additional paid-in capital for the difference between the consideration received and the partial interest at book value. Conversely, if we retain a noncontrolling interest upon completion of the partial sale of real estate, we would recognize a gain or loss as if 100% of the real estate were sold.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of long-lived assets
On a quarterly basis,Prior to and subsequent to the end of each quarter, we review current activities and changes in the business conditions of all of our properties prior to and subsequent to the end of each quarterlong-lived assets to determine the existence of any triggering events or impairment indicators requiring an impairment analysis. If triggering events or impairment indicators are identified, we review an estimate of the future undiscounted cash flows, for the properties, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration.
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2. | Summary of significant accounting policies (continued) |
Long-lived assets to be held and used, including our rental properties, CIP, land held for development, right-of-use assets related to operating leases in which we are the lessee, and intangibles, are individually evaluated for impairment when conditions exist that may indicate that the carrying amount of a long-lived asset may not be recoverable. The carrying amount of a long-lived asset to be held and used is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. ImpairmentTriggering events or impairment indicators or triggering events for long-lived assets to be held and used including our rental properties, CIP, land held for development, and intangibles, are assessed by project and include significant fluctuations in estimated net operating income, occupancy changes, significant near-term lease expirations, current and historical operating and/or cash flow losses, construction costs, estimated completion dates, rental rates, and other market factors. We assess the expected undiscounted cash flows based upon numerous factors, including, but not limited to, construction costs, available market information, current and historical operating results, known trends, current market/economic conditions that may affect the property,asset, 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 losscharge is not required to be recognized, the recognition of depreciation or amortization 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 estateasset is expected to be held and used. We may adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives.
We use the held for sale impairment model for our properties classified as held for sale. The held for sale impairment model is different from the held and used impairment model. Under the held for sale impairment model, an impairment losscharge is recognized if the carrying amount of the long-lived asset classified as held for sale exceeds its fair value less cost to sell. Because of these two different models, it is possible for a long-lived asset previously classified as held and used to require the recognition of an impairment charge upon classification as held for sale.
International operations
In addition to operating properties in the U.S., we have 3 operating properties in Canada and 1 operating property in China. The functional currency for our subsidiaries operating in the U.S. is the U.S. dollar. The functional currencies for our foreign subsidiaries are the local currencies in each respective country. The assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect as of the financial statement date. Income statementRevenue and expense accounts of our foreign subsidiaries are translated using the weighted-average exchange rate for the periods presented. Gains or losses resulting from the translation are classified in accumulated other comprehensive income as a separate component of total equity.equity and are excluded from net income.
Whenever a foreign investment meets the criteria for classification as held for sale, we evaluate the recoverability of the investment under the held for sale impairment model. We may recognize an impairment charge if the carrying amount of the investment exceeds its fair value less cost to sell. In determining an investment’s carrying amount, we consider its net book value and any cumulative unrealized cumulative foreign currency translation adjustment related to the investment.
The appropriate amounts of foreign exchange rate gains or losses classified in accumulated other comprehensive income will beare reclassified to net income only when realized upon the sale of our investment or upon the complete or substantially complete liquidation of our investment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments
We hold equity investments in certain publicly traded companies and investments in certain privately held entities and limited partnerships primarily involved in the life science, technology, and technologyagtech industries. AllAs a REIT, we generally limit our ownership of oureach individual entity’s voting stock to less than 10%. Our equity investments (except those accounted for under the equity method and those that result in activelyconsolidation of the investee) are measured as follows:
•Investments in publicly traded public companies are considered available-for-saleclassified as investments with readily determinable fair values and are reflectedpresented at fair value in the accompanyingour consolidated balance sheets, with changes in fair value recognized in net income. The fair values for our investments in publicly traded companies are determined based on sales prices or quotes available on securities exchanges.
•Investments in privately held entities without readily determinable fair values fall into two categories:
•Investments in privately held entities that report NAV per share, such as our privately held investments in limited partnerships, are presented at fair value. Fair value has been determined based upon the closing price as of each balance sheet date, with unrealized gains and losses shownusing NAV as a separate componentpractical expedient, with changes in fair value recognized in net income. We use NAV per share reported by limited partnerships generally without adjustment, unless we are aware of information indicating that the NAV reported by a limited partnership does not accurately reflect the fair value of the investment at our reporting date. We disclose the timing of liquidation of an investee’s assets and the date when redemption restrictions will lapse (or indicate if this timing is unknown) if the investee has communicated this information to us or has announced it publicly.
•Investments in privately held entities that do not report NAV per share are accounted for using a measurement alternative under which these investments are measured at cost, adjusted for observable price changes and impairments, with changes recognized in net income.
For investments in privately held entities that do not report NAV per share, an observable price arises from an orderly transaction for an identical or similar investment of the same issuer, which is observed by an investor without expending undue cost and effort. Observable price changes result from, among other comprehensive income. The classificationthings, equity transactions of each investment is determined at the time each investment is made,same issuer executed during the reporting period, including subsequent equity offerings or other reported equity transactions related to the same issuer. To determine whether these transactions are indicative of an observable price change, we evaluate, among other factors, whether these transactions have similar rights and such determination is reevaluated at each balance sheet date. The costobligations, including voting rights, distribution preferences, and conversion rights to the investments we hold.
We monitor investments in privately held entities that do not report NAV per share throughout the year for new developments, including operating results, prospects and results of each investment sold is determinedclinical trials, new product initiatives, new collaborative agreements, capital-raising events, and merger and acquisition activities. These investments are evaluated on the basis of a qualitative assessment for indicators of impairment by monitoring the specific identification method, with realized gainspresence of the following triggering events or losses classified in other incomeimpairment indicators: (i) a significant deterioration in the accompanying consolidated statementsearnings performance, asset quality, or business prospects of income. the investee; (ii) a significant adverse change in the regulatory, economic, or technological environment of the investee, (iii) a significant adverse change in the general market condition, including the research and development of technology and products that the investee is bringing or attempting to bring to the market, or (iv) significant concerns about the investee’s ability to continue as a going concern. If such indicators are present, we are required to estimate the investment’s fair value and immediately recognize an impairment charge in an amount equal to the investment’s carrying value in excess of its estimated fair value.
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 require accounting 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 initially 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 generally limit our ownership percentage in the voting stock of each individual entity to less than 10%.
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2. | Summary of significant accounting policies (continued) |
We periodically assess ourhad no investments in available-for-sale equity securities and privately held companies accounted for under the costequity method as of June 30, 2020.
We recognize both realized and unrealized gains and losses in our consolidated statements of operations, classified within investment income. Unrealized gains and losses represent changes in fair value for other-than-temporary impairment. We monitor each ofinvestments in publicly traded companies, changes in NAV, as a practical expedient to estimate fair value, for investments in privately held entities that report NAV per share, and observable price changes on our investments throughoutin privately held entities that do not report NAV per share. Impairments are realized losses, which result in an adjusted cost, and represent charges to reduce the year for new developments,carrying values of investments in privately held entities that do not report NAV per share to their estimated fair value. Realized gains and losses represent the difference between proceeds received upon disposition of investments and their historical or adjusted cost.
In April 2019, the FASB issued an accounting standard that amends the financial instruments standard by clarifying that all private investments that do not report NAV and are adjusted under the measurement alternative (for observable price changes and impairments) described above represent nonrecurring fair value measurement adjustments and therefore require applicable fair value disclosures, including operating results, resultsdisclosures about the level 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 an unrealized loss related to an available-for-sale equity security is determined to be other-than-temporary, such unrealized loss is reclassified from other comprehensive income into current earnings. For a cost method investment, if a decline in the fair value of an investment below its carrying value is determined to be other-than-temporary, such investment is written down to its estimatedhierarchy within which the fair value with a chargemeasurements are categorized. The accounting standard became effective for us and was adopted on January 1, 2020. Beginning in 2020, pursuant to current earnings. If there are no identified events or changesthe requirements of this new standard, we provide incremental fair value disclosures related to our investments in circumstancesprivately held entities that might have an adverse effect on our cost method investments, we do not estimate the investment’s fair value. Refer toreport NAV per share in Note 59 – “Investments”“Fair Value Measurements” to these unaudited consolidated financial statementsstatements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenues
The table below provides detail of our consolidated total revenues for further information.the three and six months ended June 30, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
Income from rentals: | | | | | | | | |
Revenues subject to the lease accounting standard: | | | | | | | | |
Operating leases | | $ | 430,339 | | | $ | 358,461 | | | $ | 859,083 | | | $ | 701,802 | |
Direct financing lease | | 616 | | | 604 | | | 1,228 | | | 1,205 | |
Revenues subject to the lease accounting standard | | 430,955 | | | 359,065 | | | 860,311 | | | 703,007 | |
Revenues subject to the revenue recognition accounting standard | | 4,901 | | | 12,553 | | | 13,150 | | | 23,360 | |
Income from rentals | | 435,856 | | | 371,618 | | | 873,461 | | | 726,367 | |
Other income | | 1,100 | | | 2,238 | | | 3,414 | | | 6,331 | |
Total revenues | | $ | 436,956 | | | $ | 373,856 | | | $ | 876,875 | | | $ | 732,698 | |
Recognition
During the three and six months ended June 30, 2020, revenues that were subject to the lease accounting standard aggregated $431.0 million and $860.3 million, respectively, and represented 98.6% and 98.1%, respectively, of our total revenues. During the three and six months ended June 30, 2020, our total revenues also included $6.0 million, or 1.4%, and $16.6 million, or 1.9%, respectively, subject to other accounting guidance. For a detailed discussion related to our revenue streams, refer to the “Lease accounting” and “Recognition of revenue arising from contracts with customers” sections within this Note 2 to these unaudited consolidated financial statements.
Lease accounting
Transition
On January 1, 2019, we adopted a new lease accounting standard that sets principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a lease agreement (i.e., lessees and lessors). The new lease accounting standard required the use of the modified retrospective transition method. Upon adoption of the new lease accounting standard, we elected the following practical expedients and accounting policies provided by this lease standard:
•Package of practical expedients – required us not to reevaluate our existing or expired leases as of January 1, 2019, under the new lease accounting standard.
•Optional transition method practical expedient – required us to apply the new lease accounting standard prospectively from the adoption date of January 1, 2019.
•Single component accounting policy – required us to account for lease and nonlease components within a lease under the new lease accounting standard if certain criteria are met.
•Land easements practical expedient – required us to continue to account for land easements existing as of January 1, 2019, under the accounting standards applied to them prior to January 1, 2019.
•Short-term lease accounting policy – required us not to record the related lease liabilities and right-of-use assets for operating leases in which we are the lessee with a term of 12 months or less.
Upon adoption of the new lease accounting standard, we elected the package of practical expedients and the optional transition method, which permitted January 1, 2019, to be our initial application date. Our election of the package of practical expedients and the optional transition method allowed us not to reassess:
•Whether any contracts effective prior to January 1, 2019, were leases or contained leases. This practical expedient was primarily applicable to entities that had contracts containing embedded leases. As of December 31, 2018, we had no such contracts; therefore, this practical expedient had no effect on us.
•The lease classification for any leases that commenced prior to January 1, 2019. Our election of the package of practical expedients required us not to revisit the classification of our leases that commenced prior to January 1, 2019. For example, all of our leases that were classified as operating leases in accordance with the lease accounting standards in effect prior to January 1, 2019, continued to be classified as operating leases after adoption of the new lease standard.
•Previously capitalized initial direct costs for any leases that commenced prior to January 1, 2019. Our election of the package of practical expedients and the optional transition method required us not to reassess whether initial direct leasing costs capitalized prior to the adoption of the new lease accounting standard in connection with the leases that commenced prior to January 1, 2019, qualified for capitalization under the new lease accounting standard.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
We applied the package of practical expedients consistently to all leases (i.e., in which we were the lessee or the lessor) that commenced before January 1, 2019. The election of this package permitted us to “run off” our leases that commenced before January 1, 2019, for the remainder of their lease terms and to apply the new lease accounting standard to leases commencing or modified after January 1, 2019.
For our leases that commenced prior to January 1, 2019, under the package of practical expedients and optional transition method, we were not required to reassess whether initial direct leasing costs capitalized prior to the adoption of the new lease accounting standard in connection with such leases qualified for capitalization under the new lease accounting standard. Therefore, we continue to amortize these initial direct leasing costs over their respective lease terms.
On January 1, 2019, as required by the new lease accounting standard, we recognized a cumulative adjustment to retained earnings aggregating $3.5 million to write off initial direct leasing costs that were capitalized in connection with leases that were executed but had not commenced before January 1, 2019. These costs were capitalized in accordance with the lease accounting standards existing prior to January 1, 2019, and would not qualify for capitalization under the new lease accounting standard.
Under the package of practical expedients, all of our operating leases existing as of January 1, 2019, in which we were the lessee, continued to be classified as operating leases subsequent to the adoption of the new lease accounting standard. In accordance with the lease accounting standard adopted on January 1, 2019, we classified the present value of the remaining future rental payments associated with these operating leases in our consolidated balance sheets. Consequently, on January 1, 2019, we recognized a lease liability aggregating $218.7 million, which represented the present value of the remaining future rental payments aggregating $590.3 million related to our ground and office leases, in which we were the lessee, existing as of January 1, 2019.
This liability was classified within accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets and included approximately $27.0 million reclassified out of the deferred rent liabilities balance in accordance with the new lease standard. We have also recognized a corresponding right-of-use asset, which was classified within other assets in our consolidated balance sheets. The present value of the remaining lease payments was calculated for each operating lease existing as of January 1, 2019, in which we were the lessee by using each respective remaining lease term and a corresponding estimated incremental borrowing rate. The incremental borrowing rate is the interest rate that we estimated we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments.
Subsequent application of the new lease accounting standard
Definition of a lease
When we enter into a contract or amend an existing contract, we evaluate whether the contract meets the definition of a lease. To meet the definition of a lease, the contract must meet all three criteria:
(i)One party (lessor) must hold an identified asset;
(ii)The counterparty (lessee) must have the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of the contract; and
(iii)The counterparty (lessee) must have the right to direct the use of the identified asset throughout the period of the contract.
Lease classification
The criteria to determine whether a lease should be accounted for as a finance lease for lessees or a sales-type lease for lessors include any of the following:
(i)Ownership is transferred from lessor to lessee by the end of the lease term;
(ii)An option to purchase is reasonably certain to be exercised;
(iii)The lease term is for the major part of the underlying asset’s remaining economic life;
(iv)The present value of lease payments equals or exceeds substantially all of the fair value of the underlying asset; or
(v)The underlying asset is specialized and is expected to have no alternative use at the end of the lease term.
If any of these criteria is met, a lease is classified as a finance lease by the lessee and as a sales-type lease by the lessor. If none of the criteria are met, a lease is classified as an operating lease by the lessee but may still qualify as a direct financing lease or an operating lease for the lessor. The existence of a residual value guarantee from an unrelated third party other than the lessee may qualify the lease as a direct financing lease by the lessor. Otherwise, the lease is classified as an operating lease by the lessor. Therefore, lessees apply a dual approach by classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, which corresponds to a similar evaluation performed by lessors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Lessor accounting
Costs to execute leases
We capitalize initial direct costs, which represent only incremental costs of a lease that would not have been incurred if the lease had not been obtained. Costs that we incur to negotiate or arrange a lease, regardless of its outcome, such as for fixed employee compensation, tax, or legal advice to negotiate lease terms, and other costs, are expensed as incurred.
Operating leases
We account for the revenue from our lease contracts by utilizing the single component accounting policy. This policy requires us to account for, by class of underlying asset, the lease component and nonlease component(s) associated with each lease as a single component if two criteria are met:
(i)The timing and pattern of transfer of the lease component and the nonlease component(s) are the same; and
(ii)The lease component would be classified as an operating lease if it were accounted for separately.
Lease components consist primarily of fixed rental payments, which represent scheduled rental amounts due under our leases, and contingent rental payments. Nonlease components consist primarily of tenant recoveries representing reimbursements of rental operating expenses under our triple net lease structure, including recoveries for utilities, repairs and maintenance, and common area expenses.
If the lease component is the predominant component, we account for all revenues under such lease as a single component in accordance with the lease accounting standard. Conversely, if the nonlease component is the predominant component, all revenues under such lease are accounted for in accordance with the revenue recognition accounting standard. Our operating leases qualify for the single component accounting, and the lease component in each of our leases is predominant. Therefore, we account for all revenues from our operating leases under the lease accounting standard and classify these revenues as income andfrom rentals in our consolidated statements of operations.
We commence recognition of income from rentals related to the operating leases at the date the tenant recoveries
Rental revenuetakes possession or controls the physical use of the leased asset. Income from rentals related to fixed rental payments under operating leases is recognized on a straight-line basis over the respective operating lease terms. We classify amounts currently recognized as rental revenue in our consolidated statements of income, and amounts expected to be received in later yearsperiods as deferred rent in the accompanyingour consolidated balance sheets. Amounts received currently but recognized as revenue in future yearsperiods are classified in accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets.
Income from rentals related to variable payments includes tenant security depositsrecoveries and contingent rental payments. Tenant recoveries, including reimbursements of utilities, repairs and maintenance, common area expenses, real estate taxes and insurance, and other operating expenses, are recognized as revenue in the accompanyingperiod during which the applicable expenses are incurred and the tenant’s obligation to reimburse us arises. Income from rentals related to other variable payments is recognized when associated contingencies are removed.
We assess collectibility from our tenants of future lease payments for each of our operating leases. If we determine that collectibility is probable, we recognize income from rentals based on the methodology described above. If we determine that collectibility is not probable, we recognize an adjustment to lower our income from rentals. Furthermore, we may recognize a general allowance at a portfolio level (not the individual level), if we do not expect to collect future lease payments in full.
Due to the uncertainties posed to the business and operations of our tenants by the COVID-19 pandemic, during the three months ended March 31, 2020, we recognized an adjustment aggregating $1.6 million to lower our income from rentals and deferred rent related to certain leases where we determined that the collection of future lease payments was not probable. For these leases, we ceased the recognition of income from rentals on a straight-line basis and began the recognition of income from rentals on a cash basis when lease payments are collected. We will not resume straight-line recognition of income from rentals for these leases until we determine that collectibility of future payments related to these leases is probable. During the three months ended June 30, 2020, 0 further adjustments were required.
During the six months ended June 30, 2020, we also recorded a general allowance aggregating $3.5 million, which was primarily incurred and recognized during the three months ended March 31, 2020, for a pool of deferred rent balances, which at the portfolio level (not the individual level) was not expected to be collected in full through the lease term. We recorded the general allowance as a reduction of our income from rentals and deferred rent balance within our consolidated statements of operations and consolidated balance sheets. We commence recognitionsheets, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Direct financing and sales-type leases
As of rental revenue at the date the property is ready for its intended use and the tenant takes possession of or controls the physical use of the property.
Rental revenue fromJune 30, 2020, we had one direct financing leaseslease and no sales-type leases. Income from rentals related to our direct financing lease is recognized over the lease term using the effective interest rate method. At lease inception,commencement, we record an asset within other assets in our consolidated balance sheets, which represents our net investment in the direct financing lease. This initial net investment is determined by aggregating the total future minimum lease payments attributable to the direct financing lease and the estimated residual value of the property less unearned income. Over the lease term, the investment in the direct financing lease is reduced and rental income is recognized as rental revenueincome from rentals in our consolidated statements of income and producesoperations, producing a constant periodic rate of return on the net investment in the direct financing lease.
Tenant recoveries relatedWe evaluate our net investment in the direct financing lease for impairment under the new current expected credit loss standard that we adopted on January 1, 2020. For more information, refer to reimbursementthe “Allowance for credit losses” section within this Note 2 – “Summary of significant accounting policies” to these unaudited consolidated financial statements.
Lessee accounting
We have operating lease agreements in which we are the lessee consisting of ground and office leases. At the lease commencement date (or at the acquisition date if the lease is acquired as part of a real estate taxes, insurance, utilities, repairsacquisition), we are required to recognize a liability to account for our future obligations under these operating leases, and maintenance, common areaa corresponding right-of-use asset.
The lease liability is measured based on the present value of the future lease payments, including payments during the term under our extension options that we are reasonably certain to exercise. The present value of the future lease payments is calculated for each operating lease using each respective remaining lease term and a corresponding estimated incremental borrowing rate, which is the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments. Subsequently, the lease liability is accreted by applying a discount rate established at the lease commencement date to the lease liability balance as of the beginning of the period and is reduced by the payments made during the period. We classify the operating lease liability in accounts payable, accrued expenses, and other operating expenses are recognized as revenueliabilities in our consolidated balance sheets.
The right-of-use asset is measured based on the period during whichcorresponding lease liability, adjusted for initial direct leasing costs and any other consideration exchanged with the applicable expenses are incurred andlandlord prior to the tenant’s obligation to reimburse us arises.
Tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes, and other expenses recoverable from 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 tenants to make payments required under the termscommencement of the lease, and for tenant recoveries due. Ifas well as adjustments to reflect favorable or unfavorable terms of an acquired lease when compared with market terms at the time of acquisition. Subsequently, the right-of-use asset is amortized on a tenant fails to make contractual payments beyond any allowance, we maystraight-line basis during the lease term. We classify the right-of-use asset in other assets in our consolidated balance sheets.
Recognition of revenue arising from contracts with customers
We recognize additional bad debt expense in future periods equalrevenues associated with transactions arising from contracts with customers, excluding revenues subject to the lease accounting standard discussed in the “Lease accounting” section above, in accordance with the revenue recognition accounting standard. A customer is distinguished from a noncustomer by the nature of the goods or services that are transferred. Customers are provided with goods or services that are generated by a company’s ordinary output activities, whereas noncustomers are provided with nonfinancial assets that are outside of a company’s ordinary output activities.
We generally recognize revenue representing the transfer of goods and services to customers in an amount that reflects the consideration to which we expect to be entitled in the exchange. In order to determine the recognition of revenue from customer contracts, we use a five-step model to (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy the performance obligation.
We identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. We consider whether we control the goods or services prior to the transfer to the customer in order to determine whether we should account for the arrangement as a principal or agent. If we determine that we control the goods or services provided to the customer, then we are the principal to the transaction, and we recognize the gross amount of uncollectible tenant receivablesconsideration expected in the exchange. If we simply arrange but do not control the goods or services being transferred to the customer, then we are considered to be an agent to the transaction, and deferred rent arisingwe recognize the net amount of consideration we are entitled to retain in the exchange.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Total revenues subject to the revenue recognition accounting standard and classified within income from rentals in our consolidated statements of operations for the straight-liningthree and six months ended June 30, 2020, included $4.9 million and $13.2 million, respectively, primarily related to short-term parking revenues associated with long-term lease agreements. During the three and six months ended June 30, 2019, revenues subject to the revenue recognition accounting standard and classified within income from rentals in our consolidated statements of rent. Asoperations were $12.6 million and $23.4 million, respectively. Short-term parking revenues do not qualify for the single lease component practical expedient, discussed in the “Lessor accounting” subsection of September 30, 2017,the “Lease accounting” section within this Note 2, due to the difference in the timing and December 31, 2016, no allowance for uncollectible tenant receivablespattern of transfer of our parking service obligations and deferred rent was deemed necessary.associated lease components within the same lease agreement. We recognize short-term parking revenues in accordance with the revenue recognition accounting standard when the service is provided and the performance obligation is satisfied, which normally occurs at a point in time.
Monitoring of tenant credit quality
During the term of each lease, we monitor the credit quality and any related material changes of our tenants by (i) monitoring the credit rating of tenants that are rated by a nationally recognized credit rating agency, (ii) reviewing financial statements of the tenants that are publicly available or that are required to be delivered to us pursuant to the applicable lease, (iii) monitoring news reports regarding our tenants and their respective businesses, and (iv) monitoring the timeliness of lease payments. We have a research team consisting of employees who, among them, have doctorate, graduate,
Allowance for credit losses
On January 1, 2020, we adopted an accounting standard (further clarified in subsequently issued updates) that requires companies to estimate and undergraduate degrees in biology, chemistry, industrial biotechnology, and engineering, and experiencerecognize lifetime expected losses, rather than incurred losses, which results in the life scienceearlier recognition of credit losses even if the expected risk of credit loss is remote. The accounting standard applies to most financial assets measured at amortized cost and technology industries,certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases arising from sales-type and direct financing leases, and off-balance-sheet credit exposures (e.g., loan commitments). The standard does not apply to the receivables arising from operating leases. An assessment of the collectibility of operating lease payments and the recognition of an adjustment to lease income based on this assessment is governed by the lease accounting standard discussed in the “Lease accounting” section earlier within this Note 2 to these unaudited consolidated financial statements.
Upon adoption of the accounting standard, we had one lease subject to this standard classified as well as in finance. Our research team is responsible for assessing and monitoringa direct financing lease with a net investment balance aggregating $39.9 million prior to the credit qualityloss adjustment. In this direct financing lease, the payment obligation of the lessee is collateralized by real estate property. Historically, we have had no collection issues related to this direct financing lease; therefore, we assessed the probability of default on this lease based on the lessee’s financial condition, credit rating, business prospects, remaining lease term, and expected value of the underlying collateral upon its repossession. Based on the aforementioned considerations, we estimated a credit loss adjustment related to this direct financing lease aggregating $2.2 million, which was recognized as a cumulative adjustment to retained earnings and as a reduction of the investment in the direct financing lease balance from $39.9 million to $37.7 million in our tenantsconsolidated balance sheets on January 1, 2020. Subsequent to the initial recognition, at each reporting date we recognize a credit loss adjustment, if necessary, for our current estimate of expected credit losses, which is classified within rental operations in our consolidated statements of operations. For further details, refer to Note 5 – “Leases” to these unaudited consolidated financial statements.
In addition to our direct financing lease, the accounting standard on credit losses applies to our receivables that result from revenue transactions within the scope of the revenue recognition accounting standard discussed in the “Recognition of revenue arising from contracts with customers” section earlier within this Note 2. Upon adoption of the standard on January 1, 2020, our receivables resulting from revenue transactions within the scope of revenue recognition accounting standard aggregated $16.1 million. Among other factors, we considered the short-term nature of these receivables, our positive assessment of the financial condition and any material changesbusiness prospects of the payors, and minimal historical collectibility issues. Based on the aforementioned considerations, we estimated the credit loss related to our trade receivables to approximate $259 thousand, which was recognized as a cumulative adjustment to retained earnings and as a reduction of the tenant receivables balance in their credit quality.our consolidated balance sheets on January 1, 2020.
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2. | Summary of significant accounting policies (continued) |
Income taxes
We are organized and operate 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 shareholdersstockholders annually (excluding net capital gains) and meets certain other conditions is not subject to federal income tax on its distributed taxable income, but could be subject to certain federal, foreign, 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, foreign, 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 the 2011–20162014 through 2019 calendar years.
Recent accounting pronouncements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Definition of a business
On October 1, 2016, we adopted an ASU issued by the FASB in January 2017, which clarified the definition of a business. Refer to “Investments in Real EstateEmployee and Properties Classified as Held for Sale” above for additional information.
Employeenon-employee share-based payments
On January 1, 2017, we adoptedWe have implemented an ASU issued by the FASB in March 2016, which simplifies several aspects of employee share-based payment accounting, including the accounting for forfeitures. The ASU allows an entity to make anentity-wide accounting policy election either to continue to estimate the total number of awards that are expected to vest (the method used prior to January 1, 2017) or to account for forfeitures of share-based awards granted to employees and non-employees when they occur. As a result of this policy, we recognize expense on share-based awards with time-based vesting conditions without reductions for an estimate of forfeitures. This entity-wide accounting policy election only applies to service conditions; forcondition awards. For performance conditions, the entity continuescondition awards, we continue to assess the probability that such conditions will be achieved. If an entity electsExpenses related to account forforfeited awards are reversed as forfeitures when they occur,occur. In addition, all nonforfeitable dividends paid on share-based payment awards are initially charged toclassified in retained earnings and reclassified to compensation cost only whenif forfeitures of the underlying awards occur. Our employee and non-employee share-based awards are measured on the grant date and recognized over the recipient’s required service period.
Forward equity sales agreements
We elected to account for forfeitures whenour forward equity sales agreements in accordance with the accounting guidance governing financial instruments and derivatives. As of June 30, 2020, none of our forward equity sales agreements were deemed to be liabilities as they occurdid not embody obligations to repurchase our shares, nor did they embody obligations to issue a variable number of shares for which the monetary value was predominantly fixed, varied with something other than the fair value of our shares, or varied inversely in relation to our shares. We also evaluated whether the agreements met the derivatives and applied this ASUhedging guidance scope exception to be accounted for as equity instruments and concluded that the agreements can be classified as equity contracts based on a modified retrospective basis resulting in a cumulative-effect adjustment aggregating approximately $368 thousand, which was recorded as a decrease to retained earnings and an increase to additional paid-in capital upon adoptionthe following assessment: (i) none of the ASUagreements’ exercise contingencies were based on January 1, 2017.observable markets or indices besides those related to the market for our own stock price and operations; and (ii) none of the settlement provisions precluded the agreements from being indexed to our own stock.
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2. | Summary of significant accounting policies (continued) |
Recent accounting pronouncements (continued)
Issuer and guarantor subsidiaries of guaranteed securities
Lease accounting, revenue recognition, and financial instruments
In February 2016,March 2020, the FASBSEC issued an ASU that sets out new lease accounting standardsamendment to reduce and simplify financial disclosure requirements for both lesseesissuers and lessors. In May 2014, the FASB issued an ASU that will require a new model for recognitionguarantors of revenue arising from contracts with customers, as well as recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. In January 2016, the FASB issued an ASU that amended the accounting for equity investments. These three ASUs will update the current accounting standards for all of our revenues with the exception of revenues subject to other accounting standards as noted in the table below. Our revenues and gains on sales of real estate for the nine months ended September 30, 2017, and the related effective date for adoption of new ASUs, consisted of the following (in thousands):
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| Date of ASU Adoption | | Nine Months Ended September 30, 2017 |
Revenues subject to the new lease ASU: | | | | |
Rental revenues | 1/1/19 | | $ | 604,570 |
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Tenant recoveries (1) | 1/1/19 | | 188,874 |
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| $ | 793,444 |
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Revenues subject to the new revenue recognition ASU: | | | | |
Parking and other revenues | 1/1/18 | | | 32,323 |
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Revenues not subject to the new lease or revenue recognition ASUs: | | | | |
Investment income subject to the new financial instruments ASU | 1/1/18 | | $ | 2,007 |
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Interest and other income within the scope of other existing accounting standards | N/A | | 1,532 |
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| | | | 3,539 |
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Total revenues | | | | $ | 829,306 |
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Gains on sales of real estate subject to the new revenue recognition ASU | 1/1/18 | | | $ | 381 |
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(1) | Includes a portion of tenant recoveries that is subject to the new revenue recognition ASU upon adoption of the new lease ASU on January 1, 2019. See further discussion below. |
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2. | Summary of significant accounting policies (continued) |
Recent accounting pronouncements (continued)
Lease accounting
In February 2016, the FASB issued an ASU that sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a lease agreement (i.e., lessees and lessors).registered debt offerings. The ASUguidance is effective for us no later thanfilings on or after January 1, 2019,4, 2021, with early adoption permitted. Upon evaluation of the guidance, we elected to early adopt the amendment as of and for the six months ended June 30, 2020.
Generally, a parent entity must provide separate subsidiary issuer or guarantor financial statements, unless it qualifies for disclosure exceptions provided in the amendment. Currently, a parent entity must fully own the subsidiary issuer or guarantor and guarantee its registered security fully and unconditionally to qualify for disclosure exceptions under the existing guidance. Pursuant to the amendment, a parent entity may be eligible for disclosure exceptions if it meets the following criteria:
•The ASU requiressubsidiary issuer or guarantor is a consolidated subsidiary of the parent company, and
•The subsidiary issues a registered security that is:
•Issued jointly and severally with the parent company, or
•Fully and unconditionally guaranteed by the parent company.
A parent entity that meets the above criteria may instead present summarized financial information (“alternative disclosures”). We evaluated the criteria and determined that we are eligible for the exceptions, which allow us to identify lease and nonlease components of a lease agreement. This ASU will govern the recognition of revenue for lease components. Revenue related to nonlease components under our lease agreements will be subject to the new revenue recognition standard effective upon adoption of the new lease accounting standard. We expect to adopt the new lease accounting standard on January 1, 2019.provide alternative disclosures.
The lease ASU requires the useamendment also allows for further simplification of the modified retrospective transition method and does not allow for a full retrospective approach. Under the modified retrospective method, an entity will apply the standard to all leases that exist at, or commence after, the beginning of the earliest comparative period presented in the financial statements, with a cumulative adjustment to the opening balance of retained earnings for the effect of applying the standard at the date of initial application. In addition, an entity may elect a practical expedient package, which allows the following:
An entity need not reassess whether any expired or existing contracts are or contain leases;
An entity need not reassess the lease classification for any expired or existing leases; and
An entity need not reassess initial direct costs for any existing leases.
These three practical expedients are available as a single election that must be elected as a package and must be consistently applied to all existing leases at the date of adoption. The FASB has also tentatively noted in Board meeting minutes of May 2017 that lessors that adopt this package of practical expedients are not expected to reassess expired or existing leases at the date of adoption in order to bifurcate lease and nonlease components under the new lease ASU.
Lessor accounting
We recognized revenue from our lease agreements aggregating $793.4 million for the nine months ended September 30, 2017. This revenue consisted primarily of rental revenue and tenant recoveries aggregating $604.6 million and $188.9 million, respectively.
Under current accounting standards, we recognize rental revenue from our operating leases on a straight-line basis over the respective lease terms. We commence recognition of rental revenue at the date the property is ready for its intended use and the tenant takes possession of or controls the physical use of the property. We recognize rental revenue from direct financing leases over the lease term using the effective interest rate method.
Under the new lease ASU, each lease agreement will be evaluated to identify the lease components and nonlease components within each lease agreement. The total consideration in the lease agreement will be allocated to the lease and nonlease components based on their relative standalone selling prices. Lessors will continue to recognize the lease revenue component using an approach that is substantially equivalent to existing guidance for operating leases (straight-line basis) and direct financing leases (effective interest rate method).
Under current accounting standards, tenant recoveries related to payments of real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses, are considered lease components. We recognize these tenant recoveries as revenue when services are rendered in an amount equal to the related operating expenses incurred that are recoverable under the terms of the applicable lease.
We have not completed our analysis of this ASU but expect that our tenant recoveries will be separated into lease and nonlease components. Tenant recoveries that qualify as lease components, which relate to the right to use the leased asset (e.g., property taxes, insurance), will be accounted for under the new lease ASU. Tenant recoveries that qualify as nonlease components, which relate to payments for goods or services that are transferred separately from the right to use the underlying asset, including tenant recoveries related to payments for maintenance activities and common area expenses, will be accounted for under the new revenue recognition ASU upon adoption of the new lease ASU on January 1, 2019.
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2. | Summary of significant accounting policies (continued) |
Recent accounting pronouncements (continued)
Lease accounting (continued)
Tenant recoveries that are categorized as lease components will generally be variable consideration. Tenant recoveries that are categorized as nonlease components will be recognized at a point in time or over time based on the pattern of transfer of the underlying goods or services to our tenants.
Costs to execute leases
The new ASU will require that lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. Under this ASU, allocated payroll costs and other costs such as legal costs incurred as part of the leasing process prior to the execution of a lease will no longer qualify for classification as initial direct costs but will instead be expensed as incurred. During the nine months ended September 30, 2017, we capitalized $18.4 million of such costs. Under the new ASU, these costs will be expensed as incurred.
Lessee accounting
Under the new lease ASU, lessees are required to apply a dual approach by classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases.
The ASU requires the recognition of a right-of-use asset and a related liability to account for our future obligations under our ground lease arrangements for which we are the lessee. For the nine months ended September 30, 2017, we recognized rent expense, included in rental operations expense, aggregating $9.4 million under these ground leases. As of September 30, 2017, the remaining contractual payments under our ground lease agreements for which we are the lessee aggregated $584.0 million. All of our existing ground leases for which we are the lessee are currently classified as operating leases, and therefore, we will have the option, under the practical expedients provided by the lease ASU, to continue to classify these leases as operating leases upon adoption of the ASU. We are still evaluating the impact to our consolidated financial statements from the initial recognition of each lease liability upon adoption and the pattern of recognition of ground lease expense subsequent to adoption.
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2. | Summary of significant accounting policies (continued) |
Recent accounting pronouncements (continued)
Revenue recognition
In May 2014, the FASB issued an ASU on recognition of revenue arising from contracts with customers, as well as recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers, and subsequently, it issued additional guidance that further clarified the ASU. The revenue recognition ASU has implications for all revenues, excluding those that are under the specific scope of other accounting standards, such as revenue associated with leases (described above) and financial instruments (described below). Our revenues and gains for the nine months ended September 30, 2017, which will become subject to the revenue recognition ASU upon adoption on January 1, 2018, were as follows (in thousands):
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| Nine Months Ended September 30, 2017 |
Parking and other revenue | $ | 32,323 |
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Gain on sales of real estate | $ | 381 |
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The core principle underlying the revenue recognition ASU is that an entity will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in such exchange. This will require entities to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer.
A customer is distinguished from a noncustomer by the nature of the goods or services that are transferred. Customers are provided with goods or services that are generated by a company’s ordinary output activities, whereas noncustomers are provided with nonfinancial assets that are outside of a company’s ordinary output activities. This distinction may not significantly change the pattern of income recognition, but will determine whether that income is classified as revenue (contracts with customers) or other gains/losses (contracts with noncustomers) in our consolidated income statement.
The ASU will require the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that we (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy the performance obligation.
An entity will also be required to determine if it controls the goods or services prior to the transfer to the customer in order to determine if it should account for the arrangement as a principal or agent. Principal arrangements, where the entity controls the goods or services provided, will result in the recognition of the gross amount of consideration expected in the exchange. Agent arrangements, where the entity simply arranges but doesn’t control the goods or services being transferred to the customer, will result in the recognition of the net amount the entity is entitled to retain in the exchange.
The ASU is effective for us on January 1, 2018. Entities can use either a full retrospective or modified retrospective method to adopt the ASU. Under the full retrospective method, all periods presented will be restated upon adoption to conform to the new standard and a cumulative adjustment for effects on periods prior to 2016 will be recorded to retained earnings as of January 1, 2016. Under the modified retrospective approach, prior periods are not restated to conform to the new standard. Instead, a cumulative adjustment for effects of applying the new standard to periods prior to 2018 is recorded to retained earnings as of January 1, 2018. Additionally, incremental disclosures are required to present the 2018 revenues under the prior standard. Under the modified retrospective method, an entity may also elect to apply the standard to either (i) all contracts as of January 1, 2018, or (ii) only to contracts that are not completed as of January 1, 2018.
We continue to review the impact that the new standard will have on our consolidated financial statements and our disclosures. We continue to implement changes to our accounting policies, business processes, and internal controls to support the new accounting and disclosure requirements. We expect to complete our assessment and implementation by December 31, 2017.
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2. | Summary of significant accounting policies (continued) |
Recent accounting pronouncements (continued)
Revenue recognition (continued)
Revenue within the scope of the new revenue recognition ASU
Parking
Parking and other revenue aggregated $32.3 million for the nine months ended September 30, 2017. These revenues consist primarily of short term rental revenues that are not considered lease revenue. These revenues will be accounted under the new revenue recognition ASU effective January 1, 2018. Under current accounting standards, we recognize parking when the amounts are fixed or determinable, collectability is reasonably assured, and services have been rendered. Under the new revenue recognition ASU, the recognition of such revenue will occur when the services are provided and the performance obligations are satisfied. These services are normally provided at a point in time, therefore revenue recognition under the new revenue recognition ASU is expected to be similar to the recognition pattern under existing accounting standards.
Sales of real estate
During the nine months ended September 30, 2017, we sold real estate for contractual sales prices aggregating $10.9 million, which resulted in an aggregate gain of $381 thousand. Our ordinary output activities consist of leasing space to our tenants in our operating properties, not the sale of real estate. Therefore, sales of real estate qualify as contracts with non-customers.
The amount and timing of recognition of gain or loss on those sales may differ significantly under the new standards. The current standards focus on whether the seller retains substantial risks or rewards of ownership as a result of its continuing involvement with the sold property.
Under the new standard, which includes guidance on recognition of gains and losses arising from the derecognition of nonfinancial assets in a transaction with noncustomers, the derecognition model is based on the transfer of control. If a real estate sale contract includes ongoing involvement by the seller with the property, the seller must evaluate each promised good or service under the contract to determine whether it represents a separate performance obligation, constitutes a guarantee, or prevents the transfer of control. If a good or service is considered a separate performance obligation, an allocated portion of the transaction price should be recognized as revenue as the entity transfers the related good or service to the buyer.
Under the current standards, a partial sale of real estate in which the seller retains a noncontrolling interest results in the recognition of a gain or loss related to the interest sold.
Under the new standards, a partial sale of real estate in which the seller retains a noncontrolling interest will result in recognition by the seller of a gain or loss as if 100% of the real estate was sold. Conversely, under the new standards, a partial sale of real estate in which the seller retains a controlling interest will result in the seller’s continuing to reflect the asset at its current book value, recording a noncontrolling interest for the book value of the partial interest sold, and recognizing additional paid-in capital for the difference between the consideration received and the partial interest at book value, consistent with the current accounting standards.
Tenant recoveries
As previously noted above in the lease accounting section, certain tenant recoveries may be subject to the new revenue recognition ASU upon our adoption of the lease ASU, no later than January 1, 2019.
Revenue within the scope of guidance other than revenue recognition or lease accounting
Interest and investment income fall outside the scope of the new revenue recognition and lease accounting standards. Investment income is subject to a recently issued accounting pronouncement on financial instruments related to the accounting for equity investments.
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2. | Summary of significant accounting policies (continued) |
Recent accounting pronouncements (continued)
Financial instruments
In January 2016, the FASB issued an ASU that amended the accounting for equity investments (except for debt securities and equity investments accounted for under the equity method of accounting or that result in consolidation) and the presentation and disclosure requirements for financial instruments. The core principle of the amendment involves the measurement of equity investments at fair value and the recognition of changes in fair value of those investments during each period in net income.
As of September 30, 2017, our consolidated balance sheet contained the following amounts related to our investments (in thousands):
|
| | | | | | | | | | | |
| Cost | | Net Unrealized Gains | | Total |
Available-for-sale equity securities | $ | 55,433 |
| | $ | 45,189 |
| | $ | 100,622 |
|
Investments accounted for under cost method: | | | | | |
Investments in limited partnerships | 136,044 |
| | N/A |
| | 136,044 |
|
Investments in other privately held entities | 248,596 |
| | N/A |
| | 248,596 |
|
Total investments | $ | 440,073 |
| | $ | 45,189 |
| | $ | 485,262 |
|
For the nine months ended September 30, 2017, our consolidated statement of income and statement of comprehensive income contained the following amounts related to our investments (in thousands):
|
| | | |
| Nine Months Ended September 30, 2017 |
Investment income recognized in net income | $ | 2,007 |
|
Unrealized gain recognized in other comprehensive income (component of stockholder’s equity) | $ | 23,414 |
|
The ASU is effective for us on January 1, 2018. The ASU requires the use of the modified retrospective transition method, under which cumulative unrealized gains and losses related to equity investments with readily determinable fair values will be reclassified from accumulated other comprehensive income to retained earnings on January 1, 2018, upon adoption of this ASU. The guidance related to equity investments without readily determinable fair values, including our investments in limited partnerships and other privately held entities will be applied prospectively to all investments that exist as of the date of adoption. We expect the adoption of this new ASU to increase the volatility of our earnings due to the recognition of changes in fair value of our equity investments in net income for reporting periods subsequent to December 31, 2017.
The ASU introduces significant changes to current accounting for equity investments, including elimination of (i) the classification of equity investments as trading or available-for-sale, and the related recognition of unrealized holding gains and losses on available-for-sale equity securities in other comprehensive income, (ii) the cost method of accounting for equity securities that do not have readily determinable fair values, and (iii) the consideration of impairments as other-than-temporary, and instead requires recognition of impairments under a single-step model. A readily determinable fair value exists on investments for which sales prices/quotes are available on securities exchanges, or are published and are the basis for current transactions.
Under the new ASU, equity investments in publicly traded securities are required to be measured and reported at fair value, with the changes in fair value recognized through earnings. The year-to-date change in unrealized holding gains on available-for-sale equity securities, aggregating $23.4 million for the nine months ended September 30, 2017, would have been recognized in net income under this new ASU.
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2. | Summary of significant accounting policies (continued) |
Recent accounting pronouncements (continued)
Financial instruments (continued)
Equity investments without readily determinable fair values, which are currently subject to the cost method of accounting, will be accounted for under two categories, as follows:
Equity investments that qualify for the practical expedientalternative disclosures. A parent entity was required to provide disclosures within the footnotes to the consolidated financial statements. However, the amendment allows for such disclosures to be measured at net asset value (NAV) in accordance with ASC 820, Fair Value Measurement, such as our other privately held investments in limited partnerships, are required to be measured using the reported NAV per share or otherwise valued at fair value using other accepted valuation techniques. The aggregate NAV per share of our investments in limited partnerships exceeds our cost basis by approximately $71.8 million as of September 30, 2017. Under a proposed ASU issued recently by the FASB, the cumulative difference between NAV and cost basis for these investments is expected to be recognized as a cumulative adjustment to our retained earnings on January 1, 2018. Subsequent changes in NAV per share will be recognized in earnings each reporting period. The year-to-date change in unrealized holding gains on other privately held investments in limited partnerships, aggregating approximately $16.2 million for the nine months ended September 30, 2017, would have been recognized in net income under this new ASU.
Equity investments that do not qualify for the NAV practical expedient, such as our private investments, will be measured at cost less impairments, adjusted for observable price changes that are known or can be reasonably known. An “observable price” is a price observed in an orderly transaction for an identical or similar investmentprovided outside of the same issuer. Investments will be evaluated onfinancial statements, including within the basis“Management’s Discussion and Analysis of a qualitative assessment for indicatorsFinancial Condition and Results of impairment. IfOperations” section in Item 2. As such, indicatorsour disclosures are present, we are required to estimate the investment’s fair value and recognize an impairment loss equal to the amount by which the investment’s carrying value exceeds its fair value.
The new ASU requires additional disclosures. Equity investments that have readily determinable fair values require disclosure of the unrealized gains and losses recognized through earnings during the period that relate to equity securities still held at the reporting date. Equity investments without readily determinable fair values require disclosure of (i) the carrying amount, (ii) the amount of impairments and downward adjustments, if any, both cumulative and annual, (iii) the amount of upward adjustments, if any, both cumulative and annual, and (iv) qualitative information to facilitate an understanding of the quantitative disclosures.
We continue to review the impact that the new standard will have onno longer presented in our consolidated financial statements and our disclosures. We also continuehave been relocated to implement changes to our accounting policies, business processes,the “Management’s Discussion and internal controls to support the new accountingAnalysis of Financial Condition and disclosure requirements. We expect to complete our assessment and implementation by December 31, 2017.Results of Operations” section in Item 2.
Joint venture distributions
In August 2016,We use the FASB issued an ASU that provides guidance on“nature of the distribution” approach to determine the classification within our statement of cash flows of cash distributions received from equity method investments, including our unconsolidated joint ventures, in the statement of cash flows. The ASU provides two approaches to determine the classification of cashventures. Under this approach, distributions received from equity method investees: (i) the “cumulative earnings” approach, under which distributions up to the amount of cumulative equity in earnings recognized will be classified as cash flows from operating activities, and those in excess of that amount will be classified as cash inflows from investing activities, and (ii) the “nature of the distribution” approach, under which distributions will beare classified based on the nature of the underlying activity that generated the cash distributions. An entity may elect either the “cumulative earnings” or the “nature of the distribution” approach. An entity that elects the “nature of the distribution” approach but lacksIf we lack the information necessary to apply itthis approach in the future, we will be required to apply the “cumulative earnings” approach as an accounting change on a retrospective basis. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and will be applied retrospectively (exceptions apply). We will adopt this ASU on January 1, 2018, and expectUnder the cumulative earnings approach, distributions up to use the “natureamount of the distribution” approach. We currently present distributions from ourcumulative equity method investees utilizing the “nature of the distribution” approach; therefore, the adoption of this ASU will have no impact on our consolidated financial statements. During the nine months ended September 30, 2017, distributions received from our equity method investees totaled $38.8 million, consisting of approximately $249 thousandin earnings recognized are classified as a return on investment (cash flowscash inflows from operating activities)activities, and approximately $38.6 millionthose in excess of that amount are classified as a return of investment (cash flowscash inflows from investing activities).activities.
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2. | Summary of significant accounting policies (continued) |
Recent accounting pronouncements (continued)
Restricted cash
In November 2016, the FASB issued an ASU that will require companies toWe present cash and cash equivalents separately from restricted cash within our consolidated balance sheets. We include restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statementconsolidated statements of cash flows. The ASU will require disclosure ofWe provide a reconciliation between the statement of financial positionbalance sheets and the statementstatements of cash flows, as required when the statement of financial positionbalance includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. An entity with material restricted cash and restricted cash equivalents balances will be required to disclosecash. We also provide a disclosure of the nature of the restrictions. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and will be applied retrospectivelyrestrictions related to all periods presented. As of September 30, 2017, and December 31, 2016, we had $27.7 million and $16.3 million ofmaterial restricted cash respectively, on our consolidated balance sheets. Upon adoption of this ASU, restricted cash balances will be included with cash and cash equivalents balances as of the beginning and ending of each period presented in our consolidated statements of cash flows; separate line items reconciling changes in restricted cash balances to the changes in cash and cash equivalents will no longer be presented within the operating, investing, and financing sections of our consolidated statements of cash flows.balances.
Allowance for credit losses3. INVESTMENTS IN REAL ESTATE
In June 2016, the FASB issued an ASU that changes the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. The ASU will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures (e.g., loan commitments). The ASU is effective for reporting periods beginning after December 15, 2019, with early adoption permitted, and will be applied as a cumulative adjustment to retained earnings as of the effective date. We are currently assessing the potential effect the adoption of this ASU will have on our consolidated financial statements.
Hedge accounting
In August 2017, the FASB issued an ASU that simplifies hedge accounting. The purpose of this updated ASU is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. For cash flow hedges that are highly effective, the new standard requires all changes (effective and ineffective components) in the fair value of the hedging instrument to be recorded in other comprehensive income and to be reclassified into earnings only when the hedged item impacts earnings.
Under existing standards, a quantitative assessment is made on an ongoing basis to determine whether a hedge is highly effective in offsetting changes in cash flows associated with the hedged item. Currently, hedge accounting requires hedge ineffectiveness to be recognized in earnings. Under the new standard, an entity will still be required to perform an initial quantitative test. However, the new standard allows an entity to elect to subsequently perform only a qualitative assessment unless facts and circumstances change.
The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. For cash flow hedges in existence at the date of adoption, an entity is required to apply a cumulative-effect adjustment for previously recognized ineffectiveness from retained earnings to accumulated other comprehensive income, as of the beginning of the fiscal year when an entity adopts the amendments in this ASU.
We utilize interest rate hedge agreements to hedge a portion of our exposure to variable interest rates primarily associated with borrowings based on LIBOR. As a result, all of our interest rate hedge agreements are designated as cash flow hedges. During the three and nine months ended September 30, 2017, and September 30, 2016, we did not have any hedge ineffectiveness related to our interest rate hedge agreements. Therefore, we do not believe this ASU would have impacted our operating results for the nine months ended September 30, 2017.
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3. | Investments in real estate |
Our consolidated investments in real estate, including real estate assets held for sale as described in Note 15 – “Assets Classified as Held for Sale” to these unaudited consolidated financial statements, consisted of the following as of SeptemberJune 30, 2017,2020, and December 31, 20162019 (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
Rental properties: | | | | |
Land (related to rental properties) | | $ | 2,415,232 | | | $ | 2,225,785 | |
Buildings and building improvements | | 12,475,563 | | | 11,775,132 | |
Other improvements | | 1,392,958 | | | 1,277,862 | |
Rental properties | | 16,283,753 | | | 15,278,779 | |
Development and redevelopment of new Class A properties: | | | | |
Development and redevelopment projects | | 2,552,851 | | | 2,057,084 | |
Future development projects | | 382,015 | | | 182,746 | |
Gross investments in real estate | | 19,218,619 | | | 17,518,609 | |
Less: accumulated depreciation | | (2,967,150) | | | (2,704,657) | |
Net investments in real estate – North America | | 16,251,469 | | | 14,813,952 | |
Net investments in real estate – Asia | | 29,656 | | | 30,086 | |
Investments in real estate | | $ | 16,281,125 | | | $ | 14,844,038 | |
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Land (related to rental properties) | | $ | 1,206,152 |
| | $ | 1,131,416 |
|
Buildings and building improvements | | 8,466,889 |
| | 7,810,269 |
|
Other improvements | | 714,834 |
| | 584,565 |
|
Rental properties | | 10,387,875 |
| | 9,526,250 |
|
Development and redevelopment of new Class A properties: | | | | |
Undergoing construction | | | | |
Development projects – target delivery in 2017 | | 466,047 |
| | 809,254 |
|
Development projects – target delivery in 2018 and 2019 | | 143,038 |
| | — |
|
Redevelopment projects – target delivery in 2018 and 2019 | | 59,224 |
| | — |
|
Near-term projects undergoing marketing and pre-construction | | 114,954 |
| | — |
|
Intermediate-term developments projects | | 333,870 |
| | — |
|
Future development projects | | 289,314 |
| | 253,551 |
|
Gross investments in real estate | | 11,794,322 |
| | 10,589,055 |
|
Less: accumulated depreciation | | (1,785,115 | ) | | (1,546,798 | ) |
Net investments in real estate – North America | | 10,009,207 |
| | 9,042,257 |
|
Net investments in real estate – Asia | | 37,314 |
| | 35,715 |
|
Investments in real estate | | $ | 10,046,521 |
| | $ | 9,077,972 |
|
Acquisitions
Our real estate asset acquisitions during the ninesix months ended SeptemberJune 30, 2017,2020, consisted of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Square Footage | | | | | | | | | | | |
Market | | Number of Properties | | Future Development | | Active Redevelopment | | | | Operating With Future Development/Redevelopment | | Operating | | Contractual Purchase Price | |
Greater Boston | | 1 | | — | | | — | | | | | — | | | 509,702 | | | $ | 226,512 | | |
San Francisco | | 5 | | 260,000 | | | — | | | | | 300,010 | | | 582,309 | | | 105,000 | | (1) |
San Diego | | 2 | | — | | | — | | | | | — | | | 219,628 | | | 102,250 | | |
Other | | 3 | | 35,000 | | | — | | | | | 71,021 | | | 180,960 | | | 50,817 | | |
Three months ended March 31, 2020 | | 11 | | 295,000 | | | — | | | | | 371,031 | | | 1,492,599 | | | 484,579 | | |
| | | | | | | | | | | | | | | |
San Francisco | | 2 | | 700,000 | | | — | | | | | 26,738 | | | — | | | 113,250 | | |
San Diego | | 1 | | 200,000 | | | — | | | | | 41,475 | | | — | | | 43,000 | | |
Other | | 1 | | 544,825 | | | 63,774 | | | | | — | | | — | | | 59,000 | | |
Three months ended June 30, 2020 | | 4 | | 1,444,825 | | | 63,774 | | | | | 68,213 | | | — | | | 215,250 | | |
| | | | | | | | | | | | | | | |
Six months ended June 30, 2020 | | 15 | | 1,739,825 | | | 63,774 | | | | | 439,244 | | | 1,492,599 | | | $ | 699,829 | | (2) |
|
| | | | | | | | | | | | | |
| | Square Footage | | |
Three Months Ended | | Operating | | Redevelopment | | Future Development | | Purchase Price |
March 31, 2017 | | 232,470 |
| | — |
| | 1,508,890 |
| | $ | 218,500 |
|
June 30, 2017 | | 272,634 |
| | 175,000 |
| | 1,030,000 |
| | 244,009 |
|
September 30, 2017 | | 168,424 |
| | 104,212 |
| | 280,000 |
| | 110,700 |
|
| | 673,528 |
| | 279,212 |
| | 2,818,890 |
| | $ | 573,209 |
|
We evaluated each(1)In January 2020, we formed a real estate joint venture with subsidiaries of the transactions detailed below to determine whether the integrated set ofBoston Properties, Inc. Amount excludes our partner’s contributed real estate assets and activities acquired met the definition ofwith a business. Acquisitions that do not meet the definition of a business are accounted for as asset acquisitions. An integrated set of assets and activities does not qualify as a business if substantially all of thetotal fair market value of $350.0 million. Refer to Note 4 – “Consolidated and unconsolidated real estate joint ventures” to these unaudited consolidated financial statements for additional information.
(2)Represents the gross assets is concentrated in either a single identifiable asset or a groupaggregate contractual purchase price of similar identifiable assets, or if the acquired assets do not include a substantive process.our acquisitions, which can differ from cash outflows related to acquisitions due to closing costs and other acquisition adjustments such as prorations of rents and expenses.
We evaluatedBased upon our evaluation of each of the completed acquisitions andacquisition, we determined that substantially all of the fair value related to each acquisition is concentrated in a single identifiable asset or a group of similar identifiable assets, or is associated with a land parcel with no operations. Accordingly, each transaction did not meet the definition of a business and consequentlytherefore was accounted for as an asset acquisition. In each of these transactions, we allocated the total consideration for each acquisition to the individual assets and liabilities acquired on a relative fair value basis.
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3. | Investments in real estate (continued) |
3. INVESTMENTS IN REAL ESTATE (continued)
Cambridge, Greater Boston
325 Binney Street
In March 2017,During the six months ended June 30, 2020, we acquired land parcels at 325 Binney Street (formerly named 303 Binney Street) in our Cambridge submarket of Greater Boston15 properties for aan aggregate purchase price of $80.3$699.8 million. The property is located adjacent toIn connection with our Alexandria Center® at One Kendall Square campusacquisitions, we recorded in-place leases aggregating $83.5 million and is currently entitled forbelow-market leases in which we are the developmentlessor aggregating $21.6 million. As of 163,339 RSF forJune 30, 2020, the weighted-average amortization period remaining on our in-place and below-market leases acquired during the six months ended June 30, 2020, was 5.0 years and 4.4 years, respectively, and 4.9 years in total.
In January 2020, we formed a real estate joint venture with subsidiaries of Boston Properties, Inc. through our contribution of real estate assets, and are targeting a 51% ownership interest over time. Our partner contributed three office or office/laboratory space and 45,626 RSF for residential space.
Route 128, Greater Boston
266 and 275 Second Avenue
In July 2017, we acquired two propertiesbuildings, aggregating 203,757776,003 RSF, at 266601, 611, and 275 Second Avenue in651 Gateway Boulevard, and land supporting 260,000 SF of future development with aggregate fair market value of $350.0 million. For the discussion of our Route 128 submarketformation of Greater Boston forconsolidated real estate joint venture, refer to the “Formation of a purchase priceconsolidated real estate joint venture, impairment of $71.0 million. The properties consist of 144,584 RSF of office/laboratory space, which is 100% occupied by multiple tenants. The remaining 59,173 RSF, or 29% of the total RSF, are currently undergoing conversion from office to office/laboratory space through redevelopment.
Mission Bay/SoMa, San Francisco
1455 and 1515 Third Street
In November 2016, we acquired the remaining 49% interest in ouran unconsolidated real estate joint venture, with Uber Technologies, Inc. (“Uber”) for $90.1 million,and sales of which $56.8 million is payablepartial interests” section within Note 4 – “Consolidated and unconsolidated real estate joint ventures” to these unaudited consolidated financial statements.
Sales of real estate assets and impairment charges
For the discussion of our sales of partial interests in 681, 685, and 701 Gateway Boulevard in our South San Francisco submarket during the three equal installments upon Uber’s completionmonths ended March 31, 2020, and sales of construction milestones. The first installment of $18.9 million was paidpartial interests in properties at 9808 and 9868 Scranton Road in our Sorrento Mesa submarket during the three months ended June 30, 2017.2020, refer to the “Formation of a consolidated real estate joint venture, impairment of an unconsolidated real estate joint venture, and sales of partial interests” section in Note 4 – “Consolidated and unconsolidated real estate joint ventures” to these unaudited consolidated financial statements.
88 Bluxome StreetImpairment charges
During the six months ended June 30, 2020, we recognized impairment charges aggregating $15.2 million, which primarily consisted of a $10 million write-off of the pre-acquisition deposit for previously pending acquisition of an operating tech office property for which our revised economic projections declined from our initial underwriting. We recognized this impairment charge in April 2020, concurrently with the submission of our notice to terminate the transaction.
4. CONSOLIDATED AND UNCONSOLIDATED REAL ESTATE JOINT VENTURES
From time to time, we enter into joint venture agreements through which we own a partial interest in real estate entities that own, develop, and operate real estate properties. As of June 30, 2020, our real estate joint ventures held the following properties:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property | | Market | | Submarket | | Our Ownership Interest(1) | | |
Consolidated joint ventures(2): | | | | | | | | | |
| 225 Binney Street | | Greater Boston | | Cambridge | | | 30.0 | % | |
| 75/125 Binney Street | | Greater Boston | | Cambridge | | | 40.0 | % | |
| 409 and 499 Illinois Street | | San Francisco | | Mission Bay/SoMa | | | 60.0 | % | |
| 1500 Owens Street | | San Francisco | | Mission Bay/SoMa | | | 50.1 | % | |
| Alexandria Technology Center® – Gateway(3) | | San Francisco | | South San Francisco | | | 45.0 | % | |
| 500 Forbes Boulevard | | San Francisco | | South San Francisco | | | 10.0 | % | |
| Campus Pointe by Alexandria(4) | | San Diego | | University Town Center | | | 55.0 | % | |
| 5200 Illumina Way | | San Diego | | University Town Center | | | 51.0 | % | |
| 9625 Towne Centre Drive | | San Diego | | University Town Center | | | 50.1 | % | |
| SD Tech by Alexandria(5) | | San Diego | | Sorrento Mesa | | | 50.0 | % | |
| | | | | | | | | |
Unconsolidated joint ventures(2): | | | | | | | | | |
| Menlo Gateway | | San Francisco | | Greater Stanford | | | 49.0 | % | |
| 704 Quince Orchard Road | | Maryland | | Gaithersburg | | | 56.8 | % | (6) |
| 1655 and 1725 Third Street | | San Francisco | | Mission Bay/SoMa | | | 10.0 | % | |
(1)Refer to the table on the next page that shows our categorization of our existing significant joint ventures under the consolidation framework.
(2)In January 2017,addition to the consolidated real estate joint ventures listed, various partners hold insignificant noncontrolling interests in six other joint ventures in North America and we acquired land parcels aggregating 2.6 acres at 88 Bluxome Streethold an interest in our Mission Bay/SoMa submarket of San Francisco for a purchase price of $130.0 million.two other insignificant unconsolidated real estate joint ventures in North America.
South San Francisco, San Francisco
201 Haskins Way
In September 2017, we acquired a 6.5-acre future development site located at 201 Haskins Way, located(3)Excludes 600, 630, 650, 901, and 951 Gateway Boulevard in our South San Francisco submarket of San Francisco for a purchase price of $33.0 million. The existing building, aggregating 23,840 RSF, is currently 100% leased through 2020.submarket.
Greater Stanford, San Francisco
960 Industrial Road
In May 2017, we acquired a future ground-up development site at 960 Industrial Road aggregating 11.0 acres in our Greater Stanford submarket of San Francisco for a purchase price of $65.0 million.
825 and 835 Industrial Road
In June 2017, we acquired an 8-acre future development site located at 825 and 835 Industrial Road in our Greater Stanford submarket of San Francisco for a purchase price of $85.0 million. The property is currently entitled for the development of two buildings aggregating 530,000 RSF and a parking structure.
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3. | Investments in real estate (continued) |
1450 Page Mill Road
In June 2017, we acquired a 77,634 RSF recently developed technology office building at 1450 Page Mill Road, subject to a ground lease, located in Stanford Research Park, a collaborative business community that supports innovative companies in their R&D pursuits, in our Greater Stanford submarket of San Francisco for a purchase price of $85.3 million. The building is 100% leased to Infosys Limited for 12 years.
Torrey Pines/Sorrento Mesa, San Diego
3050 Callan Road and Vista Wateridge
In March 2017, we acquired land parcels aggregating 13.5 acres at 3050 Callan Road and Vista Wateridge in our Torrey Pines and Sorrento Mesa submarkets of San Diego, respectively, for an aggregate purchase price of $8.3 million.
Rockville, Maryland
9900 Medical Center Drive
In August 2017, we acquired a 45,039 RSF redevelopment property at 9900 Medical Center Drive in our Rockville submarket of Maryland for a purchase price of $6.7 million. The building is adjacent to our existing properties at 9800 and 9920 Medical Center Drive.
Research Triangle Park
5 Laboratory Drive
In May 2017, we acquired a 175,000 RSF redevelopment property at 5 Laboratory Drive in our Research Triangle Park market for a purchase price of $8.8 million.
Investments in consolidated real estate joint ventures
In June 2016, we completed a sale of a 45% partial interest in 10290 Campus Point Drive to an institutional investor, TIAA Global Asset Management and affiliates (“TIAA”). 10290 Campus Point Drive is a 305,006 RSF office/laboratory building in our University Town Center submarket of San Diego, 100% leased to Eli Lilly and Company. Gross proceeds received from our partner related to this real estate joint venture through September 30, 2017 were $92.4 million, including $8.1 million received during the nine months ended September 30, 2017, $15.7 million received during the three months ended December 31, 2016, and $68.6 million received during the nine months ended September 30, 2016. Remaining proceeds from our partner of $13.9 million are expected to be received primarily in the fourth quarter of 2017.
In December 2016, we completed a separate joint venture agreement with TIAA to sell a 45% partial interest in 10300(4)Excludes 9880 Campus Point Drive in our University Town Center submarket of San Diego, which is a 449,759 RSF building primarily leased to Celgene Corporation and The Regents of the University of California, for a sales price of $150.0 million. Gross proceeds received from our partner through September 30, 2017, were $137.3 million. Remaining proceeds of $12.7 million are expected to be received primarily in the fourth quarter of 2017.submarket.
We retained controlling interests in each of 10290 Campus Point Drive and 10300 Campus Point Drive following each sale above and, therefore, continue to consolidate both entities. As a result, we accounted for the proceeds from each transaction as equity financings. Each transaction did not qualify as a sale of real estate and did not result in purchase price adjustments to the carrying value of the net assets sold. Accordingly, the carrying amount of our partner’s share of assets and liabilities is reported at historical cost basis.
We own partial interests in the following Class A properties through our real estate joint ventures with TIAA: (i) 30% in 225 Binney Street in our Cambridge submarket of Greater Boston, (ii) 50.1% in 1500 Owens Street in our Mission Bay/SoMa submarket of San Francisco, (iii) 60% in 409 and 499 Illinois Street in our Mission Bay/SoMa submarket of San Francisco, and (iv) 55% in 10290 and 10300 Campus Point(5)Excludes 5505 Morehouse Drive in our University Town Center submarket of San Diego.Sorrento Mesa submarket.
(6)Represents our ownership interest; our voting interest is limited to 50%.
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3. | Investments in real estate (continued) |
Under each of these real estate joint venture arrangements, we are the managing member and earn a fee for continuing to manage the day-to-day operations of each property.
For each of our joint ventures with TIAA, we evaluated the partially owned legal entity that owns the propertyOur consolidation policy is fully described under the variable interest model to determine whether each entity met any of the three characteristics of a VIE, which are as follows:
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1) | The entity does not have sufficient equity to finance its activities without additional subordinated financial support. |
Each joint venture has significant equity at risk to fund its activities as the ventures are primarily capitalized by contributions from the members and could obtain, if necessary, non-recourse commercial financing arrangements on customary terms.
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2) | The entity is established with non-substantive voting rights. |
The voting rights of each joint venture require both members to approve major decisions, which results in voting rights that are disproportionate to the members’ economic interest. However, the activities of each joint venture are conducted on behalf of both members, so the voting rights, while disproportionate, are substantive.
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3) | The equity holders, as a group, lack the characteristics of a controlling financial interest, as evidenced by lack of substantive kick-out rights or substantive participating rights. |
TIAA lacks substantive kick-out rights as it may not remove us as the managing member without cause.
TIAA also lacks substantive participating rights as day-to-day control is vested in us as the managing member and the major decisions that require unanimous consent are primarily protective in nature.
Based on the analysis detailed“Consolidation” section in Note 2 – “Summary of Significant Accounting Policies”significant accounting policies” to ourthese unaudited consolidated financial statements, TIAA, asstatements. Consolidation accounting is highly technical, but its framework is primarily based on the non-managing membercontrolling financial interests and benefits of eachthe joint ventures.
We generally consolidate a joint venture lacksthat is a legal entity that we control (i.e., we have the characteristicspower to direct the activities of the joint venture that most significantly affect its economic performance) through contractual rights, regardless of our ownership interest, and where we determine that we have benefits through the allocation of earnings or losses and fees paid to us that could be significant to the joint venture (the “VIE model”).
We also generally consolidate joint ventures when we have a controlling financial interest inthrough voting rights and where our voting interest is greater than 50% (the “voting model”). Voting interest differs from ownership interest for some joint ventures.
We account for joint ventures that do not meet the consolidation criteria under the equity method of accounting by recognizing our share of income and losses.
4. CONSOLIDATED AND UNCONSOLIDATED REAL ESTATE JOINT VENTURES (continued)
The table below shows the categorization of our existing significant joint ventures under the consolidation framework:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property | | Consolidation Model | | Voting Interest | | Consolidation Analysis | | | Conclusion |
| | | | | | | | | |
225 Binney Street | | VIE model
| | Not applicable under VIE model | | We have: | | | Consolidated |
75/125 Binney Street | | | | | | (i) | The power to direct the activities of the joint venture that most significantly affect its economic performance; and
| | |
409 and 499 Illinois Street | | | | | | | | | |
1500 Owens Street | | | | | | | | | |
Alexandria Technology Center® – Gateway | | | | | | | | | |
500 Forbes Boulevard | | | | | | (ii) | Benefits that can be significant to the joint venture.
| | |
Campus Pointe by Alexandria | | | | | | | | | |
5200 Illumina Way | | | | | | Therefore, we are the primary beneficiary of each VIE
| | | |
9625 Towne Centre Drive | | | | | | | | | |
SD Tech by Alexandria | | | | | | | | | |
Menlo Gateway | | | | | | We do not control the joint venture and are therefore not the primary beneficiary | | | Equity method of accounting |
| | | | | | | | | |
704 Quince Orchard Road | | Voting model | | Does not exceed 50% | | Our voting interest is 50% or less | | | |
1655 and 1725 Third Street | | | | | | | | | |
Formation of a consolidated real estate joint venture, because it does not have substantiveimpairment of an unconsolidated real estate joint venture, and sales of partial interests
Alexandria Technology Center® – Gateway
In January 2020, we formed a real estate joint venture with subsidiaries of Boston Properties, Inc. We currently own 45% of the real estate joint venture and are expecting to increase our ownership to 51%. Our partner contributed three office buildings, aggregating 776,003 RSF, at 601, 611, and 651 Gateway Boulevard, and land supporting 260,000 SF of future development with aggregate fair market value of $350.0 million. We contributed one office building, one office/laboratory building, one amenity building, aggregating 313,262 RSF, at 701, 681, and 685 Gateway Boulevard, respectively, and land supporting 377,000 SF of future development with aggregate fair market value of $281.9 million. This future campus in our South San Francisco submarket will aggregate 1.7 million RSF.
As part of the joint venture agreement, we are responsible for operations that most significantly impact the economic performance of the joint venture. Our joint venture partner lacks kick-out rights orover our role as property manager. Also, our partner lacks substantive participating rights. Therefore, eachrights that would allow it to significantly impact the economic performance of the joint venture, meetsand can affect the criteria to be considered a VIE and, accordingly, is evaluated for consolidation underoperations of the variable interest model.
After determining that these joint ventures are VIEs,venture primarily through the exercise of its protective rights. Therefore, we determined that we are the primary beneficiary of eachthe joint venture. Accordingly, we have consolidated the joint venture under the variable interest model.
The aggregate fair value of the properties we contributed to the joint venture of $281.9 million exceeded their historical cost basis. These properties remained consolidated in our financial statements; therefore, no adjustments were made to the carrying values of these properties, and no gain was recognized in our consolidated statements of operations. We accounted for this transaction as an equity transaction with an adjustment of $55.8 million to our additional paid-in capital and noncontrolling interest balances. Refer to the “Consolidation” section in Note 2 – “Summary of significant accounting policies” to these unaudited consolidated financial statements for additional information.
1401/1413 Research Boulevard
In January 2015, we formed a joint venture with a local retail developer and operator by contributing a land parcel located in our Rockville submarket of Maryland. The joint venture developed a retail shopping center aggregating approximately 90,000 RSF, which was primarily funded by a $26.2 million construction loan that is non-recourse to us and matures in May 2021. As of December 31, 2019, our investment in this joint venture was $7.7 million, which primarily consisted of the value of the retail shopping center, and was accounted for under the equity method of accounting as we did not have a controlling interest.
In March 2020, as a result of the impact of COVID-19 pandemic and the State of Maryland’s shelter-in-place orders, which led to the closure of the retail center, and the near-term secured loan debt maturity, we evaluated the recoverability of our investment and recognized a $7.6 million impairment charge to lower the carrying amount of our investment balance, which primarily consisted of real estate, to its estimated fair value less costs to sell. The estimated real estate impairment charge reduced our investment balance in the joint venture to 0 dollars and was classified in equity in earnings of unconsolidated real estate joint ventures within our consolidated statements of operations for the six months ended June 30, 2020.
4. CONSOLIDATED AND UNCONSOLIDATED REAL ESTATE JOINT VENTURES (continued)
9808 and 9868 Scranton Road
In April 2020, we completed the sale of a 50% interest in properties at 9808 and 9868 Scranton Road in our Sorrento Mesa submarket, aggregating 219,628 RSF, to our partner in the SD Tech by Alexandria consolidated real estate joint venture, as, inof which we own 50%. The gross proceeds received from our capacity as managing member, we have the powerpartner were $51.1 million. We continue to make decisions that most significantly influence operationscontrol and economic performance of theconsolidate this joint ventures. In addition, through our investment in each joint venture, we have the right to receive benefits and participate in losses that can be significant to the VIEs. Based on this evaluation, we concluded that we are the primary beneficiary of each joint venture, andventure; therefore, we consolidate each entity.accounted for the proceeds from this transaction as equity financing with no gain recognized in earnings.
Consolidated VIEs’ balance sheet information
The following table below aggregates the balance sheet information of our consolidated VIEs as of SeptemberJune 30, 2017,2020, and
December 31, 20162019 (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
Investments in real estate | | $ | 3,242,687 | | | $ | 2,678,476 | |
Cash and cash equivalents | | 94,459 | | | 81,021 | |
Other assets | | 328,197 | | | 280,343 | |
Total assets | | $ | 3,665,343 | | | $ | 3,039,840 | |
| | | | |
Secured notes payable | | $ | — | | | $ | — | |
Other liabilities | | 150,676 | | | 149,471 | |
Total liabilities | | 150,676 | | | 149,471 | |
Redeemable noncontrolling interests | | 2,510 | | | 2,388 | |
Alexandria Real Estate Equities, Inc.’s share of equity | | 1,887,855 | | | 1,600,729 | |
Noncontrolling interests’ share of equity | | 1,624,302 | | | 1,287,252 | |
Total liabilities and equity | | $ | 3,665,343 | | | $ | 3,039,840 | |
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Investments in real estate | | $ | 979,698 |
| | $ | 993,710 |
|
Cash and cash equivalents | | 29,665 |
| | 27,498 |
|
Other assets | | 62,886 |
| | 57,166 |
|
Total assets | | $ | 1,072,249 |
| | $ | 1,078,374 |
|
| | | | |
Secured notes payable | | $ | — |
| | $ | — |
|
Other liabilities | | 46,054 |
| | 66,711 |
|
Total liabilities | | 46,054 |
| | 66,711 |
|
Alexandria Real Estate Equities, Inc.’s share of equity | | 541,293 |
| | 538,069 |
|
Noncontrolling interests’ share of equity | | 484,902 |
| | 473,594 |
|
Total liabilities and equity | | $ | 1,072,249 |
| | $ | 1,078,374 |
|
| | | | |
| |
3. | Investments in real estate (continued) |
In determining whether to aggregate the balance sheet information of our consolidated VIEs, we considered the similarity of each VIE, including the primary purpose of these entities to own, manage, operate, and lease real estate properties owned by the VIEs, and the similar nature of our involvement in each VIE as a managing member. Due to the similarity of the characteristics, among these VIE’s, we present the balance sheet information of these entities on an aggregated basis.
For each None of our consolidated VIEs, none of itsVIEs’ assets have restrictions that limit their use to settle specific obligations of the VIE. There are no creditors or other partners of our consolidated VIEs that have recourse to our general credit. Our maximum exposure to all our consolidated VIEs is limited to our variable interests in each VIE.
Unconsolidated real estate joint ventures
Sale
Our maximum exposure to our unconsolidated VIEs is limited to our investment in each VIE. Our investments in unconsolidated real estate joint ventures, accounted for under the equity method of accounting presented in our consolidated balance sheets as of June 30, 2020, and December 31, 2019, consisted of the following (in thousands):
| | | | | | | | | | | | | | |
Property | | June 30, 2020 | | December 31, 2019 |
Menlo Gateway | | $ | 294,482 | | | $ | 288,408 | |
704 Quince Orchard Road | | 4,882 | | | 4,748 | |
1655 and 1725 Third Street | | 15,886 | | | 37,016 | |
Other | | 11,608 | | | 16,718 | |
| | $ | 326,858 | | | $ | 346,890 | |
Our unconsolidated real estate joint ventures have the following non-recourse secured loans that include the following key terms as of June 30, 2020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unconsolidated Joint Venture | | Our Share | | Maturity Date | | | | Stated Rate | | Interest Rate(1) | | 100% at Joint Venture Level | |
| | | | | | | | | | | | Debt Balance(2) | |
704 Quince Orchard Road | | 56.8% | | | 3/16/23 | | | L+1.95% | | 2.40% | | $ | 11,602 | | |
1655 and 1725 Third Street | | 10.0% | | | 3/10/25 | | | 4.50% | | 4.57% | | 598,020 | | |
Menlo Gateway, Phase II | | 49.0% | | | 5/1/35 | | | 4.53% | | 4.59% | | 106,580 | | |
Menlo Gateway, Phase I | | 49.0% | | | 8/10/35 | | | 4.15% | | 4.18% | | 140,843 | | |
| | | | | | | | | | | | $ | 857,045 | | |
(1)Includes interest expense and amortization of loan fees.
(2)Represents outstanding principal, net of unamortized deferred financing costs, as of June 30, 2020.
5. LEASES
We are subject to the lease accounting standard that sets principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a lease agreement (i.e., lessees and lessors).
As a lessor, we are required to disclose, among other things, the following:
•A description of the nature of leases, including terms for any variable payments, options to extend or terminate, and options to purchase the underlying asset;
•Tabular presentation of undiscounted cash flows to be received over the next five years and thereafter separately for operating leases and direct financing leases;
•The amount of lease income and its location on the statements of operations;
•Income classified separately for operating leases and direct financing leases; and
•Our risk management strategy to mitigate declines in residual value of the leased assets.
As a lessee, we are required to disclose, among other things, the following:
•A description of the nature of leases, including terms for any variable payments, options to extend or terminate, and options to purchase the underlying asset;
•The amounts of lease liabilities and corresponding right-of-use assets and their respective locations in the balance sheet;
•The weighted-average remaining lease term and weighted-average discount rate of leases;
•Tabular presentation of undiscounted cash flows of our remaining lease payment obligations over the next five years and thereafter; and
•Total lease costs, including cash paid, amounts expensed, and amounts capitalized.
Refer to the “Lease accounting” section in Note 2 – “Summary of significant accounting policies” to these unaudited consolidated financial statements for additional information.
Leases in which we are the lessor
As of June 30, 2020, we had 304 properties aggregating 28.8 million operating RSF located in key locations, including Greater Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and Research Triangle. We focus on developing Class A properties in AAA innovation cluster locations, which we consider to be highly desirable for tenancy by life science, technology, and agtech entities. Such locations are generally characterized by high barriers to entry for new landlords, high barriers to exit for tenants, and a limited supply of available space. As of June 30, 2020, all leases in which we are the lessor were classified as operating leases with the exception of one direct financing lease. Our operating leases and direct financing lease are described below.
Operating leases
As of June 30, 2020, our 304 properties were subject to operating lease agreements. Two of these properties, representing 2 land parcels, are subject to lease agreements that each contain an option for the lessee to purchase the underlying asset from us at fair market value during each of the 30-day periods commencing on the dates that are 15 years, 30 years, and 74.5 years after the rent commencement date of October 1, 2017. The remaining lease term related to each of the 2 land parcels is 72.4 years. Our leases generally contain options to extend lease terms at prevailing market rates at the time of expiration. Certain operating leases contain early termination options that require advance notification and payment of a penalty, which in most cases is substantial enough to be deemed economically disadvantageous by a tenant to exercise. Future lease payments to be received under the terms of our operating lease agreements, excluding expense reimbursements, in effect as of June 30, 2020, are outlined in the table below (in thousands):
| | | | | | | | |
Year | | Amount |
2020 | | $ | 568,696 | |
2021 | | 1,167,198 | |
2022 | | 1,162,111 | |
2023 | | 1,107,646 | |
2024 | | 1,028,838 | |
Thereafter | | 6,696,779 | |
Total | | $ | 11,731,268 | |
Refer to Note 3 – “Investments in real estate” to these unaudited consolidated financial statements for additional information about our owned real estate assets, which are the underlying assets under our operating leases.
Direct financing lease
As of June 30, 2020, we had one direct financing lease agreement for a parking structure with a remaining lease term of 72.4 years. The lessee has an option to purchase the underlying asset at fair market value during each of the 30-day periods commencing on the dates that are 15 years, 30 years, and impairment charges
North America
In January 2017, we completed74.5 years after the salerent commencement date of a vacant property at 6146 Nancy Ridge Drive locatedOctober 1, 2017. The components of net investment in our Sorrento Mesa submarketdirect financing lease are summarized in the table below (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Gross investment in direct financing lease | $ | 259,606 | | | $ | 260,457 | |
Less: unearned income | (219,312) | | | (220,541) | |
Less: allowance for credit losses | (2,839) | | | — | |
Net investment in direct financing lease | $ | 37,455 | | | $ | 39,916 | |
On January 1, 2020, we adopted an accounting standard that requires companies to estimate and recognize expected losses, rather than incurred losses, which results in the earlier recognition of San Diego for a purchase pricecredit losses even if the expected risk of $3.0 million andcredit loss is remote. This new accounting standard applies to our direct financing lease described above. Upon adoption of the new standard on January 1, 2020, we recognized a gaincredit loss adjustment related to this direct financing lease aggregating $2.2 million, as described in detail within the “Allowance for credit losses” section in Note 2 – “Summary of $270 thousand.
In June 2017, we recognized an impairment charge of $203 thousand on a 20,580 RSF property located in a non-cluster market. We had previously recognized an impairment of $1.6 million in December 2016 when management committedsignificant accounting policies” to the sale of the property and evaluated this asset under the held for sale impairment model. We completed the sale of this asset in July 2017 for a gross sale price of $800 thousand with no gain or loss.
Asia
During the year ended December 31, 2016, we completed sales of real estate investments in Asia in multiple transactions. At the date of closing of each sale, the related cumulative unrealized foreign currency translation loss was reclassified to net income. We calculated a related gain or loss on disposal of each asset using the sales proceeds in comparison to the net book value on the date of sale, costs to sell, and any related cumulative unrealized foreign currency translation adjustments. Prior to completing the sales, upon initial classification as held for sale, we considered the net book value, cost to sell and cumulative unrealized foreign currency translation losses in determining the carrying amount for evaluating each real estate asset for impairment.
On March 31, 2016, we evaluated two separate potential transactions to sell land parcels in our India submarket aggregating 28 acres. We determined that these land parcels met the criteria for classification as held for sale as of March 31, 2016, including among others, the following: (i) management’s having the authority committed to sell the real estate, and (ii) the sale was probable within one year. Upon classification as held for sale, we recognized an impairment charge of $29.0 million to lower the carrying amount of the real estate to its estimated fair value less cost to sell of approximately $10.2 million. In determining the carrying amount for evaluating the real estate for impairment, we considered our net book value, cost to sell, and a $10.6 million unrealized cumulative foreign currency translation loss.
unaudited consolidated financial statements. During the three months ended June 30, 2016,March 31, 2020, we sold one of these land parcels totaling five acres for a sales price of $7.5 million at no gain or loss. During the three months ended September 30, 2016, we sold the second of these land parcels totaling 23 acres for a sales price of $5.3 million at no gain or loss. In order to calculate the gain or loss on the sale, we consideredupdated our net book value, costassessment of the sale,current estimated credit loss related to this direct financing lease and cumulative foreign currency translationestimated the loss of $6.9to increase to $2.8 million as of June 30, 2016, and $3.8 million asMarch 31, 2020. As a result, we recognized an additional credit loss adjustment of September 30, 2016, which were each reclassified from accumulated other comprehensive income to net income upon$614 thousand classified within rental operations in our consolidated statement of operations for the disposition of each asset.
On April 22, 2016, we decided to monetize our remaining real estate investments located in Asia in order to invest capital into our highly leased value-creation pipeline. We determined that these investments met the criteria for classification as held for sale when we achieved the following, among other criteria: (i) committed to sell all of our real estate investments in Asia, (ii) obtained approval from our Board of Directors, and (iii) determined that the sale of each property/land parcel was probable within one year. During the threesix months ended June 30, 2016, upon classification as held for sale, we recognized an impairment charge of $154.1 million related2020. No adjustment to our remaining real estate investments located in Asia to lower the carrying costs of the real estate to its estimated fair value less cost to sell. In determining the carrying amount for evaluating the real estate for impairment, we considered our net book value, cost to sell, and a $40.2 million cumulative foreign currency translationcredit loss whichbalance was reclassified to net income upon the disposition of the assets. Impairment of real estate recognizedrequired during the three months ended June 30, 2016, of $156.1 million primarily relates2020. For further details, refer to the impairment charge of $154.1 million as described above, as well as an impairment charge of $2.0 million related to properties in North America.
| |
3. | Investments in real estate (continued) |
As of September 30, 2016, we had eight operating properties aggregating 1.2 million RSF and land parcels aggregating 168 acres remaining in Asia, which continued to meet the classification as held“Allowance for sale. During the three months ended September 30, 2016, we updated our assumptions of fair value for the remaining real estate investments located in Asia, and as a result, we recognized an additional impairment charge of $7.3 million.
During the three months ended December 31, 2016, we completed the sale of our remaining real estate investments in India consisting of six rental properties aggregating approximately 566,355 RSF and four land parcels aggregating approximately 168 acres for an aggregate sales price of $53.4 million with no gain or loss. In order to calculate the gain or loss on the sale, we considered our net book value, cost of the sale, and cumulative foreign currency translation loss of $39.4 million, which was reclassified from accumulated other comprehensive income to net income upon the disposition of each asset.
As a result of the completion of sales in India, we also liquidated legal entities through which we owned our real estate investments in India and reclassified the remaining cumulative foreign currency translation loss of $2.4 million related to the real estate investments in India into earnings during the three months ended March 31, 2017, upon completion of the liquidation.
As of September 30, 2017, our remaining real estate investments in Asia consist of two operating properties in China aggregating 634,328 RSF currently classified as held for sale. Cumulative unrealized foreign currency translation gains of approximately $1.1 million related to these real estate investments will be reclassified from accumulated other comprehensive income to net income upon completion of the sales of these two investments.
The fair value considered in our impairment of each investment was determined based on the following: (i) preliminary nonbinding letters of intent, (ii) significant other observable inputs, including the consideration of certain local government land acquisition programs, and (iii) discounted cash flow analyses.
We evaluated whether our real estate investments in Asia met the criteria for classification as discontinued operations, including, among others, (i) if the properties meet the held for sale criteria, and (ii) if the sale of these assets represents a strategic shift that has or will have a major effect on our operations and financial results. In our assessment, we considered, among other factors, that our total revenue from properties located in Asia was approximately 1.5% of our total consolidated revenues. At the time of evaluation, we also noted total assets related to our investment in Asia were approximately 2.5% of our total assets. Consequently, we concluded that the monetization of our real estate investments in Asia did not represent a strategic shift that will have a major effect in our operations and financial results and, therefore, did not meet the criteria for classification as discontinued operations.
Commitments to sell real estate
One of our tenants holds a fixed-price option to purchase from us the property that it currently leases. The purchase option is exercisable no later than December 29, 2017. The property subject to this purchase option is one of our older properties and has a net book value of $6.8 million as of September 30, 2017. The option is exercisable at a purchase price of $20.8 million, excluding any customary and ordinary closing costs. As of September 30, 2017, the purchase price option had not been exercised.
| |
4. | Investments in unconsolidated real estate joint ventures |
360 Longwood Avenue
We have a 27.5% ownership interest in an unconsolidated real estate joint venture that, as of June 30, 2017, owned a building aggregating 413,799 RSF in our Longwood Medical Area submarket of Greater Boston. In July 2017, the unconsolidated real estate joint venture completed the sale of the condominium interest representing 203,090 RSF, or 49%, of the property, to our anchor tenant, pursuant to a fixed-price purchase option in its original lease agreement executed in 2011. Additionally, the unconsolidated real estate joint venture repaid the existing secured construction loan. Our share of the gain recognized was $14.1 million, which is reflected in our equity in earnings of unconsolidated real estate joint ventures in our unaudited consolidated statement of income during the three months ended September 30, 2017.
In August 2017, the unconsolidated real estate joint venture entered into a mortgage loan agreement, secured by the remaining interest in the property, that included the following key terms and amounts outstanding as of September 30, 2017 (amounts represent 100% at the joint venture level, dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Maturity Date | | Stated Rate | | Interest Rate (1) | | Debt Balance (2) | | Outstanding Principal | | Remaining Commitments | | Total |
| 9/1/22 | (3) | | 3.32 | % | | | 3.62 | % | | $ | 94,086 |
| | $ | 95,000 |
| | $ | — |
| | $ | 95,000 |
|
| 9/1/22 | (3) | | L+1.85 | % | | | N/A |
| | $ | — |
| | $ | — |
| | $ | 17,000 |
| | $ | 17,000 |
|
| |
(1) | Represents interest rate including interest expense and amortization of loan fees. |
| |
(2) | Represents outstanding principal, net of unamortized deferred financing costs. |
| |
(3) | The unconsolidated real estate joint venture has two one-year options to extend the stated maturity date to September 1, 2024, subject to certain conditions. Additionally, the loan commitment balance excludes an earn-out advance provision that allows for incremental borrowings up to $48.0 million, subject to certain conditions. |
During the nine months ended September 30, 2017, we received a cash distribution of $38.8 million from the joint venture, primarily from the condominium sale and loan refinancing.
We evaluated our ownership interests in the 360 Longwood Avenue joint venture using the consolidation guidance, as describedcredit losses” section in Note 2 – “Summary of Significant Accounting Policies”significant accounting policies.”
Future lease payments to be received under the terms of our direct financing lease as of June 30, 2020, are outlined in the table below (in thousands):
| | | | | | | | |
Year | | Total |
2020 | | $ | 856 | |
2021 | | 1,756 | |
2022 | | 1,809 | |
2023 | | 1,863 | |
2024 | | 1,919 | |
Thereafter | | 251,403 | |
Total | | $ | 259,606 | |
Income from rentals
Our total income from rentals includes revenue related to agreements for the rental of our real estate, which primarily includes revenues subject to the lease accounting standard and to the revenue recognition accounting standard as shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
Income from rentals: | | | | | | | | |
Revenues subject to the lease accounting standard: | | | | | | | | |
Operating leases | | $ | 430,339 | | | $ | 358,461 | | | $ | 859,083 | | | $ | 701,802 | |
Direct financing lease | | 616 | | | 604 | | | 1,228 | | | 1,205 | |
Revenues subject to the lease accounting standard | | 430,955 | | | 359,065 | | | 860,311 | | | 703,007 | |
Revenues subject to the revenue recognition accounting standard | | 4,901 | | | 12,553 | | | 13,150 | | | 23,360 | |
Income from rentals | | $ | 435,856 | | | $ | 371,618 | | | $ | 873,461 | | | $ | 726,367 | |
Our revenues that are subject to the revenue recognition accounting standard and are classified in income from rentals consist primarily of short-term parking revenues that are not considered lease revenues under the lease accounting standard. Refer to the “Revenues” and “Recognition of revenue arising from contracts with customers” sections in Note 2 – “Summary of significant accounting policies” to these unaudited consolidated financial statements for additional information.
Residual value risk management strategy
Our leases do not have guarantees of residual value on the underlying assets. We manage risk associated with the residual value of our leased assets by (i) evaluating each potential acquisition of real estate to determine whether this entityit meets our business objective to invest primarily in high-demand markets with limited supply of available space, (ii) directly managing our leased properties, conducting frequent property inspections, proactively addressing potential maintenance issues before they arise, and timely resolving any occurring issues, (iii) carefully selecting our tenants and monitoring their credit quality throughout their respective lease terms, and (iv) focusing on making continuous improvements to our sustainability efforts and achievement of our sustainability goals for ground-up development of new buildings, which are targeting Gold or Platinum LEED® certification. Our environmentally focused design decisions, careful selection of construction materials, and continuous monitoring of our properties throughout their lives are expected to promote the durability of building infrastructure and enhance residual value of our properties.
Leases in which we are the lessee
Operating lease agreements
We have operating lease agreements in which we are the lessee consisting of ground and office leases. Certain of these leases have options to extend or terminate the contract terms upon meeting certain criteria. There are no notable restrictions or covenants imposed by the leases, nor guarantees of residual value.
Additionally, we recognize a right-of-use asset, which was classified within other assets in our consolidated balance sheets, and a related liability, which was classified within accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets, to account for our future obligations under ground and office lease arrangements in which we are the lessee. Refer to the “Lessee accounting” subsection of the “Lease accounting” section in Note 2 – “Summary of significant accounting policies” to these unaudited consolidated financial statements.
As of June 30, 2020, the present value of the remaining contractual payments aggregating $733.5 million, under our operating lease agreements, including our extension options that we are reasonably certain to exercise, was $291.7 million. Our corresponding operating lease right-of-use assets, adjusted for initial direct leasing costs and other consideration exchanged with the landlord prior to the commencement of the lease, aggregated $283.6 million. As of June 30, 2020, the weighted-average remaining lease term of operating leases in which we are the lessee was approximately 43 years, and the weighted-average discount rate was 5.17%. The weighted-average discount date is based on the incremental borrowing rate estimated for each lease, which is the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments.
Ground lease obligations as of June 30, 2020, included leases for 33 of our properties, which accounted for approximately 11% of our total number of properties. Excluding one ground lease that expires in 2036 related to one operating property with a net book value of $7.5 million as of June 30, 2020, our ground lease obligations have remaining lease terms ranging from approximately 33 years to 94 years, including extension options which we are reasonably certain to exercise.
The reconciliation of future lease payments, under non-cancelable operating ground and office leases in which we are the lessee, to the operating lease liability reflected in our consolidated balance sheet as of June 30, 2020, is presented in the table below (in thousands):
| | | | | | | | |
Year | | Total |
2020 | | $ | 7,650 | |
2021 | | 17,294 | |
2022 | | 17,843 | |
2023 | | 18,018 | |
2024 | | 18,262 | |
Thereafter | | 654,457 | |
Total future payments under our operating leases in which we are the lessee | | 733,524 | |
Effect of discounting | | (441,814) | |
Operating lease liability | | $ | 291,710 | |
Lessee operating costs
Operating lease costs relate to our ground and office leases in which we are the lessee. Ground leases generally require fixed annual rent payments and may also include escalation clauses and renewal options. Our operating lease obligations related to our office leases have remaining terms of up to 14 years, exclusive of extension options. For the three and six months ended June 30, 2020 and 2019, our costs for operating leases in which we are the lessee were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
Gross operating lease costs | | $ | 5,816 | | | $ | 4,870 | | | $ | 11,437 | | | $ | 9,424 | |
Capitalized lease costs | | (880) | | | (388) | | | (1,720) | | | (450) | |
Expenses for operating leases in which we are the lessee | | $ | 4,936 | | | $ | 4,482 | | | $ | 9,717 | | | $ | 8,974 | |
| | | | | | | | |
For the six months ended June 30, 2020 and 2019, amounts paid and classified as operating activities in our consolidated statements of cash flows for leases in which we are the lessee, were $10.5 million and $8.9 million, respectively.
6. CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
Cash, cash equivalents, and restricted cash consisted of the following characteristics of a VIE:
| |
1) | The entity does not have sufficient equity to finance its activities without additional subordinated financial support. |
This entity has significant equity and non-recourse financing in place to support operations as of SeptemberJune 30, 2017.2020, and December 31, 2019 (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Cash and cash equivalents | $ | 206,860 | | | $ | 189,681 | |
Restricted cash: | | | |
Funds held in trust under the terms of certain secured notes payable | 24,495 | | | 24,331 | |
Funds held in escrow related to construction projects and investing activities | 4,579 | | | 23,252 | |
Other | 5,606 | | | 5,425 | |
| 34,680 | | | 53,008 | |
Total | $ | 241,540 | | | $ | 242,689 | |
| |
2) | The entity is established with non-substantive voting rights. |
Our 27.5% ownership interest in 360 Longwood Avenue consists of an interest in a joint venture with a development partner. The joint venture with our development partner holds an interest in the property with an institutional investor. Our development partner was responsible for the day-to-day management of construction and development activities, and we are responsible for the day-to-day administrative operations of components of the property following development completion. At the property level, all major decisions (including the development plan, annual budget, leasing plan, and financing plan) require approval of all three investors. Although voting rights within the structure are disproportionate to the members’ economic interests, the activities of the ventures are conducted on behalf of all members, and therefore, the voting rights, while disproportionate, are substantive.
30
| |
3) | The equity holders, as a group, lack the characteristics of a controlling financial interest, as evidenced by lack of substantive kick-out rights or substantive participating rights. |
The non-managing members have significant participating rights, including in the day-to-day management of development activities and the participation in decisions related to the operations of the property.
Based on our evaluation above, our 360 Longwood Avenue joint venture does not meet the VIE criteria and does not qualify for evaluation under the variable interest model. Therefore, we evaluated this joint venture under the voting model. Under the voting model, we consolidate the entity if we determine that we, directly or indirectly, have greater than 50% of the voting shares and that noncontrolling equity holders do not have substantive participating rights. Our interest in the 360 Longwood Avenue joint venture is limited to 27.5%, and since we do not have other contractual rights that give us control of the entity, we account for this joint venture under the equity method of accounting.7. INVESTMENTS
We hold equity investments in certain publicly traded companies and privately held entities and limited partnerships primarily involved in the life science, technology, and technology industries. All of our equityagtech industries, further described below.
Investments in publicly traded companies
Our investments in activelypublicly traded public companies are considered available-for-saleclassified as investments with readily determinable fair values and are reflectedpresented at fair value in the accompanying unauditedour consolidated balance sheets, atwith changes in fair value. value classified in investment income in our consolidated statements of operations.
Investments in privately held companies
Our investments in privately held entities consist of (i) investments in entities that report NAV, and (ii) investments in privately held entities that do not report NAV. These investments are primarilyaccounted for as follows:
Investments in privately held entities that report NAV
Investments in entities that report NAV, such as our privately held investments in limited partnerships, are presented at fair value using NAV as a practical expedient, with changes in fair value recognized in net income. We use NAV reported by limited partnerships generally without adjustment, unless we are aware of information indicating that the NAV reported by a limited partnership does not accurately reflect the fair value of the investment at our reporting date.
Investments in privately held entities that do not report NAV
Investments in privately held entities that do not report NAV are carried at cost, adjusted for observable price changes and impairments, with changes recognized in net income. These investments continue to be evaluated on the basis of a qualitative assessment for indicators of impairment by utilizing the same monitoring criteria described in the “Investments” section in Note 2 – “Summary of significant accounting policies” to these unaudited consolidated financial statements, and by monitoring the presence of the following impairment indicators:
(i)a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee,
(ii)a significant adverse change in the regulatory, economic, or technological environment of the investee,
(iii)a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates, and/or
(iv)significant concerns about the investee’s ability to continue as a going concern.
If such indicators are present, we are required to estimate the investment’s fair value and immediately recognize an impairment charge in an amount equal to the investment’s carrying value in excess of its estimated fair value.
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 initially recognize our investment at cost method.
Investments in available-for-sale equity securities with gross unrealizedand adjust the carrying amount of the investment to recognize our share of the earnings or losses as of September 30, 2017, had been in a continuous unrealized loss position for less than 12 months. We have the ability and intentinvestee subsequent to hold these investments for a reasonable period of time sufficient for the recoverydate of our investment. We believehad no investments accounted for under the equity method as of June 30, 2020.
Investment income/loss recognition and classification
We classify unrealized and realized gains and losses on our investments within investment income in our consolidated statements of operations. Unrealized gains and losses represent:
(i)changes in fair value for investments in publicly traded companies,
(ii)changes in NAV, as a practical expedient to estimate fair value, for investments in privately held entities that these unrealized losses are temporary. Accordingly, there are no other-than-temporary impairmentsreport NAV, and/or
(iii)observable price changes of our investments in accumulatedprivately held entities that do not report NAV.
An observable price arises from an orderly transaction for an identical or similar investment of the same issuer. Observable price changes result from, among other comprehensive incomethings, equity transactions of the same issuer executed during the reporting period, including subsequent equity offerings or other reported equity transactions related to available-for-sale equity securities asthe same issuer. To determine whether these transactions are indicative of September 30, 2017,an observable price change, we evaluate, among other factors, whether these transactions have similar rights and December 31, 2016.obligations, including voting rights, distribution preferences, and conversion rights to the investments we hold.
7. INVESTMENTS (continued)
Realized gains and losses represent the difference between proceeds received upon disposition of investments and their historical or adjusted cost. Impairments are realized losses, which result in an adjusted cost, and represent charges to reduce the carrying values of investments in privately held entities that do not report NAV to their estimated fair value.
The following table summarizestables summarize our investments as of SeptemberJune 30, 2017,2020, and December 31, 20162019 (in thousands):
| | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | |
| Cost | | Unrealized Gains (Losses) | | Carrying Amount |
Investments: | | | | | |
Publicly traded companies | $ | 159,129 | | | $ | 262,841 | | | $ | 421,970 | |
Entities that report NAV | 302,954 | | | 218,602 | | | 521,556 | |
Entities that do not report NAV: | | | | | |
Entities with observable price changes | 48,565 | | | 74,708 | | | 123,273 | |
Entities without observable price changes | 251,666 | | | — | | | 251,666 | |
Total investments | $ | 762,314 | | | $ | 556,151 | | | $ | 1,318,465 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Available-for-sale equity securities, cost basis | $ | 55,433 |
| | $ | 41,392 |
|
Unrealized gains | 50,104 |
| | 25,076 |
|
Unrealized losses | (4,915 | ) | | (5,783 | ) |
Available-for-sale equity securities, at fair value | 100,622 |
| | 60,685 |
|
Investments accounted for under cost method | 384,640 |
| | 281,792 |
|
Total investments | $ | 485,262 |
| | $ | 342,477 |
|
| | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | |
| Cost | | Unrealized Gains (Losses) | | Carrying Amount |
Investments: | | | | | |
Publicly traded companies | $ | 148,109 | | | $ | 170,528 | | | $ | 318,637 | |
Entities that report NAV | 271,276 | | | 162,626 | | | 433,902 | |
Entities that do not report NAV: | | | | | |
Entities with observable price changes | 42,045 | | | 68,489 | | | 110,534 | |
Entities without observable price changes | 277,521 | | | — | | | 277,521 | |
Total investments | $ | 738,951 | | | $ | 401,643 | | | $ | 1,140,594 | |
The table below outlines
Cumulative adjustments recognized on investments in privately held entities that do not report NAV, held as of June 30, 2020, aggregated $74.7 million, which consisted of upward adjustments representing unrealized gains of $77.0 million and downward adjustments representing unrealized losses of $2.3 million.
During the componentssix months ended June 30, 2020, adjustments recognized on investments in privately held entities that do not report NAV aggregated $6.2 million, which consisted of our investment income classified within other incomeupward adjustments of $7.5 million primarily representing unrealized gains, and downward adjustments of $1.3 million representing unrealized losses. Additionally, we recognized an impairment charge of $24.5 million primarily related to four investments in privately held entities that do not report NAV. Refer to the accompanying“Investments” section of Note 2 – “Summary of significant accounting policies” to these unaudited consolidated financial statements of income (in thousands):for further details.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Investment gains | $ | 2,644 |
| | $ | 8,115 |
| | $ | 8,425 |
| | $ | 28,721 |
|
Investment losses | (1,599 | ) | | (3,849 | ) | | (6,418 | ) | | (10,670 | ) |
Investment income | $ | 1,045 |
| | $ | 4,266 |
| | $ | 2,007 |
| | $ | 18,051 |
|
Investment losses include impairments of approximately $4.5 million related to two investments for the nine months ended September 30, 2017 and $3.1 million related to oneOur investment income/loss for the three and ninesix months ended SeptemberJune 30, 2016. We reclassified $0.0 million, $(2.5) million, $8.5 million, and $18.6 million2020, consisted of previously recorded unrealized gains/(losses) from accumulated other comprehensive income to net incomethe following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2020 | | | | |
| | Unrealized Gains (Losses) | | Realized Gains (Losses) | | Total |
Investments held at June 30, 2020: | | | | | | |
Publicly traded companies | | $ | 113,669 | | | $ | — | | | $ | 113,669 | |
Entities that report NAV | | 52,985 | | | — | | | 52,985 | |
Entities that do not report NAV, held at period end | | 2,290 | | | (4,702) | | | (2,412) | |
Total investments held at June 30, 2020 | | 168,944 | | | (4,702) | | | 164,242 | |
Investment dispositions during the three months ended June 30, 2020: | | | | | | |
Recognized in the current period | | — | | | 20,415 | | | 20,415 | |
Previously recognized losses | | 2,708 | | | (2,708) | | | — | |
Total investment dispositions during the three months ended June 30, 2020 | | 2,708 | | | 17,707 | | | 20,415 | |
Investment income | | $ | 171,652 | | | $ | 13,005 | | | $ | 184,657 | |
7. INVESTMENTS (continued)
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2020 | | | | |
| | Unrealized Gains (Losses) | | Realized Gains (Losses) | | Total |
Investments held at June 30, 2020: | | | | | | |
Publicly traded companies | | $ | 100,916 | | | $ | — | | | $ | 100,916 | |
Entities that report NAV | | 55,976 | | | — | | | 55,976 | |
Entities that do not report NAV, held at period end | | 6,219 | | | (24,482) | | | (18,263) | |
Total investments held at June 30, 2020 | | 163,111 | | | (24,482) | | | 138,629 | |
Investment dispositions during the six months ended June 30, 2020: | | | | | | |
Recognized in the current period | | — | | | 24,207 | | | 24,207 | |
Previously recognized gains | | (8,603) | | | 8,603 | | | — | |
Total investment dispositions during the six months ended June 30, 2020 | | (8,603) | | | 32,810 | | | 24,207 | |
Investment income | | $ | 154,508 | | | $ | 8,328 | | | $ | 162,836 | |
Our investment income/loss for the three and ninesix months ended SeptemberJune 30, 2017 and September2019, consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | | | |
| | Unrealized Gains (Losses) | | Realized Gains (Losses) | | Total |
Investments held at June 30, 2019: | | | | | | |
Publicly traded companies | | $ | 15,028 | | | $ | — | | | $ | 15,028 | |
Entities that report NAV | | (3,168) | | | — | | | (3,168) | |
Entities that do not report NAV, held at period end | | 4,024 | | | — | | | 4,024 | |
Total investments held at June 30, 2019 | | 15,884 | | | — | | | 15,884 | |
Investment dispositions during the three months ended June 30, 2019: | | | | | | |
Recognized in the current period | | — | | | 5,616 | | | 5,616 | |
Previously recognized gains | | (4,826) | | | 4,826 | | | — | |
Total investment dispositions during the three months ended June 30, 2019 | | (4,826) | | | 10,442 | | | 5,616 | |
Investment income | | $ | 11,058 | | | $ | 10,442 | | | $ | 21,500 | |
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | | | |
| | Unrealized Gains (Losses) | | Realized Gains (Losses) | | Total |
Investments held at June 30, 2019: | | | | | | |
Publicly traded companies | | $ | 56,802 | | | $ | — | | | $ | 56,802 | |
Entities that report NAV | | 29,261 | | | — | | | 29,261 | |
Entities that do not report NAV, held at period end | | 9,464 | | | — | | | 9,464 | |
Total investments held at June 30, 2019 | | 95,527 | | | — | | | 95,527 | |
Investment dispositions during the six months ended June 30, 2019: | | | | | | |
Recognized in the current period | | — | | | 9,529 | | | 9,529 | |
Previously recognized gains | | (12,263) | | | 12,263 | | | — | |
Total investment dispositions during the six months ended June 30, 2019 | | (12,263) | | | 21,792 | | | 9,529 | |
Investment income | | $ | 83,264 | | | $ | 21,792 | | | $ | 105,056 | |
Investments in privately held entities that report NAV
We are committed to funding approximately $224.9 million for all investments in privately held entities primarily related to our investments in limited partnerships. Our funding commitments expire at various dates over the next 11 years, with a weighted-average expiration of 8.5 yearsas of June 30, 2016, respectively,2020. These investments are not redeemable by us, but we may receive distributions from these investments throughout their term. Our investments in conjunction with our dispositionsprivately held entities that report NAV generally have expected initial terms in excess of and impairment losses realized from available-for-sale securities.10 years. The weighted-average remaining term during which these investments are expected to be liquidated was 5.3 years as of June 30, 2020.
8. OTHER ASSETS
The following table summarizes the components of other assets as of September 30, 2017, and December 31, 2016 (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Acquired in-place leases | $ | 312,885 | | | $ | 281,650 | |
Deferred compensation plan | 27,753 | | | 22,225 | |
Deferred financing costs – $2.95 billion unsecured senior lines of credit | 13,628 | | | 13,064 | |
Deposits | 12,574 | | | 31,028 | |
Furniture, fixtures, and equipment | 31,027 | | | 23,031 | |
Net investment in direct financing lease | 37,455 | | | 39,916 | |
Notes receivable | 2,240 | | | 435 | |
Operating lease right-of-use asset | 283,637 | | | 264,709 | |
Other assets | 40,179 | | | 32,040 | |
Prepaid expenses | 14,442 | | | 11,324 | |
Property, plant, and equipment | 154,860 | | | 174,292 | |
Total | $ | 930,680 | | | $ | 893,714 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Acquired below-market ground leases | $ | 12,741 |
| | $ | 12,913 |
|
Acquired in-place leases | 66,188 |
| | 63,408 |
|
Deferred compensation plan | 14,832 |
| | 11,632 |
|
Deferred financing costs – $1.65 billion unsecured senior line of credit | 11,453 |
| | 14,239 |
|
Deposits | 3,592 |
| | 3,302 |
|
Furniture, fixtures, and equipment | 11,443 |
| | 12,839 |
|
Interest rate hedge assets | 3,733 |
| | 4,115 |
|
Net investment in direct financing lease | 38,057 |
| | 37,297 |
|
Notes receivable | 635 |
| | 694 |
|
Prepaid expenses | 11,329 |
| | 9,724 |
|
Property, plant, and equipment | 27,263 |
| | 19,891 |
|
Other assets | 11,790 |
| | 11,143 |
|
Total | $ | 213,056 |
| | $ | 201,197 |
|
9. FAIR VALUE MEASUREMENTS
The components of our net investment in direct financing lease as of September 30, 2017, and December 31, 2016, are summarized in the table below (in thousands):
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Gross investment in direct financing lease | | $ | 263,980 |
| | $ | 264,954 |
|
Less: unearned income | | (225,923 | ) | | (227,657 | ) |
Net investment in direct financing lease | | $ | 38,057 |
| | $ | 37,297 |
|
Future minimum lease payments to be received under our direct financing lease as of September 30, 2017, were as follows (in thousands):
|
| | | | |
Year | | Total |
2017 | | $ | 261 |
|
2018 | | 1,607 |
|
2019 | | 1,655 |
|
2020 | | 1,705 |
|
2021 | | 1,756 |
|
Thereafter | | 256,996 |
|
Total | | $ | 263,980 |
|
| |
7. | Fair value measurements (continued) |
| |
7. | Fair value measurements |
We provide 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 by 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 (Level 1), (ii) significant other observable inputs (Level 2), and (iii) significant unobservable inputs.inputs (Level 3). 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.curves. 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 no0 transfers between the levels in the fair value hierarchy during the ninesix months ended SeptemberJune 30, 20172020.
Assets and 2016.liabilities measured at fair value on a recurring basis
The following tables settable sets forth the assets and liabilities that we measure at fair value on a recurring basis by level in the fair value hierarchy (in thousands). There were no liabilities measured at fair value on a recurring basis as of June 30, 2020, and December 31, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Using | | | | |
Description | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Investments in publicly traded companies: | | | | | | | | |
As of June 30, 2020 | | $ | 421,970 | | | $ | 421,970 | | | $ | — | | | $ | — | |
As of December 31, 2019 | | $ | 318,637 | | | $ | 318,637 | | | $ | — | | | $ | — | |
Our investments in publicly traded companies represent investments with readily determinable fair values, and are carried at fair value, with changes in fair value classified in net income. We also hold investments in privately held entities, which consist of (i) investments that report NAV, and (ii) investments that do not report NAV, further described below.
Our investments in privately held entities that report NAV, such as our privately held investments in limited partnerships, are carried at fair value using NAV as a practical expedient, with changes in fair value classified in net income. As of June 30, 2020, and December 31, 2019, the carrying values of investments in privately held entities that report NAV aggregated $521.6 million and $433.9 million, respectively. These investments are excluded from the fair value hierarchy above as required by the fair value accounting standards. We estimate the fair value of each of our investments in limited partnerships based on the most recent NAV reported by each limited partnership. As a result, the determination of fair values of our investments in privately held entities that report NAV generally does not involve significant estimates, assumptions, or judgments.
9. FAIR VALUE MEASUREMENTS (continued)
Assets and liabilities measured at fair value on a nonrecurring basis
On January 1, 2020, we adopted a new accounting standard described within the “Investments” section in Note 2 – “Summary of significant accounting policies” to these unaudited consolidated financial statements. Beginning in 2020, in accordance with this new accounting standard, we provide fair value disclosures, including disclosures about the level in the fair value hierarchy, for our investments in privately held entities that do not report NAV, which were adjusted to their fair value by applying the measurement alternative described within the “Investments” section in Note 2 – “Summary of significant accounting policies” to these unaudited consolidated financial statements.
The following table sets forth the assets measured at fair value on a nonrecurring basis by level within the fair value hierarchy as of SeptemberJune 30, 2017,2020 (in thousands). These investments were measured at various times during the period from January 1, 2018, to June 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Using | | | | | | |
Description | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Investments in privately held entities that do not report NAV | | $ | 140,089 | | | $ | — | | | $ | 123,273 | | (1) | | $ | 16,816 | | (2) |
| | | | | | | | | | |
(1)This balance represents the total carrying amount of our equity investments in privately held entities with observable price changes, included in our total investments balance of $1.3 billion in our consolidated balance sheets as of June 30, 2020. For more information, refer to Note 7 – “Investments” to these unaudited consolidated financial statements.
(2)This amount is included in the $251.7 million balance of investments in privately held entities without observable price changes disclosed in Note 7 – “Investments” to these unaudited consolidated financial statements, and December 31, 2016 (in thousands):represents the carrying amount of investments in privately held entities that do not report NAV for which impairments have been recognized in accordance with the measurement alternative guidance described within the “Investments” section in Note 2 – “Summary of significant accounting policies.”
|
| | | | | | | | | | | | | | | | |
| | | | September 30, 2017 |
Description | | Total | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
Assets: | | | | | | | | |
Available-for-sale equity securities | | $ | 100,622 |
| | $ | 100,622 |
| | $ | — |
| | $ | — |
|
Interest rate hedge agreements | | $ | 3,733 |
| | $ | — |
| | $ | 3,733 |
| | $ | — |
|
Liabilities: | | | | | | | | |
Interest rate hedge agreements | | $ | 583 |
| | $ | — |
| | $ | 583 |
| | $ | — |
|
Our investments in privately held entities that do not report NAV are measured at cost, adjusted for observable price changes and impairments, with changes recognized in net income. These investments are evaluated on a nonrecurring basis based on the observable price changes in orderly transactions for the identical or similar investment of the same issuer. Further adjustments are not made until another observable transaction occurs. Therefore, the determination of fair values of our investments in privately held entities that do not report NAV does not involve significant estimates and assumptions or subjective and complex judgments. |
| | | | | | | | | | | | | | | | |
| | | | December 31, 2016 |
Description | | Total | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
Assets: | | | | | | | | |
Available-for-sale equity securities | | $ | 60,685 |
| | $ | 60,685 |
| | $ | — |
| | $ | — |
|
Interest rate hedge agreements | | $ | 4,115 |
| | $ | — |
| | $ | 4,115 |
| | $ | — |
|
Liabilities: | | | | | | | | |
Interest rate hedge agreements | | $ | 3,587 |
| | $ | — |
| | $ | 3,587 |
| | $ | — |
|
We also subject our investments in privately held entities that do not report NAV to a qualitative assessment for indicators of impairment. If indicators of impairment are present, we are required to estimate the investment’s fair value and immediately recognize an impairment charge in an amount equal to the investment’s carrying value in excess of its estimated fair value. During the six months ended June 30, 2020, we recognized an impairment charge of $24.5 million primarily related to four investments in privately held entities that do not report NAV.
The estimates of fair value typically incorporate valuation techniques that include an income approach reflecting a discounted cash flow analysis, and a market approach that includes a comparative analysis of acquisition multiples and pricing multiples generated by market participants. In certain instances, we may use multiple valuation techniques for a particular investment and estimate its fair value based on an average of multiple valuation results.
Refer to the “Formation of a consolidated real estate joint venture, impairment of an unconsolidated real estate joint venture, and sales of partial interests” section in Note 4 – “Consolidated and unconsolidated real estate joint ventures,” Note 7 – “Investments,” and Note 15 – “Assets classified as held for sale” to these unaudited consolidated financial statements for further discussion on assets and liabilities measured at fair value on a nonrecurring basis.
The carrying values of cash and cash equivalents, restricted cash, tenant receivables, other assets,deposits, notes receivable, accounts payable, accrued expenses, and tenant security depositsother short-term liabilities approximate their fair value. Our available-for-sale equity securities and our interest rate hedge agreements have been recognized at fair value. Refer to Note 5 – “Investments” and Note 9 – “Interest Rate Hedge Agreements” to these unaudited consolidated financial statements for further details.
The fair values of our secured notes payable, unsecured senior notes payable, $1.65and our $2.2 billion and $750 million unsecured senior linelines of credit and unsecured senior bank term loans were estimated using widely accepted valuation techniques, including discounted cash flow analyses using 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.
| |
7. | Fair value measurements (continued) |
9. FAIR VALUE MEASUREMENTS (continued)
As of SeptemberJune 30, 2017,2020, and December 31, 2016,2019, the book and estimated fair values of our available-for-sale equity securities, interest rate hedge agreements, secured notes payable, unsecured senior notes payable, and $2.2 billion and $750 million unsecured senior linelines of credit and unsecured senior bank term loans were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | | | |
| Book Value | | Fair Value Hierarchy | | | | | | Estimated Fair Value |
| | | Level 1 | | Level 2 | | Level 3 | | |
Liabilities: | | | | | | | | | |
Secured notes payable | $ | 344,784 | | | $ | — | | | $ | 371,062 | | | $ | — | | | $ | 371,062 | |
Unsecured senior notes payable | $ | 6,738,486 | | | $ | — | | | $ | 7,859,363 | | | $ | — | | | $ | 7,859,363 | |
$2.2 billion unsecured senior line of credit | $ | 440,000 | | | $ | — | | | $ | 436,167 | | | $ | — | | | $ | 436,167 | |
$750 million unsecured senior line of credit | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | |
| Book Value | | Fair Value Hierarchy | | | | | | Estimated Fair Value |
| | | Level 1 | | Level 2 | | Level 3 | | |
Liabilities: | | | | | | | | | |
Secured notes payable | $ | 349,352 | | | $ | — | | | $ | 363,344 | | | $ | — | | | $ | 363,344 | |
Unsecured senior notes payable | $ | 6,044,127 | | | $ | — | | | $ | 6,571,668 | | | $ | — | | | $ | 6,571,668 | |
$2.2 billion unsecured senior line of credit | $ | 384,000 | | | $ | — | | | $ | 383,928 | | | $ | — | | | $ | 383,928 | |
|
| | | | | | | | | | | | | | | |
| September 30, 2017 |
| December 31, 2016 |
| Book Value |
| Fair Value |
| Book Value |
| Fair Value |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale equity securities | $ | 100,622 |
|
| $ | 100,622 |
|
| $ | 60,685 |
|
| $ | 60,685 |
|
Interest rate hedge agreements | $ | 3,733 |
|
| $ | 3,733 |
|
| $ | 4,115 |
|
| $ | 4,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Interest rate hedge agreements | $ | 583 |
|
| $ | 583 |
|
| $ | 3,587 |
|
| $ | 3,587 |
|
Secured notes payable | $ | 1,153,890 |
| | $ | 1,156,769 |
| | $ | 1,011,292 |
| | $ | 1,016,782 |
|
Unsecured senior notes payable | $ | 2,801,290 |
| | $ | 2,943,568 |
| | $ | 2,378,262 |
| | $ | 2,431,470 |
|
Unsecured senior line of credit | $ | 314,000 |
| | $ | 313,993 |
| | $ | 28,000 |
| | $ | 27,998 |
|
Unsecured senior bank term loans | $ | 547,860 |
| | $ | 550,371 |
| | $ | 746,471 |
| | $ | 750,422 |
|
Nonrecurring fair value measurements10. SECURED AND UNSECURED SENIOR DEBT
Refer The following table summarizes our outstanding indebtedness and respective principal payments as of June 30, 2020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stated Rate | | Interest Rate (1) | | Maturity Date (2) | | Principal Payments Remaining for the Periods Ending December 31, | | | | | | | | | | | | | | Unamortized (Deferred Financing Cost), (Discount) Premium | | | |
Debt | | | | | | | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Principal | | | | Total | |
Secured notes payable | | | | | | | | | | | | | | | | | | | | | | | | | |
San Diego | | 4.66 | % | | 4.90 | % | | 1/1/23 | | $ | 893 | | | $ | 1,852 | | | $ | 1,942 | | | $ | 26,259 | | | $ | — | | | $ | — | | | $ | 30,946 | | | $ | (164) | | | $ | 30,782 | | |
Greater Boston | | 3.93 | % | | 3.19 | | | 3/10/23 | | 790 | | | 1,628 | | | 1,693 | | | 74,517 | | | — | | | — | | | 78,628 | | | 1,503 | | | 80,131 | | |
Greater Boston | | 4.82 | % | | 3.40 | | | 2/6/24 | | 1,623 | | | 3,394 | | | 3,564 | | | 3,742 | | | 183,527 | | | — | | | 195,850 | | | 9,688 | | | 205,538 | | |
San Francisco | | 4.14 | % | | 4.42 | | | 7/1/26 | | — | | | — | | | — | | | — | | | — | | | 28,200 | | | 28,200 | | | (595) | | | 27,605 | | |
San Francisco | | 6.50 | % | | 6.50 | | | 7/1/36 | | 25 | | | 26 | | | 28 | | | 30 | | | 32 | | | 587 | | | 728 | | | — | | | 728 | | |
Secured debt weighted-average interest rate/subtotal | | 4.55 | % | | 3.57 | | | | | 3,331 | | | 6,900 | | | 7,227 | | | 104,548 | | | 183,559 | | | 28,787 | | | 334,352 | | | 10,432 | | | 344,784 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial paper program(3) | | N/A | | N/A | (3) | N/A | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
$750 million unsecured senior line of credit(4) | | L+1.05 | % | | N/A | (4) | 4/14/22 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
$2.2 billion unsecured senior line of credit | | L+0.825 | % | | 1.33 | | | 1/28/24 | | — | | | — | | | — | | | — | | | 440,000 | | | — | | | 440,000 | | | — | | | 440,000 | | |
Unsecured senior notes payable | | 3.90 | % | | 4.04 | | | 6/15/23 | | — | | | — | | | — | | | 500,000 | | | — | | | — | | | 500,000 | | | (1,769) | | | 498,231 | | |
Unsecured senior notes payable – green bond | | 4.00 | % | | 4.03 | | | 1/15/24 | | — | | | — | | | — | | | — | | | 650,000 | | | — | | | 650,000 | | | (449) | | | 649,551 | | |
Unsecured senior notes payable | | 3.45 | % | | 3.62 | | | 4/30/25 | | — | | | — | | | — | | | — | | | — | | | 600,000 | | | 600,000 | | | (4,236) | | | 595,764 | | |
Unsecured senior notes payable | | 4.30 | % | | 4.50 | | | 1/15/26 | | — | | | — | | | — | | | — | | | — | | | 300,000 | | | 300,000 | | | (2,704) | | | 297,296 | | |
Unsecured senior notes payable – green bond | | 3.80 | % | | 3.96 | | | 4/15/26 | | — | | | — | | | — | | | — | | | — | | | 350,000 | | | 350,000 | | | (2,840) | | | 347,160 | | |
Unsecured senior notes payable | | 3.95 | % | | 4.13 | | | 1/15/27 | | — | | | — | | | — | | | — | | | — | | | 350,000 | | | 350,000 | | | (3,308) | | | 346,692 | | |
Unsecured senior notes payable | | 3.95 | % | | 4.07 | | | 1/15/28 | | — | | | — | | | — | | | — | | | — | | | 425,000 | | | 425,000 | | | (3,194) | | | 421,806 | | |
Unsecured senior notes payable | | 4.50 | % | | 4.60 | | | 7/30/29 | | — | | | — | | | — | | | — | | | — | | | 300,000 | | | 300,000 | | | (2,017) | | | 297,983 | | |
Unsecured senior notes payable | | 2.75 | % | | 2.87 | | | 12/15/29 | | — | | | — | | | — | | | — | | | — | | | 400,000 | | | 400,000 | | | (3,889) | | | 396,111 | | |
Unsecured senior notes payable | | 4.70 | % | | 4.81 | | | 7/1/30 | | — | | | — | | | — | | | — | | | — | | | 450,000 | | | 450,000 | | | (3,719) | | | 446,281 | | |
Unsecured senior notes payable | | 4.90 | % | | 5.05 | | | 12/15/30 | | — | | | — | | | — | | | — | | | — | | | 700,000 | | | 700,000 | | | (8,230) | | | 691,770 | | |
Unsecured senior notes payable | | 3.38 | % | | 3.48 | | | 8/15/31 | | — | | | — | | | — | | | — | | | — | | | 750,000 | | | 750,000 | | | (7,212) | | | 742,788 | | |
Unsecured senior notes payable | | 4.85 | % | | 4.93 | | | 4/15/49 | | — | | | — | | | — | | | — | | | — | | | 300,000 | | | 300,000 | | | (3,389) | | | 296,611 | | |
Unsecured senior notes payable | | 4.00 | % | | 3.91 | | | 2/1/50 | | — | | | — | | | — | | | — | | | — | | | 700,000 | | | 700,000 | | | 10,442 | | | 710,442 | | |
Unsecured debt weighted average/subtotal | | | | 3.93 | | | | | — | | | — | | | — | | | 500,000 | | | 1,090,000 | | | 5,625,000 | | | 7,215,000 | | | (36,514) | | | 7,178,486 | | |
Weighted-average interest rate/total | | | | 3.91 | % | | | | $ | 3,331 | | | $ | 6,900 | | | $ | 7,227 | | | $ | 604,548 | | | $ | 1,273,559 | | | $ | 5,653,787 | | | $ | 7,549,352 | | | $ | (26,082) | | | $ | 7,523,270 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
(1)Represents the weighted-average interest rate as of the end of the applicable period, including amortization of loan fees, amortization of debt premiums (discounts), and other bank fees.
(2)Reflects any extension options that we control.
(3)Under our commercial paper program, we have the ability to “Saleissue up to $1.0 billion in commercial paper notes bearing interest at short-term fixed rates, generally with a maturity of Real Estate Assets30 days or less and Impairment Charges”with a maximum maturity of 397 days from the date of issuance. Borrowings under the program will be used to fund short-term capital needs and are backed by our $2.2 billion unsecured senior line of credit. In the event we are unable to issue commercial paper notes or refinance outstanding borrowings under terms equal to or more favorable than those under the $2.2 billion unsecured senior line of credit, we expect to borrow under the $2.2 billion unsecured senior line of credit at L+0.825%. The commercial paper notes sold during the three months ended June 30, 2020, were issued at a weighted-average yield to maturity of 0.79%.
(4)During the three months ended June 30, 2020, we did not draw on our $750 million unsecured senior line of credit. Pursuant to the terms of the $750 million unsecured senior line of credit agreement, the outstanding commitments will be reduced by 100% of net proceeds from the issuance of new corporate debt and 50% of the net proceeds from the settlement of our forward equity sales agreements entered into in Note 3 – “InvestmentsJuly 2020. As of the date of this report, none of our forward equity sales agreements entered into in Real Estate,” Note 5 – “Investments,” and Note 14 – “Assets Classified as Held for Sale” to these unaudited consolidated financial statements for further discussion.July 2020 have been settled.
| |
8. | Secured and unsecured senior debt |
10. SECURED AND UNSECURED SENIOR DEBT (continued)
The following table summarizes our secured and unsecured senior debt as of SeptemberJune 30, 20172020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-Rate Debt | | Variable-Rate Debt | | | | | | Weighted-Average | | |
| | | | | | | | | Interest | | Remaining Term (in years) |
| | | | | Total | | Percentage | | Rate(1) | | |
Secured notes payable | $ | 344,784 | | | $ | — | | | $ | 344,784 | | | 4.6 | % | | 3.57 | % | | 3.5 |
Unsecured senior notes payable | 6,738,486 | | | — | | | 6,738,486 | | | 89.6 | | | 4.10 | | | 10.6 |
Unsecured senior lines of credit(2) | — | | | 440,000 | | | 440,000 | | | 5.8 | | | 1.33 | | | 3.6 |
Total/weighted average | $ | 7,083,270 | | | $ | 440,000 | | | $ | 7,523,270 | | | 100.0 | % | | 3.91 | % | | 9.9 |
Percentage of total debt | 94 | % | | 6 | % | | 100 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Fixed-Rate/Hedged Variable-Rate Debt | | Unhedged Variable-Rate Debt | | | | | | Weighted-Average |
| | | | | | | Interest | | Remaining Term (in years) |
| | | Total | | Percentage | | Rate (1) | |
Secured notes payable | $ | 902,207 |
| | $ | 251,683 |
| | $ | 1,153,890 |
| | 24.0 | % | | 3.80 | % | | 2.8 |
Unsecured senior notes payable | 2,801,290 |
| | — |
| | 2,801,290 |
| | 58.2 |
| | 4.16 |
| | 7.0 |
$1.65 billion unsecured senior line of credit | — |
| | 314,000 |
| | 314,000 |
| | 6.5 |
| | 2.00 |
| | 4.1 |
2019 Unsecured Senior Bank Term Loan | 199,543 |
| | — |
| | 199,543 |
| | 4.1 |
| | 2.84 |
| | 1.3 |
2021 Unsecured Senior Bank Term Loan | 348,317 |
| | — |
| | 348,317 |
| | 7.2 |
| | 2.56 |
| | 3.3 |
Total/weighted average | $ | 4,251,357 |
| | $ | 565,683 |
| | $ | 4,817,040 |
| | 100.0 | % | | 3.76 | % | | 5.3 |
Percentage of total debt | 88 | % | | 12 | % | | 100 | % | | | | | | |
| |
(1) | (1)Represents the weighted-average interest rate as of the end of the applicable period, including expense/income related to our interest rate hedge agreements, amortization of loan fees, amortization of debt premiums (discounts), and other bank fees. |
| |
8. | Secured and unsecured senior debt (continued) |
The following table summarizes our outstanding indebtedness as of Septemberthe end of the applicable period, including expense/income related to the amortization of loan fees, amortization of debt premiums (discounts), and other bank fees.
(2)Includes our commercial paper program, which had 0 outstanding balance as of June 30, 2017 (dollars in thousands):2020.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Stated Rate | | Interest Rate (1) | | Maturity | | | | | Unamortized (Deferred Financing Cost), (Discount)/Premium | | |
Debt | | | | Date (2) | | | Principal | | | Total |
Secured notes payable | | | | | | | | | | | | | |
Greater Boston | | L+1.35 | % | | 2.99 | % | | 8/23/18 | | | $ | 211,940 |
| | $ | (660 | ) | | $ | 211,280 |
|
Greater Boston | | L+1.50 | % | | 3.09 |
| | 1/28/19 | (3) | | 317,979 |
| | (1,595 | ) | | 316,384 |
|
Greater Boston | | L+2.00 | % | | 3.89 |
| | 4/20/19 | (3) | | 179,764 |
| | (2,104 | ) | | 177,660 |
|
Greater Boston, Seattle, and Maryland | | 7.75 | % | | 8.17 |
| | 4/1/20 | | | 108,940 |
| | (835 | ) | | 108,105 |
|
San Diego | | 4.66 | % | | 5.03 |
| | 1/1/23 | | | 35,370 |
| | (345 | ) | | 35,025 |
|
Greater Boston | | 3.93 | % | | 3.20 |
| | 3/10/23 | | | 82,000 |
| | 2,957 |
| | 84,957 |
|
Greater Boston | | 4.82 | % | | 3.40 |
| | 2/6/24 | | | 203,000 |
| | 16,706 |
| | 219,706 |
|
San Francisco | | 6.50 | % | | 6.78 |
| | 7/1/36 | | | 773 |
| | — |
| | 773 |
|
Secured debt weighted-average interest rate/subtotal | | 3.80 | % | | 3.80 |
| | | | | 1,139,766 |
| | 14,124 |
| | 1,153,890 |
|
| | | | | | | | | | | | | |
2019 Unsecured Senior Bank Term Loan | | L+1.20 | % | | 2.84 |
| | 1/3/19 | | | 200,000 |
| | (457 | ) | | 199,543 |
|
2021 Unsecured Senior Bank Term Loan | | L+1.10 | % | | 2.56 |
| | 1/15/21 | | | 350,000 |
| | (1,683 | ) | | 348,317 |
|
$1.65 billion unsecured senior line of credit | | L+1.00 | % | | 2.00 |
| | 10/29/21 | | | 314,000 |
| | N/A |
| | 314,000 |
|
Unsecured senior notes payable | | 2.75 | % | | 2.96 |
| | 1/15/20 | | | 400,000 |
| | (1,822 | ) | | 398,178 |
|
Unsecured senior notes payable | | 4.60 | % | | 4.75 |
| | 4/1/22 | | | 550,000 |
| | (2,922 | ) | | 547,078 |
|
Unsecured senior notes payable | | 3.90 | % | | 4.04 |
| | 6/15/23 | | | 500,000 |
| | (3,381 | ) | | 496,619 |
|
Unsecured senior notes payable | | 4.30 | % | | 4.52 |
| | 1/15/26 | | | 300,000 |
| | (3,998 | ) | | 296,002 |
|
Unsecured senior notes payable | | 3.95 | % | | 4.14 |
| | 1/15/27 | | | 350,000 |
| | (4,638 | ) | | 345,362 |
|
Unsecured senior notes payable | | 3.95 | % | | 4.09 |
| | 1/15/28 | | | 425,000 |
| | (4,334 | ) | | 420,666 |
|
Unsecured senior notes payable | | 4.50 | % | | 4.62 |
| | 7/30/29 | | | 300,000 |
| | (2,615 | ) | | 297,385 |
|
Unsecured debt weighted average/subtotal | | | | 3.75 |
| | | | | 3,689,000 |
| | (25,850 | ) | | 3,663,150 |
|
Weighted-average interest rate/total | | | | 3.76 | % | | | | | $ | 4,828,766 |
| | $ | (11,726 | ) | | $ | 4,817,040 |
|
| |
(1) | Represents the weighted-average interest rate as of the end of the applicable period, including expense/income related to our interest rate hedge agreements, amortization of loan fees, amortization of debt premiums (discounts), and other bank fees. |
| |
(2) | Reflects any extension options that we control. |
| |
(3) | Refer to “Secured Construction Loans” below for options to extend maturity dates. |
3.95% Unsecured senior notes payable due in 2028
In March 2017,2020, we completed a $425.0 million publican offering of our$700.0 million of unsecured senior notes payable due on JanuaryDecember 15, 2028,2030, at a statedan interest rate of 3.95%. The unsecured senior notes payable were priced at 99.855% of the principal amount with a yield to maturity of 3.967%. The unsecured senior notes payable are unsecured obligations of the Company and are fully and unconditionally guaranteed by Alexandria Real Estate Equities, L.P., a 100% owned subsidiary of the Company. The unsecured senior notes payable rank equally in right of payment with all other unsecured senior indebtedness. However, the unsecured senior notes payable are subordinate to existing and future mortgages and other secured indebtedness (to the extent of the value of the collateral securing such indebtedness) and to all existing and future preferred equity and liabilities, whether secured or unsecured, of the Company’s subsidiaries, other than Alexandria Real Estate Equities, L.P. We used the4.90% for net proceeds after discounts and issuance costs, of $420.5 million$691.6 million. The net proceeds were used to repayreduce the outstanding borrowingsindebtedness under our $1.65$2.2 billion unsecured senior line of credit.
Repayment of unsecured senior bank term loans
During the three months ended March 31, 2017, we completed a partial principal repayment of $200 million of our 2019 Unsecured Senior Bank Term Loan, reducing the total outstanding balance from $400 million to $200 million, and recognized a loss of $670 thousand related to the write-off of unamortized loan fees.
Amendment of unsecured senior line of credit and commercial paper program. Since January 1, 2019, we have completed the issuances of $3.4 billion in unsecured senior bank term loansnotes, with a weighted-average interest rate of 3.95% and a weighted-average maturity as of June 30, 2020, of 15.2 years.
On July 29, 2016,$1.0 billion commercial paper program
In September 2019, we amendedestablished a commercial paper program, which received credit ratings of A-2 from S&P Global Ratings and Prime-2 from Moody’s Investors Service. Under this program, we have the ability to issue up to $750.0 million of commercial paper notes generally with a maturity of 30 days or less and with a maximum maturity of 397 days from the date of issuance. Our commercial paper program is backed by our $2.2 billion unsecured senior line of credit, and completedat all times we expect to retain a partial principalminimum undrawn amount of borrowing capacity under our $2.2 billion unsecured senior line of credit equal to any outstanding balance on our commercial paper program. The net proceeds from the issuances of the notes are expected to be used for general working capital and other general corporate purposes. General corporate purposes may include, but are not limited to, the repayment of $200other debt and selective development, redevelopment, or acquisition of properties.
In March 2020, we increased the aggregate amount we may issue from time to time under our commercial paper program from $750.0 million to $1.0 billion. During the three months ended June 30, 2020, the commercial paper notes were issued at a weighted-average yield to maturity of 0.79%. As of June 30, 2020, we had 0 outstanding borrowings under our commercial paper program.
Additional $750 million unsecured senior line of credit
In April 2020, we closed an additional unsecured senior line of credit with $750.0 million of available commitments. The new unsecured senior line of credit matures on April 14, 2022, and bears interest at LIBOR plus 1.05%. In addition to the cost of borrowing, this line of credit is subject to an annual facility fee of 0.20% based on the aggregate commitment outstanding.
Pursuant to the terms of the new line of credit agreement, the outstanding commitments and any outstanding borrowings from the $750 million unsecured senior line of credit will be reduced by 100% of net cash proceeds from certain new debt transactions and 50% of net cash proceeds from new equity offerings as defined in the agreement. Therefore, upon full or partial settlement of our 2019 Unsecured Senior Bank Term Loan reducingforward equity sales agreements entered into in July 2020, described further under the total“Common equity transactions” section of Note 13 – “Stockholders’ equity” to these unaudited consolidated financial statements, the outstanding balancecommitments and any outstanding borrowings from $600the $750 million to $400 million, and recognized an aggregate loss on early extinguishmentunsecured senior line of debtcredit will be reduced by 50% of $3.2 millionnet proceeds received from the settlement related to the write-offaforementioned agreements entered into in July 2020. As of unamortized loan fees.
| |
8. | Secured and unsecured senior debt (continued) |
Secured construction loans
The following table summarizesthe date of this report, none of our secured construction loansforward equity sales agreements entered into in July 2020 have been settled. Including our existing $2.2 billion unsecured senior line of credit, we have $2.95 billion in aggregate commitments under our unsecured senior lines of credit as of SeptemberJune 30, 2017 (dollars in thousands):2020.
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| | | | | | | | | | | | | | | | | | | | | |
Property/Market | | Stated Rate | | Maturity Date | | Outstanding Principal Balance | | Remaining Commitments | | Aggregate Commitments |
75/125 Binney Street/Greater Boston | | | L+1.35 | % | | | 8/23/18 | | | $ | 211,940 |
| | $ | — |
| | $ | 211,940 |
|
50 and 60 Binney Street/Greater Boston | | | L+1.50 | % | | | 1/28/19 | (1) | | 317,979 |
| | 32,021 |
| | 350,000 |
|
100 Binney Street/Greater Boston | | | L+2.00 | % | (2) | | 4/20/19 | (3) | | 179,764 |
| | 124,517 |
| | 304,281 |
|
| | | | | | | | | | $ | 709,683 |
| | $ | 156,538 |
| | $ | 866,221 |
|
| |
(1) | We have two one-year options to extend the stated maturity date to January 28, 2021, subject to certain conditions. |
| |
(2) | Refer to the interest rate cap agreements in Note 9 – “Interest Rate Hedge Agreements.” |
| |
(3) | We have two one-year options to extend the stated maturity date to April 20, 2021, subject to certain conditions. |
Interest expense
The following table summarizes interest expense for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Gross interest | $ | 75,807 | | | $ | 64,553 | | | $ | 146,226 | | | $ | 122,162 | |
Capitalized interest | (30,793) | | | (21,674) | | | (55,473) | | | (40,183) | |
Interest expense | $ | 45,014 | | | $ | 42,879 | | | $ | 90,753 | | | $ | 81,979 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Gross interest | $ | 48,123 |
| | $ | 40,753 |
| | $ | 137,888 |
| | $ | 116,520 |
|
Capitalized interest | (17,092 | ) | | (14,903 | ) | | (45,325 | ) | | (40,790 | ) |
Interest expense | $ | 31,031 |
| | $ | 25,850 |
| | $ | 92,563 |
| | $ | 75,730 |
|
11. ACCOUNTS PAYABLE, ACCRUED EXPENSES, AND OTHER LIABILITIES
| |
9. | Interest rate hedge agreements |
We use interest rate derivatives to hedge the variable cash flows associated with certain of our existing LIBOR-based variable-rate debt, including our $1.65 billion unsecured senior line of credit, unsecured senior bank term loans, and secured notes payable, and to manage our exposure to interest rate volatility. Our derivative instruments include interest rate swaps and interest rate caps.
In our interest rate hedge agreements, the ineffective portion of the change in fair value is required to be recognized directly in earnings. During the nine months ended September 30, 2017 and 2016, our interest rate hedge 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 hedge agreements that are designated and that qualify as cash flow hedges are classified in accumulated other comprehensive income. Amounts classified in accumulated other comprehensive income 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 $1.4 million in accumulated other comprehensive income to earnings as a decrease of interest expense. As of September 30, 2017, and December 31, 2016, the fair values of our interest rate swap and cap agreements aggregating an asset balance were classified in other assets, and the fair value of our interest rate swap agreements 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 7 – “Fair Value Measurements” to these unaudited consolidated financial statements for further details. Under our interest rate hedge agreements, we have no collateral posting requirements.
We have agreements with certain of our derivative counterparties that contain a provision wherein we could be declared in default on our derivative obligations (i) if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness or (ii) if we default on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender. If we had breached any of these provisions as of September 30, 2017, we could have been required to settle our obligations under the agreements at their termination value of $352 thousand.
We had the following outstanding interest rate hedge agreements that were designated as cash flow hedges of interest rate risk as of September 30, 2017 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Rate Hedge Type | | | | | | Number of Contracts | | Weighted-Average Interest Pay/ Cap Rate(1) | | Fair Value as of 9/30/17 | | Notional Amount in Effect as of |
| Effective Date | | Maturity Date | | | | | 9/30/17 | | 12/31/17 | | 12/31/18 | | 12/31/19 |
Swap | | March 31, 2017 | | March 31, 2018 | | 4 | | 0.78% | | $ | 692 |
| | $ | 250,000 |
| | $ | 250,000 |
| | $ | — |
| | $ | — |
|
Swap | | March 31, 2017 | | March 31, 2018 | | 11 | | 1.51% | | (554 | ) | | 650,000 |
| | 650,000 |
| | — |
| | — |
|
Cap | | July 29, 2016 | | April 20, 2019 | | 2 | | 2.00% | | 66 |
| | 108,000 |
| | 126,000 |
| | 150,000 |
| | — |
|
Swap | | March 29, 2018 | | March 31, 2019 | | 8 | | 1.16% | | 2,975 |
| | — |
| | — |
| | 600,000 |
| | — |
|
Swap | | March 29, 2019 | | March 31, 2020 | | 1 | | 1.89% | | (29 | ) |
| — |
| | — |
| | — |
| | 100,000 |
|
Total | | | | | | | | | | $ | 3,150 |
| | $ | 1,008,000 |
| | $ | 1,026,000 |
| | $ | 750,000 |
| | $ | 100,000 |
|
| |
(1) | In addition to the interest pay rate for each swap agreement, interest is payable at an applicable margin over LIBOR for borrowings outstanding as of September 30, 2017, as listed under the column heading “Stated Rate” in our summary table of outstanding indebtedness and respective principal payments under Note 8 – “Secured and Unsecured Senior Debt” to these unaudited consolidated financial statements. |
| |
10. | Accounts payable, accrued expenses, and tenant security deposits |
The following table summarizes the components of accounts payable, accrued expenses, and tenant security depositsother liabilities as of SeptemberJune 30, 2017,2020, and December 31, 20162019 (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Accounts payable and accrued expenses | $ | 233,661 | | | $ | 198,994 | |
Accrued construction | 232,060 | | | 275,818 | |
Acquired below-market leases | 186,329 | | | 194,773 | |
Conditional asset retirement obligations | 29,551 | | | 14,037 | |
Deferred rent liabilities | 3,632 | | | 2,897 | |
Operating lease liability | 291,710 | | | 271,808 | |
Unearned rent and tenant security deposits | 283,332 | | | 275,863 | |
Other liabilities | 82,906 | | | 86,078 | |
Total | $ | 1,343,181 | | | $ | 1,320,268 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Accounts payable and accrued expenses | $ | 338,296 |
| | $ | 366,174 |
|
Acquired below-market leases | 92,388 |
| | 59,509 |
|
Conditional asset retirement obligations | 7,457 |
| | 3,095 |
|
Deferred rent liabilities | 27,747 |
| | 34,426 |
|
Interest rate hedge liabilities | 583 |
| | 3,587 |
|
Unearned rent and tenant security deposits | 240,501 |
| | 231,416 |
|
Other liabilities | 33,098 |
| | 33,464 |
|
Total | $ | 740,070 |
| | $ | 731,671 |
|
Some of our properties may contain asbestos, which, under certain conditions, requires remediation. Although we believe that the asbestos is appropriately contained in accordance with environmental regulations, our practice is to remediate the asbestos upon the development or redevelopment of the affected property. We recognize a liability for the fair value of a conditional asset retirement obligation (including asbestos) when the fair value of the liability can be reasonably estimated. For certain properties, we do not recognize an asset retirement obligation when there is an indeterminate settlement date for the obligation because the period in which we may remediate the obligation may not be estimated with any level of precision to provide for a meaningful estimate of the retirement obligation. These conditional asset retirement obligations are included in the table above.
In March 2017,12. EARNINGS PER SHARE
From time to time, we enteredenter into agreements to sell an aggregate of 6.9 million shares of our common stock, which consist of an initial issuance of 2.1 million shares and the remaining 4.8 million shares subject to forward equity sales agreements, at a public offering price of $108.55 per share, less issuance costs and underwriters’ discount.which are discussed in Note 13 – “Stockholders’ equity” to these unaudited consolidated financial statements. We issued the initial 2.1 million shares at closing in March 2017 for net proceeds, after underwriters’ discount and issuance costs, of $217.8 million and expect to settle the forward equity sales agreements on the remaining 4.8 million shares of common stock no later than March 2018, for net proceeds of $495.5 million, after underwriters’ discount and issuance costs, with further adjustments as provided for in the sales agreements.
To account for the forward equity sales agreements, we considered the accounting guidance governing financial instruments and derivatives and concluded that our forward equity sales agreements were not liabilities as they did not embody obligations to repurchase our shares nor did they embody obligations to issue a variable number of shares for which the monetary value was predominantly fixed, varying with something other than the fair value of the shares, or varying inversely in relation to our shares. We then evaluated whether the agreements met the derivatives and hedging guidance scope exception to be accounted for as equity instruments and concluded that the agreements can be classified as equity contracts based on the following assessment: (i) none of the agreements’ exercise contingencies were based on observable markets or indices besides those related to the market for our own stock price and operations; and (ii) none of the settlement provisions precluded the agreements from being indexed to our own stock.
We also considered the potential dilution resulting from the forward equity sales agreements on the EPS calculations. We useAt inception, the treasury method toagreements do not have an effect on the computation of basic EPS as no shares are delivered until settlement. The common shares issued upon the settlement of the forward equity sales agreements, weighted for the period these common shares were outstanding, are included in the denominator of basic EPS. To determine the dilution resulting from the forward equity sales agreements during the period of time prior to settlement. Thesettlement, we calculate the number of weighted-average shares outstanding – diluted used in the computation of EPS for the three and nine months ended September 30, 2017, includes the effect from the assumed issuance of 4.8 million shares pursuant to the settlement of the forward equity sales agreements at the contractual price, less the assumed repurchase of common shares at the average market price using the net proceeds of $495.5treasury stock method.
In October 2019, we elected to convert 2.3 million adjusted as provided for in the forward equity sales agreements. The impact to our weighted-averageoutstanding shares – diluted for the three and nine months ended September 30, 2017, was 698 thousand and 430 thousand, respectively, weighted-average incremental shares.
| |
11. | Earnings per share (continued) |
For purposes of calculating diluted EPS, we did not assume conversion of our 7.00% Series D cumulative convertible preferred stock (“Series D Convertible Preferred Stock”) forinto shares of our common stock. As of December 31, 2019, we had 0 shares of our Series D Convertible Preferred Stock outstanding. For the three and nine months ended September 30, 2017 and 2016, sinceperiod in 2019 during which our Series D Convertible Preferred Stock was outstanding, we calculated the result was antidilutive to EPS attributable tonumber of weighted-average shares outstanding – diluted using the if-converted method. Shares of Alexandria Real Estate Equities, Inc.’s common stockholders from continuing operations during those periods. Refer to “7.00% Series D Cumulative Convertible Preferred Stock Repurchases”shares issued upon conversion, weighted for the period the common shares were outstanding, were included in Note 12 – “Stockholders’ Equity” to these unaudited consolidated financial statementsthe denominator for further discussionthe period after the date of the partial repurchases of our Series D Convertible Preferred Stock.conversion.
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 Series D Convertible Preferred Stock and forward equity sales agreements are not participating securities and are therefore are 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(after amounts attributable to noncontrolling interests, dividends on preferred stock, and preferred stock redemption charge) to common stockstockholders and unvested restricted stock awards by using the weighted-average shares of each class outstanding for quarter-to-date and year-to-date periods independently, based on their respective participation rights to dividends declared (or accumulated) and undistributed earnings.
The table below is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Net income | $ | 243,561 | | | $ | 87,179 | | | $ | 274,239 | | | $ | 223,997 | |
Net income attributable to noncontrolling interests | (13,907) | | | (8,412) | | | (25,820) | | | (16,071) | |
Dividends on preferred stock | — | | | (1,005) | | | — | | | (2,031) | |
Preferred stock redemption charge | — | | | — | | | — | | | (2,580) | |
Net income attributable to unvested restricted stock awards | (3,054) | | | (1,432) | | | (3,574) | | | (3,134) | |
Numerator for basic and diluted EPS – net income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | 226,600 | | | $ | 76,330 | | | 244,845 | | | 200,181 | |
| | | | | | | |
Denominator for basic EPS – weighted-average shares of common stock outstanding | 124,333 | | | 111,433 | | | 122,883 | | | 111,245 | |
Dilutive effect of forward equity sales agreements | 115 | | | 68 | | | 234 | | | 34 | |
Denominator for diluted EPS – weighted-average shares of common stock outstanding | 124,448 | | | 111,501 | | | 123,117 | | | 111,279 | |
Net income per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders: | | | | | | | |
Basic | $ | 1.82 | | | $ | 0.68 | | | $ | 1.99 | | | $ | 1.80 | |
Diluted | $ | 1.82 | | | $ | 0.68 | | | $ | 1.99 | | | $ | 1.80 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) | $ | 59,546 |
| | $ | 28,559 |
| | $ | 148,597 |
| | $ | (69,591 | ) |
Net income attributable to noncontrolling interests | (5,773 | ) | | (4,084 | ) | | (18,892 | ) | | (11,614 | ) |
Dividends on preferred stock | (1,302 | ) | | (5,007 | ) | | (6,364 | ) | | (16,388 | ) |
Preferred stock redemption charge | — |
| | (13,095 | ) | | (11,279 | ) | | (25,614 | ) |
Net income attributable to unvested restricted stock awards | (1,198 | ) | | (921 | ) | | (3,498 | ) | | (2,807 | ) |
Numerator for basic and diluted EPS – net income (loss) attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | 51,273 |
| | $ | 5,452 |
| | $ | 108,564 |
| | $ | (126,014 | ) |
| | | | | | | |
Denominator for basic EPS – weighted-average shares of common stock outstanding | 92,598 |
| | 76,651 |
| | 90,336 |
| | 74,526 |
|
Dilutive effect of forward equity sales agreements | 698 |
| | 751 |
| | 430 |
| | — |
|
Denominator for diluted EPS – adjusted – weighted-average shares of common stock outstanding | 93,296 |
| | 77,402 |
| | 90,766 |
| | 74,526 |
|
Net income (loss) per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – basic and diluted | $ | 0.55 |
| | $ | 0.07 |
| | $ | 1.20 |
| | $ | (1.69 | ) |
13. STOCKHOLDERS’ EQUITY
ATM common stock offering program
Common equity transactions
In October 2016,January 2020, we established an ATM common stock offering program that allowed usentered into forward equity sales agreements aggregating $1.0 billion to sell up to an aggregate of $600.06.9 million shares of our common stock. Duringstock (including the six months ended June 30, 2017,exercise of an underwriters’ option) at a public offering price of $155.00 per share, before underwriting discounts. In March 2020, we completed our ATM program with the sale of 2.1settled 3.4 million shares of common stock for grossfrom our forward equity sales agreement and received proceeds of $245.8 million, or $118.97 per share,$500.0 million. We expect to settle the remaining outstanding forward equity sales agreements in 2020, and netreceive proceeds of approximately $241.8 million. There is no remaining availability under this ATM program. $519.6 million, to be further adjusted as provided in the aforementioned agreements. We expect to use the proceeds to fund pending and recently completed acquisitions and the construction of our highly leased development projects.
In August 2017,February 2020, we establishedentered into a new ATM common stock offering program, thatwhich allows us to sell up to an aggregate of $750.0$850.0 million of our common stock. As of June 30, 2020, we have $843.7 million available under our ATM program.
In July 2020, we entered into forward equity sales agreements aggregating $1.1 billion to sell an aggregate of 6.9 million shares of our common stock (including the exercise of an underwriters’ option) at a public offering price of $160.50 per share, before underwriting discounts. We expect to settle these forward equity sales agreements in 2020, and to use proceeds to fund pending and recently completed acquisitions and the construction of our highly leased development projects.
Dividends
During the three months ended September 30, 2017, we sold an aggregate of 2.1 million shares of common stock for gross proceeds of $249.9 million, or $119.94 per share, and received net proceeds of $245.8 million. As of September 30, 2017, the remaining aggregate amount available under our current program for future sales of common stock is $500.1 million.
| |
12. | Stockholders’ equity (continued) |
Forward equity sales agreements
Refer to Note 11 – “Earnings per Share” to these unaudited consolidated financial statements for a discussion related to our forward equity sales agreements executed in March 2017.
7.00% Series D cumulative convertible preferred stock repurchases
During the nine months ended September 30, 2017, we repurchased, in privately negotiated transactions, 501,115 outstanding shares of our Series D Convertible Preferred Stock at an aggregate price of $17.9 million, or $35.79 per share, all of which were completed during the first and second quarters of 2017. As a result of these repurchases, we recognized a preferred stock redemption charge of $5.8 million, including the write-off of original issuance costs of approximately $391 thousand. During the three months ended September 30, 2017, we did not repurchase any additional outstanding shares of our Series D Convertible Preferred Stock.
During the nine months ended September 30, 2016, we repurchased 3.0 million outstanding shares of our Series D Convertible Preferred Stock at an aggregate price of $98.6 million, or $32.72 per share, including the repurchase of 1.1 million outstanding shares of our Series D Convertible Preferred Stock during the three months ended September 30, 2016, at an aggregate price of $39.3 million, or $36.31 per share. During the nine months ended September 30, 2016, we recognized a preferred stock redemption charge of $25.6 million, including the write-off of original issuance costs of approximately $2.4 million. During the three months ended September 30, 2016, we recognized a preferred stock redemption charge of $13.1 million, including the write-off of original issuance costs of approximately $845 thousand.
6.45% Series E cumulative redeemable preferred stock redemption
In March 2017, we announced the redemption of our 6.45% Series E cumulative redeemable preferred stock (“Series E Redeemable Preferred Stock”) and recognized a preferred stock redemption charge of $5.5 million related to the write-off of original issuance costs. On April 14, 2017, we completed the redemption of all 5.2 million outstanding shares of our Series E Redeemable Preferred Stock at a redemption price of $25.00 per share, or an aggregate of $130.0 million, plus accrued dividends, using funds primarily from the proceeds of our March 2017 common stock offering discussed in Note 11 – “Earnings per Share” to these unaudited consolidated financial statements.
Dividends
In September 2017,31, 2020, we declared cash dividends on our common stock for the three months ended September 30, 2017, aggregating $82.3$130.0 million,
or $0.86 per share. Also in September 2017, we declared cash dividends on our Series D Convertible Preferred Stock for the three months ended September 30, 2017, aggregating approximately $1.3 million, or $0.4375$1.03 per share. In October 2017,April 2020, we paid the cash dividends on our common stock and Series D Convertible Preferred Stock declared for the three months ended September 30, 2017.March 31,
2020.
For
During the ninethree months ended SeptemberJune 30, 2017, our2020, we declared cash dividends on our common stock aggregated $238.4aggregating $133.7 million, or $2.55$1.06 per share, our declaredshare. In July 2020, we paid the cash dividends on our Series D Convertible Preferred Stock aggregated $3.9 million, or $1.3125 per share, and ourcommon stock declared cash dividends on our Series E Redeemable Preferred Stock aggregated $2.1 million, or $0.4031 per share. All outstanding shares of our Series E Redeemable Preferred Stock were redeemed on April 14, 2017.for the three months ended June 30, 2020.
| |
12. | Stockholders’ equity (continued) |
Accumulated other comprehensive incomeloss
AccumulatedThe following table presents the changes in accumulated other comprehensive incomeloss attributable to Alexandria Real Estate Equities, Inc. consists of’s stockholders during the followingsix months ended June 30, 2020, due to net unrealized losses on foreign currency translation (in thousands):
| | | | | | | | | | | | |
| | | | Total | | |
Balance as of December 31, 2019 | | | | $ | (9,749) | | | |
| | | | | | |
Other comprehensive loss before reclassifications | | | | (3,331) | | | |
Net other comprehensive loss | | | | (3,331) | | | |
| | | | | | |
Balance as of June 30, 2020 | | | | $ | (13,080) | | | |
|
| | | | | | | | | | | | | | | | |
|
| Net Unrealized Gain (Loss) on: | | |
|
| Available-for- Sale Equity Securities |
| Interest Rate Hedge Agreements |
| Foreign Currency Translation |
| Total |
Balance as of December 31, 2016 |
| $ | 19,293 |
|
| $ | 405 |
|
| $ | (14,343 | ) |
| $ | 5,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications |
| 23,414 |
|
| 812 |
|
| 7,592 |
|
| 31,818 |
|
Amounts reclassified from other comprehensive income |
| 2,482 |
|
| 1,810 |
|
| 2,421 |
|
| 6,713 |
|
|
| 25,896 |
|
| 2,622 |
|
| 10,013 |
|
| 38,531 |
|
Amounts attributable to noncontrolling interests |
| — |
|
| — |
|
| (22 | ) |
| (22 | ) |
Net other comprehensive income |
| 25,896 |
|
| 2,622 |
|
| 9,991 |
|
| 38,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017 |
| $ | 45,189 |
|
| $ | 3,027 |
|
| $ | (4,352 | ) |
| $ | 43,864 |
|
Common stock, preferred stock, and excess stock authorizations
In May 2017, our stockholders approved an amendment to ourOur charter to increaseauthorizes the authorizedissuance of 200.0 million shares of common stock, from 100.0 million to 200.0 million shares, of which 94.3124.6 million shares were issued and outstanding as of SeptemberJune 30, 2017.2020. Our charter also authorizes the issuance of up to 100.0 million shares of preferred stock, NaN of which 3.0 million shares were issued and outstanding as of SeptemberJune 30, 2017.2020. In addition, 200.0 million shares of “excess stock” (as defined in our charter) are authorized, noneNaN of which were issued and outstanding as of SeptemberJune 30, 2017.2020.
41
| |
13. | Noncontrolling interests |
14. NONCONTROLLING INTERESTS
Noncontrolling interests represent the third-party interests in certain entities in which we have a controlling interest. These entities owned nine projects41 properties as of SeptemberJune 30, 2017,2020, 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.
During the ninesix months ended SeptemberJune 30, 2017,2020 and 2019, we distributed $38.2 million and $24.6 million, respectively, to our consolidated joint ventures distributed $17.4 million to ourreal estate joint venture partners. During the nine months ended September 30, 2016, our distributions to noncontrolling interests aggregated $62.6 million, which primarily consisted of the second installment of $54.0 million paid to acquire the previously outstanding 10% noncontrolling interest in our 1.2 million RSF campus at Alexandria Technology Square® in our Cambridge submarket of Greater Boston. The total purchase price was $108.3 million, and the first installment of $54.3 million was paid on April 1, 2015.
In 2016, we sold our partial interests in 10290 Campus Point Drive and 10300 Campus Point Drive. As described in Note 3 – “Investments in Real Estate” to these unaudited consolidated financial statements, since we retained controlling interests in both joint ventures following the sales and continued to consolidate these entities, we accounted for the proceeds received as equity financing transactions. These transactions did not qualify as sales of real estate and did not result in purchase accounting adjustments to the carrying value. Accordingly, the carrying amounts of our partner’s share of assets and liabilities are reported at historical cost basis.
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 unauditedour 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.
| |
14. | Assets classified as held for sale |
15. ASSETS CLASSIFIED AS HELD FOR SALE
As of SeptemberJune 30, 2017, two operating2020, four properties aggregating 634,328518,765 RSF located in China, which represent our remaining real estate investments in Asia, were classified as held for sale. For additional information, refersale in our consolidated financial statements, none of which met the criteria for classification as discontinued operations.
In June 2020, we decided to sell a real estate investment aggregating 60,759 RSF located in Greater Boston, which met the criteria for classification as held for sale but did not meet the criteria for classification as discontinued operations in our consolidated financial statements. We determined the estimated fair value of this asset less costs to sell was greater than the carrying amount of the asset. Refer to “Impairment of long-lived assets” within Note 32 – “Investments in Real Estate”“Summary of significant account policies” to these unaudited consolidated financial statements.statements for additional information.
The following is a summary of net assets as of SeptemberJune 30, 2017,2020, and December 31, 2016,2019, for our remaining real estate investments in Asia that were classified as held for sale as of each respective date (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Total assets | $ | 45,388 | | | $ | 59,412 | |
Total liabilities | (2,089) | | | (2,860) | |
Total accumulated other comprehensive income | 1,611 | | | 536 | |
Net assets classified as held for sale | $ | 44,910 | | | $ | 57,088 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Total assets | $ | 41,658 |
| | $ | 39,643 |
|
Total liabilities | (2,480 | ) | | (2,342 | ) |
Total accumulated other comprehensive (income) loss | (1,082 | ) | | 828 |
|
Net assets classified as held for sale – Asia | $ | 38,096 |
| | $ | 38,129 |
|
16. SUBSEQUENT EVENTS
| |
15. | Condensed consolidating financial information |
Real estate acquired in July 2020
Alexandria Real Estate Equities, Inc. (the “Issuer”) has sold certain debt securities registered under
In July 2020, we completed the Securities Actacquisition of 1933, as amended, that are fullythree properties for an aggregate purchase price of $141.7 million, comprising 749,003 RSF of operating and unconditionally guaranteed by Alexandria Real Estate Equities, L.P. (the “LP” orfuture development and redevelopment opportunities strategically located across multiple markets.
Forward equity sales agreements
In July 2020, we entered into forward equity sales agreements aggregating $1.1 billion to sell an aggregate of 6.9 million shares of our common stock (including the “Guarantor Subsidiary”),exercise of an indirectly 100% owned subsidiaryunderwriters’ option) at a public offering price of the Issuer. The Issuer’s other subsidiaries, including, but not limited$160.50 per share, before underwriting discounts. Refer 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, 2017, and December 31, 2016, the condensed consolidating statements of income and comprehensive income for the three and nine months ended September 30, 2017 and 2016, and the condensed consolidating statements of cash flows for the nine months ended September 30, 2017 and 2016, for the Issuer, the Guarantor Subsidiary, and the Combined Non-Guarantor Subsidiaries, as well as the eliminations necessaryNote 13 – “Stockholders’ equity” to arrive at the information on athese unaudited consolidated basis. 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.
for additional information.
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Balance Sheet
as of September 30, 2017
(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 | $ | — |
| | $ | — |
| | $ | 10,046,521 |
| | $ | — |
| | $ | 10,046,521 |
|
Investments in unconsolidated real estate JVs | — |
| | — |
| | 33,692 |
| | — |
| | 33,692 |
|
Cash and cash equivalents | 37,916 |
| | — |
| | 80,646 |
| | — |
| | 118,562 |
|
Restricted cash | 138 |
| | — |
| | 27,575 |
| | — |
| | 27,713 |
|
Tenant receivables | — |
| | — |
| | 9,899 |
| | — |
| | 9,899 |
|
Deferred rent | — |
| | — |
| | 402,353 |
| | — |
| | 402,353 |
|
Deferred leasing costs | — |
| | — |
| | 208,265 |
| | — |
| | 208,265 |
|
Investments | — |
| | 1,689 |
| | 483,573 |
| | — |
| | 485,262 |
|
Investments in and advances to affiliates | 9,158,536 |
| | 8,276,072 |
| | 168,449 |
| | (17,603,057 | ) | | — |
|
Other assets | 48,095 |
| | — |
| | 164,961 |
| | — |
| | 213,056 |
|
Total assets | $ | 9,244,685 |
| | $ | 8,277,761 |
| | $ | 11,625,934 |
| | $ | (17,603,057 | ) | | $ | 11,545,323 |
|
Liabilities, Noncontrolling Interests, and Equity | | | | | | | | | |
Secured notes payable | $ | — |
| | $ | — |
| | $ | 1,153,890 |
| | $ | — |
| | $ | 1,153,890 |
|
Unsecured senior notes payable | 2,801,290 |
| | — |
| | — |
| | — |
| | 2,801,290 |
|
Unsecured senior line of credit | 314,000 |
| | — |
| | — |
| | — |
| | 314,000 |
|
Unsecured senior bank term loans | 547,860 |
| | — |
| | — |
| | — |
| | 547,860 |
|
Accounts payable, accrued expenses, and tenant security deposits | 91,163 |
| | — |
| | 648,907 |
| | — |
| | 740,070 |
|
Dividends payable | 83,402 |
| | — |
| | — |
| | — |
| | 83,402 |
|
Total liabilities | 3,837,715 |
| | — |
| | 1,802,797 |
| | — |
| | 5,640,512 |
|
Redeemable noncontrolling interests | — |
| | — |
| | 11,418 |
| | — |
| | 11,418 |
|
Alexandria Real Estate Equities, Inc.’s stockholders’ equity | 5,406,970 |
| | 8,277,761 |
| | 9,325,296 |
| | (17,603,057 | ) | | 5,406,970 |
|
Noncontrolling interests | — |
| | — |
| | 486,423 |
| | — |
| | 486,423 |
|
Total equity | 5,406,970 |
| | 8,277,761 |
| | 9,811,719 |
| | (17,603,057 | ) | | 5,893,393 |
|
Total liabilities, noncontrolling interests, and equity | $ | 9,244,685 |
| | $ | 8,277,761 |
| | $ | 11,625,934 |
| | $ | (17,603,057 | ) | | $ | 11,545,323 |
|
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Balance Sheet
as of December 31, 2016
(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 | $ | — |
| | $ | — |
| | $ | 9,077,972 |
| | $ | — |
| | $ | 9,077,972 |
|
Investments in unconsolidated real estate JVs | — |
| | — |
| | 50,221 |
| | — |
| | 50,221 |
|
Cash and cash equivalents | 30,603 |
| | — |
| | 94,429 |
| | — |
| | 125,032 |
|
Restricted cash | 102 |
| | — |
| | 16,232 |
| | — |
| | 16,334 |
|
Tenant receivables | — |
| | — |
| | 9,744 |
| | — |
| | 9,744 |
|
Deferred rent | — |
| | — |
| | 335,974 |
| | — |
| | 335,974 |
|
Deferred leasing costs | — |
| | — |
| | 195,937 |
| | — |
| | 195,937 |
|
Investments | — |
| | 4,440 |
| | 338,037 |
| | — |
| | 342,477 |
|
Investments in and advances to affiliates | 8,152,965 |
| | 7,444,919 |
| | 151,594 |
| | (15,749,478 | ) | | — |
|
Other assets | 45,646 |
| | — |
| | 155,551 |
| | — |
| | 201,197 |
|
Total assets | $ | 8,229,316 |
| | $ | 7,449,359 |
| | $ | 10,425,691 |
| | $ | (15,749,478 | ) | | $ | 10,354,888 |
|
Liabilities, Noncontrolling Interests, and Equity | | | | | | | | | |
Secured notes payable | $ | — |
| | $ | — |
| | $ | 1,011,292 |
| | $ | — |
| | $ | 1,011,292 |
|
Unsecured senior notes payable | 2,378,262 |
| | — |
| | — |
| | — |
| | 2,378,262 |
|
Unsecured senior line of credit | 28,000 |
| | — |
| | — |
| | — |
| | 28,000 |
|
Unsecured senior bank term loans | 746,471 |
| | — |
| | — |
| | — |
| | 746,471 |
|
Accounts payable, accrued expenses, and tenant security deposits | 104,044 |
| | — |
| | 627,627 |
| | — |
| | 731,671 |
|
Dividends payable | 76,743 |
| | — |
| | 171 |
| | — |
| | 76,914 |
|
Total liabilities | 3,333,520 |
| | — |
| | 1,639,090 |
| | — |
| | 4,972,610 |
|
Redeemable noncontrolling interests | — |
| | — |
| | 11,307 |
| | — |
| | 11,307 |
|
Alexandria Real Estate Equities, Inc.’s stockholders’ equity | 4,895,796 |
| | 7,449,359 |
| | 8,300,119 |
| | (15,749,478 | ) | | 4,895,796 |
|
Noncontrolling interests | — |
| | — |
| | 475,175 |
| | — |
| | 475,175 |
|
Total equity | 4,895,796 |
| | 7,449,359 |
| | 8,775,294 |
| | (15,749,478 | ) | | 5,370,971 |
|
Total liabilities, noncontrolling interests, and equity | $ | 8,229,316 |
| | $ | 7,449,359 |
| | $ | 10,425,691 |
| | $ | (15,749,478 | ) | | $ | 10,354,888 |
|
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Statement of Income
for the Three Months Ended September 30, 2017
(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 | $ | — |
| | $ | — |
| | $ | 216,021 |
| | $ | — |
| | $ | 216,021 |
|
Tenant recoveries | — |
| | — |
| | 67,058 |
| | — |
| | 67,058 |
|
Other income | 3,230 |
| | (2,589 | ) | | 5,736 |
| | (4,086 | ) | | 2,291 |
|
Total revenues | 3,230 |
| | (2,589 | ) | | 288,815 |
| | (4,086 | ) | | 285,370 |
|
| | | | | | | | | |
Expenses: | | | | | | | | | |
Rental operations | — |
| | — |
| | 83,469 |
| | — |
| | 83,469 |
|
General and administrative | 16,598 |
| | — |
| | 5,124 |
| | (4,086 | ) | | 17,636 |
|
Interest | 23,958 |
| | — |
| | 7,073 |
| | — |
| | 31,031 |
|
Depreciation and amortization | 1,787 |
| | — |
| | 106,001 |
| | — |
| | 107,788 |
|
Total expenses | 42,343 |
| | — |
| | 201,667 |
| | (4,086 | ) | | 239,924 |
|
|
|
| | | | | | | | |
Equity in earnings of unconsolidated real estate JVs | — |
| | — |
| | 14,100 |
| | — |
| | 14,100 |
|
Equity in earnings of affiliates | 92,886 |
| | 88,900 |
| | 1,702 |
| | (183,488 | ) | | — |
|
Net income | 53,773 |
| | 86,311 |
| | 102,950 |
| | (183,488 | ) | | 59,546 |
|
Net income attributable to noncontrolling interests | — |
| | — |
| | (5,773 | ) | | — |
| | (5,773 | ) |
Net income attributable to Alexandria Real Estate Equities, Inc.’s stockholders | 53,773 |
| | 86,311 |
| | 97,177 |
| | (183,488 | ) | | 53,773 |
|
Dividends on preferred stock | (1,302 | ) | | — |
| | — |
| | — |
| | (1,302 | ) |
Net income attributable to unvested restricted stock awards | (1,198 | ) | | — |
| | — |
| | — |
| | (1,198 | ) |
Net income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | 51,273 |
| | $ | 86,311 |
| | $ | 97,177 |
| | $ | (183,488 | ) | | $ | 51,273 |
|
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Statement of Income
for the Three Months Ended September 30, 2016
(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 | $ | — |
| | $ | — |
| | $ | 166,591 |
| | $ | — |
| | $ | 166,591 |
|
Tenant recoveries | — |
| | — |
| | 58,681 |
| | — |
| | 58,681 |
|
Other income | 1,077 |
| | 91 |
| | 7,852 |
| | (3,913 | ) | | 5,107 |
|
Total revenues | 1,077 |
| | 91 |
| | 233,124 |
| | (3,913 | ) | | 230,379 |
|
| | | | | | | | | |
Expenses: | | | | | | | | | |
Rental operations | — |
| | — |
| | 72,002 |
| | — |
| | 72,002 |
|
General and administrative | 15,568 |
| | — |
| | 4,199 |
| | (3,913 | ) | | 15,854 |
|
Interest | 21,318 |
| | — |
| | 4,532 |
| | — |
| | 25,850 |
|
Depreciation and amortization | 1,722 |
| | — |
| | 75,411 |
| | — |
| | 77,133 |
|
Impairment of real estate | — |
| | — |
| | 8,114 |
| | — |
| | 8,114 |
|
Loss on early extinguishment of debt | 3,230 |
| | — |
| | — |
| | — |
| | 3,230 |
|
Total expenses | 41,838 |
| | — |
| | 164,258 |
| | (3,913 | ) | | 202,183 |
|
| | | | | | | | | |
Equity in earnings of unconsolidated real estate JVs | — |
| | — |
| | 273 |
| | — |
| | 273 |
|
Equity in earnings of affiliates | 65,236 |
| | 55,532 |
| | 1,100 |
| | (121,868 | ) | | — |
|
Gain on sale of real estate – land parcels | — |
| | — |
| | 90 |
| | — |
| | 90 |
|
Net income | 24,475 |
| | 55,623 |
| | 70,329 |
| | (121,868 | ) | | 28,559 |
|
Net income attributable to noncontrolling interests | — |
| | — |
| | (4,084 | ) | | — |
| | (4,084 | ) |
Net income attributable to Alexandria Real Estate Equities, Inc.’s stockholders | 24,475 |
| | 55,623 |
| | 66,245 |
| | (121,868 | ) | | 24,475 |
|
Dividends on preferred stock | (5,007 | ) | | — |
| | — |
| | — |
| | (5,007 | ) |
Preferred stock redemption charge | (13,095 | ) | | — |
| | — |
| | — |
| | (13,095 | ) |
Net income attributable to unvested restricted stock awards | (921 | ) | | — |
| | — |
| | — |
| | (921 | ) |
Net income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | 5,452 |
| | $ | 55,623 |
| | $ | 66,245 |
| | $ | (121,868 | ) | | $ | 5,452 |
|
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Statement of Income
for the Nine Months Ended September 30, 2017
(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 | $ | — |
| | $ | — |
| | $ | 635,156 |
| | $ | — |
| | $ | 635,156 |
|
Tenant recoveries | — |
| | — |
| | 188,874 |
| | — |
| | 188,874 |
|
Other income | 11,337 |
| | (2,577 | ) | | 10,199 |
| | (13,683 | ) | | 5,276 |
|
Total revenues | 11,337 |
| | (2,577 | ) | | 834,229 |
| | (13,683 | ) | | 829,306 |
|
| | | | | | | | | |
Expenses: | | | | | | | | | |
Rental operations | — |
| | — |
| | 237,536 |
| | — |
| | 237,536 |
|
General and administrative | 55,272 |
| | — |
| | 14,510 |
| | (13,683 | ) | | 56,099 |
|
Interest | 72,907 |
| | — |
| | 19,656 |
| | — |
| | 92,563 |
|
Depreciation and amortization | 5,217 |
| | — |
| | 303,852 |
| | — |
| | 309,069 |
|
Impairment of real estate | — |
| | — |
| | 203 |
| | — |
| | 203 |
|
Loss on early extinguishment of debt | 670 |
| | — |
| | — |
| | — |
| | 670 |
|
Total expenses | 134,066 |
| | — |
| | 575,757 |
| | (13,683 | ) | | 696,140 |
|
| | | | | | | | | |
Equity in earnings of unconsolidated real estate JVs | — |
| | — |
| | 15,050 |
| | — |
| | 15,050 |
|
Equity in earnings of affiliates | 252,434 |
| | 242,345 |
| | 4,694 |
| | (499,473 | ) | | — |
|
Gain on sales of real estate – rental properties | — |
| | — |
| | 270 |
| | — |
| | 270 |
|
Gain on sales of real estate – land parcels | — |
| | — |
| | 111 |
| | — |
| | 111 |
|
Net income | 129,705 |
| | 239,768 |
| | 278,597 |
| | (499,473 | ) | | 148,597 |
|
Net income attributable to noncontrolling interests | — |
| | — |
| | (18,892 | ) | | — |
| | (18,892 | ) |
Net income attributable to Alexandria Real Estate Equities, Inc.’s stockholders | 129,705 |
| | 239,768 |
| | 259,705 |
| | (499,473 | ) | | 129,705 |
|
Dividends on preferred stock | (6,364 | ) | | — |
| | — |
| | — |
| | (6,364 | ) |
Preferred stock redemption charge | (11,279 | ) | | — |
| | — |
| | — |
| | (11,279 | ) |
Net income attributable to unvested restricted stock awards | (3,498 | ) | | — |
| | — |
| | — |
| | (3,498 | ) |
Net income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | 108,564 |
| | $ | 239,768 |
| | $ | 259,705 |
| | $ | (499,473 | ) | | $ | 108,564 |
|
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Statement of Income
for the Nine Months Ended September 30, 2016
(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 | $ | — |
| | $ | — |
| | $ | 486,505 |
| | $ | — |
| | $ | 486,505 |
|
Tenant recoveries | — |
| | — |
| | 165,385 |
| | — |
| | 165,385 |
|
Other income | 7,086 |
| | 115 |
| | 24,091 |
| | (10,638 | ) | | 20,654 |
|
Total revenues | 7,086 |
| | 115 |
| | 675,981 |
| | (10,638 | ) | | 672,544 |
|
| | | | | | | | | |
Expenses: | | | | | | | | | |
Rental operations | — |
| | — |
| | 205,164 |
| | — |
| | 205,164 |
|
General and administrative | 45,224 |
| | — |
| | 11,840 |
| | (10,638 | ) | | 46,426 |
|
Interest | 60,729 |
| | — |
| | 15,001 |
| | — |
| | 75,730 |
|
Depreciation and amortization | 4,997 |
| | — |
| | 213,171 |
| | — |
| | 218,168 |
|
Impairment of real estate | — |
| | — |
| | 193,237 |
| | — |
| | 193,237 |
|
Loss of early extinguishment of debt | 3,230 |
| | — |
| | — |
| | — |
| | 3,230 |
|
Total expenses | 114,180 |
| | — |
| | 638,413 |
| | (10,638 | ) | | 741,955 |
|
| | | | | | | | | |
Equity in losses of unconsolidated real estate JVs | — |
| | — |
| | (270 | ) | | — |
| | (270 | ) |
Equity in earnings (losses) of affiliates | 25,889 |
| | (6,282 | ) | | (98 | ) | | (19,509 | ) | | — |
|
Gain on sale of real estate – land parcels | — |
| | — |
| | 90 |
| | — |
| | 90 |
|
Net (loss) income | (81,205 | ) | | (6,167 | ) | | 37,290 |
| | (19,509 | ) | | (69,591 | ) |
Net income attributable to noncontrolling interests | — |
| | — |
| | (11,614 | ) | | — |
| | (11,614 | ) |
Net (loss) income attributable to Alexandria Real Estate Equities, Inc.’s stockholders | (81,205 | ) | | (6,167 | ) | | 25,676 |
| | (19,509 | ) | | (81,205 | ) |
Dividends on preferred stock | (16,388 | ) | | — |
| | — |
| | — |
| | (16,388 | ) |
Preferred stock redemption charge | (25,614 | ) | | — |
| | — |
| | — |
| | (25,614 | ) |
Net income attributable to unvested restricted stock awards | (2,807 | ) | | — |
| | — |
| | — |
| | (2,807 | ) |
Net (loss) income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | (126,014 | ) | | $ | (6,167 | ) | | $ | 25,676 |
| | $ | (19,509 | ) | | $ | (126,014 | ) |
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Statement of Comprehensive Income
for the Three Months Ended September 30, 2017
(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 | $ | 53,773 |
| | $ | 86,311 |
| | $ | 102,950 |
| | $ | (183,488 | ) | | $ | 59,546 |
|
Other comprehensive income | | | | | | | | | |
Unrealized gains on available-for-sale equity securities: | | | | | | | | | |
Unrealized holding gains arising during the period | — |
| | 65 |
| | 16,953 |
| | — |
| | 17,018 |
|
Reclassification adjustment for losses included in net income | — |
| | — |
| | — |
| | — |
| | — |
|
Unrealized gains on available-for-sale equity securities, net | — |
| | 65 |
| | 16,953 |
| | — |
| | 17,018 |
|
| | | | | | | | | |
Unrealized gains (losses) on interest rate hedge agreements: | | | | | | | | | |
Unrealized interest rate hedge gains (losses) arising during the period | 174 |
| | — |
| | (29 | ) | | — |
| | 145 |
|
Reclassification adjustment for amortization of interest expense included in net income | 195 |
| | — |
| | 3 |
| | — |
| | 198 |
|
Unrealized gains (losses) on interest rate hedge agreements, net | 369 |
| | — |
| | (26 | ) | | — |
| | 343 |
|
| | | | | | | | | |
Unrealized gains on foreign currency translation: | | | | | | | | | |
Unrealized foreign currency translation gains arising during the period | — |
| | — |
| | 3,836 |
| | — |
| | 3,836 |
|
Reclassification adjustment for cumulative foreign currency translation losses included in net income upon sale or liquidation | — |
| | — |
| | — |
| | — |
| | — |
|
Unrealized gains on foreign currency translation, net | — |
| | — |
| | 3,836 |
| | — |
| | 3,836 |
|
| | | | | | | | | |
Total other comprehensive income | 369 |
| | 65 |
| | 20,763 |
| | — |
| | 21,197 |
|
Comprehensive income | 54,142 |
| | 86,376 |
| | 123,713 |
| | (183,488 | ) | | 80,743 |
|
Less: comprehensive income attributable to noncontrolling interests | — |
| | — |
| | (5,783 | ) | | — |
| | (5,783 | ) |
Comprehensive income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | 54,142 |
| | $ | 86,376 |
| | $ | 117,930 |
| | $ | (183,488 | ) | | $ | 74,960 |
|
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Statement of Comprehensive Income
for the Three Months Ended September 30, 2016
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Alexandria Real Estate Equities, Inc. (Issuer) | | Alexandria Real Estate Equities, L.P. (Guarantor Subsidiary) | | Combined Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net income | $ | 24,475 |
| | $ | 55,623 |
| | $ | 70,329 |
| | $ | (121,868 | ) | | $ | 28,559 |
|
Other comprehensive income (loss) | | | | | | | | | |
Unrealized losses on available-for-sale equity securities: | | | | | | | | | |
Unrealized holding gains (losses) arising during the period | — |
| | 58 |
| | (38,679 | ) | | — |
| | (38,621 | ) |
Reclassification adjustment for gains included in net income | — |
| | (159 | ) | | (8,381 | ) | | — |
| | (8,540 | ) |
Unrealized losses on available-for-sale equity securities, net | — |
| | (101 | ) | | (47,060 | ) | | — |
| | (47,161 | ) |
| | | | | | | | | |
Unrealized gains (losses) on interest rate hedge agreements: | | | | | | | | | |
Unrealized interest rate hedge gains arising during the period | 2,979 |
| | — |
| | 3 |
| | — |
| | 2,982 |
|
Reclassification adjustment for amortization of interest expense (income) included in net income | 1,714 |
| | — |
| | (12 | ) | | — |
| | 1,702 |
|
Unrealized gains (losses) on interest rate hedge agreements, net | 4,693 |
| | — |
| | (9 | ) | | — |
| | 4,684 |
|
| | | | | | | | | |
Unrealized gains on foreign currency translation: | | | | | | | | | |
Unrealized foreign currency translation losses arising during the period | — |
| | — |
| | (1,322 | ) | | — |
| | (1,322 | ) |
Reclassification adjustment for cumulative foreign currency translation losses included in net income upon sale or liquidation | — |
| | — |
| | 3,779 |
| | — |
| | 3,779 |
|
Unrealized gains on foreign currency translation, net | — |
| | — |
| | 2,457 |
| | — |
| | 2,457 |
|
| | | | | | | | | |
Total other comprehensive income (loss) | 4,693 |
| | (101 | ) | | (44,612 | ) | | — |
| | (40,020 | ) |
Comprehensive income (loss) | 29,168 |
| | 55,522 |
| | 25,717 |
| | (121,868 | ) | | (11,461 | ) |
Less: comprehensive income attributable to noncontrolling interests | — |
| | — |
| | (4,081 | ) | | — |
| | (4,081 | ) |
Comprehensive income (loss) attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | 29,168 |
| | $ | 55,522 |
| | $ | 21,636 |
| | $ | (121,868 | ) | | $ | (15,542 | ) |
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Statement of Comprehensive Income
for the Nine Months Ended September 30, 2017
(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 | $ | 129,705 |
| | $ | 239,768 |
| | $ | 278,597 |
| | $ | (499,473 | ) | | $ | 148,597 |
|
Other comprehensive income | | | | | | | | | |
Unrealized gains on available-for-sale equity securities: | | | | | | | | | |
Unrealized holding gains arising during the period | — |
| | 20 |
| | 23,394 |
| | — |
| | 23,414 |
|
Reclassification adjustment for losses included in net income | — |
| | 4 |
| | 2,478 |
| | — |
| | 2,482 |
|
Unrealized gains on available-for-sale equity securities, net | — |
| | 24 |
| | 25,872 |
| | — |
| | 25,896 |
|
| | | | | | | | | |
Unrealized gains (losses) on interest rate hedge agreements: | | | | | | | | | |
Unrealized interest rate hedge gains (losses) arising during the period | 1,062 |
| | — |
| | (250 | ) | | — |
| | 812 |
|
Reclassification adjustment for amortization of interest expense included in net income | 1,804 |
| | — |
| | 6 |
| | — |
| | 1,810 |
|
Unrealized gains (losses) on interest rate hedge agreements, net | 2,866 |
| | — |
| | (244 | ) | | — |
| | 2,622 |
|
| | | | | | | | | |
Unrealized gains on foreign currency translation: | | | | | | | | | |
Unrealized foreign currency translation gains arising during the period | — |
| | — |
| | 7,592 |
| | — |
| | 7,592 |
|
Reclassification adjustment for cumulative foreign currency translation losses included in net income upon sale or liquidation | — |
| | — |
| | 2,421 |
| | — |
| | 2,421 |
|
Unrealized gains on foreign currency translation, net | — |
| | — |
| | 10,013 |
| | — |
| | 10,013 |
|
| | | | | | | | | |
Total other comprehensive income | 2,866 |
| | 24 |
| | 35,641 |
| | — |
| | 38,531 |
|
Comprehensive income | 132,571 |
| | 239,792 |
| | 314,238 |
| | (499,473 | ) | | 187,128 |
|
Less: comprehensive income attributable to noncontrolling interests | — |
| | — |
| | (18,914 | ) | | — |
| | (18,914 | ) |
Comprehensive income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | 132,571 |
| | $ | 239,792 |
| | $ | 295,324 |
| | $ | (499,473 | ) | | $ | 168,214 |
|
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Statement of Comprehensive Income
for the Nine Months Ended September 30, 2016
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Alexandria Real Estate Equities, Inc. (Issuer) | | Alexandria Real Estate Equities, L.P. (Guarantor Subsidiary) | | Combined Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net (loss) income | $ | (81,205 | ) | | $ | (6,167 | ) | | $ | 37,290 |
| | $ | (19,509 | ) | | $ | (69,591 | ) |
Other comprehensive loss | | | | | | | | | |
Unrealized losses on available-for-sale equity securities: | | | | | | | | | |
Unrealized holding gains (losses) arising during the period | — |
| | 136 |
| | (70,191 | ) | | — |
| | (70,055 | ) |
Reclassification adjustment for losses (gains) included in net income | — |
| | (148 | ) | | (18,479 | ) | | — |
| | (18,627 | ) |
Unrealized losses on available-for-sale equity securities, net | — |
| | (12 | ) | | (88,670 | ) | | — |
| | (88,682 | ) |
| | | | | | | | | |
Unrealized losses on interest rate hedge agreements: | | | | | | | | | |
Unrealized interest rate hedge (losses) gains arising during the period | (7,658 | ) | | — |
| | 3 |
| | — |
| | (7,655 | ) |
Reclassification adjustment for amortization of interest expense (income) included in net income | 3,737 |
| | — |
| | (12 | ) | | — |
| | 3,725 |
|
Unrealized losses on interest rate hedge agreements, net | (3,921 | ) | | — |
| | (9 | ) | | — |
| | (3,930 | ) |
| | | | | | | | | |
Unrealized gains on foreign currency translation: | | | | | | | | | |
Unrealized foreign currency translation gains arising during the period | — |
| | — |
| | 842 |
| | — |
| | 842 |
|
Reclassification adjustment for cumulative foreign currency translation losses included in net (loss) income upon sale or liquidation | — |
| | — |
| | 10,807 |
| | — |
| | 10,807 |
|
Unrealized gains on foreign currency translation, net | — |
| | — |
| | 11,649 |
| | — |
| | 11,649 |
|
| | | | | | | | | |
Total other comprehensive loss | (3,921 | ) | | (12 | ) | | (77,030 | ) | | — |
| | (80,963 | ) |
Comprehensive loss | (85,126 | ) | | (6,179 | ) | | (39,740 | ) | | (19,509 | ) | | (150,554 | ) |
Less: comprehensive income attributable to noncontrolling interests | — |
| | — |
| | (11,587 | ) | | — |
| | (11,587 | ) |
Comprehensive loss attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | $ | (85,126 | ) | | $ | (6,179 | ) | | $ | (51,327 | ) | | $ | (19,509 | ) | | $ | (162,141 | ) |
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Statement of Cash Flows
for the Nine Months Ended September 30, 2017
(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 | $ | 129,705 |
| | $ | 239,768 |
| | $ | 278,597 |
| | $ | (499,473 | ) | | $ | 148,597 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | | | | | |
Depreciation and amortization | 5,217 |
| | — |
| | 303,852 |
| | — |
| | 309,069 |
|
Loss on early extinguishment of debt | 670 |
| | — |
| | — |
| | — |
| | 670 |
|
Gain on sales of real estate – rental properties | — |
| | — |
| | (270 | ) | | — |
| | (270 | ) |
Impairment of real estate | — |
| | — |
| | 203 |
| | — |
| | 203 |
|
Gain on sales of real estate – land parcels | — |
| | — |
| | (111 | ) | | — |
| | (111 | ) |
Equity in earnings of unconsolidated real estate JVs | — |
| | — |
| | (15,050 | ) | | — |
| | (15,050 | ) |
Distributions of earnings from unconsolidated real estate JVs | — |
| | — |
| | 249 |
| | — |
| | 249 |
|
Amortization of loan fees | 5,665 |
| | — |
| | 2,913 |
| | — |
| | 8,578 |
|
Amortization of debt discounts (premiums) | 441 |
| | — |
| | (2,314 | ) | | — |
| | (1,873 | ) |
Amortization of acquired below-market leases | — |
| | — |
| | (14,908 | ) | | — |
| | (14,908 | ) |
Deferred rent | — |
| | — |
| | (74,362 | ) | | — |
| | (74,362 | ) |
Stock compensation expense | 18,649 |
| | — |
| | — |
| | — |
| | 18,649 |
|
Equity in earnings of affiliates | (252,434 | ) | | (242,345 | ) | | (4,694 | ) | | 499,473 |
| | — |
|
Investment gains | — |
| | (17 | ) | | (8,408 | ) | | — |
| | (8,425 | ) |
Investment losses | — |
| | 2,599 |
| | 3,819 |
| | — |
| | 6,418 |
|
Changes in operating assets and liabilities: | | | | | | | | |
|
|
Restricted cash | (36 | ) | | — |
| | (876 | ) | | — |
| | (912 | ) |
Tenant receivables | — |
| | — |
| | (224 | ) | | — |
| | (224 | ) |
Deferred leasing costs | — |
| | — |
| | (39,925 | ) | | — |
| | (39,925 | ) |
Other assets | (10,576 | ) | | — |
| | (86 | ) | | — |
| | (10,662 | ) |
Accounts payable, accrued expenses, and tenant security deposits | (9,813 | ) | | (9 | ) | | 40,441 |
| | — |
| | 30,619 |
|
Net cash (used in) provided by operating activities | (112,512 | ) | | (4 | ) | | 468,846 |
| | — |
| | 356,330 |
|
| | | | | | | | | |
Investing Activities | | | | | | | | | |
Proceeds from sales of real estate | — |
| | — |
| | 4,263 |
| | — |
| | 4,263 |
|
Additions to real estate | — |
| | — |
| | (660,877 | ) | | — |
| | (660,877 | ) |
Purchases of real estate | — |
| | — |
| | (590,884 | ) | | — |
| | (590,884 | ) |
Deposits for investing activities | — |
| | — |
| | 4,700 |
| | — |
| | 4,700 |
|
Investments in subsidiaries | (753,137 | ) | | (588,808 | ) | | (12,160 | ) | | 1,354,105 |
| | — |
|
Investments in unconsolidated real estate JVs | — |
| | — |
| | (248 | ) | | — |
| | (248 | ) |
Return of capital from unconsolidated real estate JVs | — |
| | — |
| | 38,576 |
| | — |
| | 38,576 |
|
Additions to investments | — |
| | — |
| | (128,190 | ) | | — |
| | (128,190 | ) |
Sales of investments | — |
| | 204 |
| | 18,692 |
| | — |
| | 18,896 |
|
Net cash used in investing activities | $ | (753,137 | ) | | $ | (588,604 | ) | | $ | (1,326,128 | ) | | $ | 1,354,105 |
| | $ | (1,313,764 | ) |
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Statement of Cash Flows (continued)
for the Nine Months Ended September 30, 2017
(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 | $ | — |
| | $ | — |
| | $ | 145,272 |
| | $ | — |
| | $ | 145,272 |
|
Repayments of borrowings from secured notes payable | — |
| | — |
| | (2,882 | ) | | — |
| | (2,882 | ) |
Proceeds from issuance of unsecured senior notes payable | 424,384 |
| | — |
| | — |
| | — |
| | 424,384 |
|
Borrowings from unsecured senior line of credit | 2,634,000 |
| | — |
| | — |
| | — |
| | 2,634,000 |
|
Repayments of borrowings from unsecured senior line of credit | (2,348,000 | ) | | — |
| | — |
| | — |
| | (2,348,000 | ) |
Repayments of borrowings from unsecured senior bank term loans | (200,000 | ) | | — |
| | — |
| | — |
| | (200,000 | ) |
Transfer to/from parent company | 47,558 |
| | 588,608 |
| | 717,939 |
| | (1,354,105 | ) | | — |
|
Change in restricted cash related to financing activities | — |
| | — |
| | (10,467 | ) | | — |
| | (10,467 | ) |
Payment of loan fees | (3,956 | ) | | — |
| | (387 | ) | | — |
| | (4,343 | ) |
Repurchase of 7.00% Series D cumulative convertible preferred stock | (17,934 | ) | | — |
| | — |
| | — |
| | (17,934 | ) |
Redemption of 6.45% Series E cumulative redeemable preferred stock | (130,350 | ) | | — |
| | — |
| | — |
| | (130,350 | ) |
Proceeds from the issuance of common stock | 705,391 |
| | — |
| | — |
| | — |
| | 705,391 |
|
Dividends on common stock | (229,814 | ) | | — |
| | — |
| | — |
| | (229,814 | ) |
Dividends on preferred stock | (8,317 | ) | | — |
| | — |
| | — |
| | (8,317 | ) |
Contributions from noncontrolling interests | — |
| | — |
| | 9,877 |
| | — |
| | 9,877 |
|
Distributions to noncontrolling interests | — |
| | — |
| | (17,432 | ) | | — |
| | (17,432 | ) |
Net cash provided by financing activities | 872,962 |
| | 588,608 |
| | 841,920 |
| | (1,354,105 | ) | | 949,385 |
|
| | | | | | | | | |
Effect of foreign exchange rate changes on cash and cash equivalents | — |
| | — |
| | 1,579 |
| | — |
| | 1,579 |
|
| | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | 7,313 |
| | — |
| | (13,783 | ) | | — |
| | (6,470 | ) |
Cash and cash equivalents as of the beginning of period | 30,603 |
| | — |
| | 94,429 |
| | — |
| | 125,032 |
|
Cash and cash equivalents as of the end of period | $ | 37,916 |
| | $ | — |
| | $ | 80,646 |
| | $ | — |
| | $ | 118,562 |
|
| | | | | | | | | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | | | |
Cash paid during the period for interest, net of interest capitalized | $ | 67,091 |
| | $ | — |
| | $ | 19,141 |
| | $ | — |
| | $ | 86,232 |
|
| | | | | | | | | |
Non-Cash Investing Activities: | | | | | | | | | |
Change in accrued construction | $ | — |
| | $ | — |
| | $ | (38,767 | ) | | $ | — |
| | $ | (38,767 | ) |
Contribution of real estate to an unconsolidated real estate JV | $ | — |
| | $ | — |
| | $ | 6,998 |
| | $ | — |
| | $ | 6,998 |
|
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Statement of Cash Flows
for the Nine Months Ended September 30, 2016
(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 (loss) income | $ | (81,205 | ) | | $ | (6,167 | ) | | $ | 37,290 |
| | $ | (19,509 | ) | | $ | (69,591 | ) |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | | | | | | | | |
Depreciation and amortization | 4,997 |
| | — |
| | 213,171 |
| | — |
| | 218,168 |
|
Loss on early extinguishment of debt | 3,230 |
| | — |
| | — |
| | — |
| | 3,230 |
|
Impairment of real estate | — |
| | — |
| | 193,237 |
| | — |
| | 193,237 |
|
Gain on sale of real estate – land parcels | — |
| | — |
| | (90 | ) | | — |
| | (90 | ) |
Equity in losses of unconsolidated real estate JVs | — |
| | — |
| | 270 |
| | — |
| | 270 |
|
Distributions of earnings from unconsolidated real estate JVs | — |
| | — |
| | 286 |
| | — |
| | 286 |
|
Amortization of loan fees | 5,826 |
| | — |
| | 2,966 |
| | — |
| | 8,792 |
|
Amortization of debt discounts (premiums) | 353 |
| | — |
| | (470 | ) | | — |
| | (117 | ) |
Amortization of acquired below-market leases | — |
| | — |
| | (2,905 | ) | | — |
| | (2,905 | ) |
Deferred rent | — |
| | — |
| | (30,679 | ) | | — |
| | (30,679 | ) |
Stock compensation expense | 19,007 |
| | — |
| | — |
| | — |
| | 19,007 |
|
Equity in earnings of affiliates | (25,889 | ) | | 6,282 |
| | 98 |
| | 19,509 |
| | — |
|
Investment gains | — |
| | (566 | ) | | (28,155 | ) | | — |
| | (28,721 | ) |
Investment losses | — |
| | 188 |
| | 10,482 |
| | — |
| | 10,670 |
|
| | | | | | | | | |
Changes in operating assets and liabilities: | | | | | | |
|
| |
|
|
Restricted cash | (16 | ) | | — |
| | (262 | ) | | — |
| | (278 | ) |
Tenant receivables | — |
| | — |
| | 843 |
| | — |
| | 843 |
|
Deferred leasing costs | — |
| | — |
| | (21,621 | ) | | — |
| | (21,621 | ) |
Other assets | (8,332 | ) | | — |
| | (6,481 | ) | | — |
| | (14,813 | ) |
Accounts payable, accrued expenses, and tenant security deposits | (35,351 | ) | | (592 | ) | | 42,106 |
| | — |
| | 6,163 |
|
Net cash (used in) provided by operating activities | (117,380 | ) | | (855 | ) | | 410,086 |
| | — |
| | 291,851 |
|
| | | | | | | | | |
Investing Activities | | | | | | | | | |
Proceeds from sales of real estate | — |
| | — |
| | 27,332 |
| | — |
| | 27,332 |
|
Additions to real estate | — |
| | — |
| | (638,568 | ) | | — |
| | (638,568 | ) |
Purchase of real estate | — |
| | — |
| | (18,108 | ) | | — |
| | (18,108 | ) |
Deposits for investing activities | — |
| | — |
| | (54,998 | ) | | — |
| | (54,998 | ) |
Investments in subsidiaries | (301,852 | ) | | (365,132 | ) | | (7,405 | ) | | 674,389 |
| | — |
|
Investments in unconsolidated real estate JVs | — |
| | — |
| | (6,924 | ) | | — |
| | (6,924 | ) |
Additions to investments | — |
| | — |
| | (68,384 | ) | | — |
| | (68,384 | ) |
Sales of investments | — |
| | 1,174 |
| | 34,121 |
| | — |
| | 35,295 |
|
Repayment of notes receivable | — |
| | — |
| | 9,054 |
| | — |
| | 9,054 |
|
Net cash used in investing activities | $ | (301,852 | ) | | $ | (363,958 | ) | | $ | (723,880 | ) | | $ | 674,389 |
| | $ | (715,301 | ) |
| |
15. | Condensed consolidating financial information (continued) |
Condensed Consolidating Statement of Cash Flows (continued)
for the Nine Months Ended September 30, 2016
(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 | $ | — |
| | $ | — |
| | $ | 215,330 |
| | $ | — |
| | $ | 215,330 |
|
Repayments of borrowings from secured notes payable | — |
| | — |
| | (234,096 | ) | | — |
| | (234,096 | ) |
Proceeds from issuance of unsecured senior notes payable | 348,604 |
| | — |
| | — |
| | — |
| | 348,604 |
|
Borrowings from unsecured senior line of credit | 2,349,000 |
| | — |
| | — |
| | — |
| | 2,349,000 |
|
Repayments of borrowings from unsecured senior line of credit | (2,084,000 | ) | | — |
| | — |
| | — |
| | (2,084,000 | ) |
Repayment of borrowings from unsecured bank term loans | (200,000 | ) | | — |
| | — |
| | — |
| | (200,000 | ) |
Transfer to/from parent company | (69,139 | ) | | 364,813 |
| | 378,715 |
| | (674,389 | ) | | — |
|
Change in restricted cash related to financing activities | — |
| | — |
| | 7,742 |
| | — |
| | 7,742 |
|
Payment of loan fees | (12,401 | ) | | — |
| | (4,098 | ) | | — |
| | (16,499 | ) |
Repurchase of 7.00% Series D cumulative convertible preferred stock | (98,633 | ) | | — |
| | — |
| | — |
| | (98,633 | ) |
Proceeds from the issuance of common stock | 367,802 |
| | — |
| | — |
| | — |
| | 367,802 |
|
Dividends on common stock | (177,966 | ) | | — |
| | — |
| | — |
| | (177,966 | ) |
Dividends on preferred stock | (17,487 | ) | | — |
| | — |
| | — |
| | (17,487 | ) |
Financing costs paid for sale of noncontrolling interests | — |
| | — |
| | (8,093 | ) | | — |
| | (8,093 | ) |
Contributions from and sale of noncontrolling interests | — |
| | — |
| | 68,621 |
| | — |
| | 68,621 |
|
Distributions to and purchase of noncontrolling interests | — |
| | — |
| | (62,605 | ) | | — |
| | (62,605 | ) |
Net cash provided by financing activities | 405,780 |
| | 364,813 |
| | 361,516 |
| | (674,389 | ) | | 457,720 |
|
| | | | | | | | | |
Effect of foreign exchange rate changes on cash and cash equivalents | — |
| | — |
| | (1,440 | ) | | — |
| | (1,440 | ) |
| | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | (13,452 | ) | | — |
| | 46,282 |
| | — |
| | 32,830 |
|
Cash and cash equivalents as of the beginning of period | 31,982 |
| | — |
| | 93,116 |
| | — |
| | 125,098 |
|
Cash and cash equivalents as of the end of period | $ | 18,530 |
| | $ | — |
| | $ | 139,398 |
| | $ | — |
| | $ | 157,928 |
|
| | | | | | | | | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | | | |
Cash paid during the period for interest, net of interest capitalized | $ | 58,062 |
| | $ | — |
| | $ | 758 |
| | $ | — |
| | $ | 58,820 |
|
| | | | | | | | | |
Non-Cash Investing Activities: | | | | | | | | | |
Change in accrued construction | $ | — |
| | $ | — |
| | $ | 23,023 |
| | $ | — |
| | $ | 23,023 |
|
| | | | | | | | | |
Non-Cash Financing Activities: | | | | | | | | | |
Redemption of redeemable noncontrolling interests | $ | — |
| | $ | — |
| | $ | (5,000 | ) | | $ | — |
| | $ | (5,000 | ) |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking statements
Certain information and statements included in this quarterly report on Form 10‑Q,10-Q, including, without limitation, statements containing the words “forecast,” “guidance,” “projects,” “estimates,” “anticipates,” “goals,” “believes,” “expects,” “intends,” “may,” “plans,” “seeks,” “should,” or “will,” or the negative of thesethose 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 life science, technology, and technologyagtech industries and/or our 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.
•Uncertain global, national, and local impacts of the ongoing COVID-19 pandemic.
•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”factors” and “Item 7. Management’s Discussiondiscussion and Analysisanalysis of Financial Conditionfinancial condition and Resultsresults of Operations” inoperations” of our annual report on Form 10‑K10-K for the fiscal year ended December 31, 2016.2019, and respective sections within this quarterly report on Form 10-Q. Readers of this quarterly report on Form 10‑Q10-Q should also read our other documents filed publicly with the SEC for further discussion regarding such factors.
The COVID-19 pandemic
In December 2019, a novel coronavirus, which causes respiratory illness and spreads from person to person (COVID-19), was first identified during an investigation into an outbreak in Wuhan, China. The first case of COVID-19 in the U.S. was reported on January 20, 2020. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the U.S. declared a national emergency with respect to COVID-19. As of July 24, 2020, according to the World Health Organization, over 15 million novel coronavirus cases have been reported worldwide. The U.S. has reported more than 3.9 million cases of COVID-19 and over 140,000 deaths as of July 24, 2020.
COVID-19 disease, treatment, and measures to combat the pandemic
Most patients with COVID-19 have had mild to severe respiratory illness with symptoms of fever, chills, cough, shortness of breath, fatigue, and loss of taste. Many individuals with COVID-19 are asymptomatic and show limited to no symptoms, highlighting the ongoing challenge of containing the continued spread of COVID-19. Some patients develop pneumonia in both lungs and/or multi-organ failure, which in some cases leads to death. There is currently no specific treatment or vaccine for COVID-19, however since scientists shared the virus’s genetic makeup in January 2020, intense research has been underway around the world. At this time, while there are no FDA-approved drugs for the treatment of COVID-19, the FDA has granted emergency use authorization for the antiviral drug remdesivir to treat severe COVID-19. In addition, the U.S. National Institutes of Health (“NIH”) has recommended the corticosteroid dexamethasone for patients with severe COVID-19 who require supplemental oxygen or mechanical ventilation.
Vaccine testing in humans started with record speed in March 2020 and as of July 24, 2020, has evolved to over 165 potential vaccines in different stages of development. The current vaccines in development use a myriad of different scientific approaches to attempt to provoke an immune response, including:
•Genetic vaccines that use part of the coronavirus’s genetic code;
•Viral vector vaccines that use a virus to deliver coronavirus genes into cells;
•Protein-based vaccines that use a coronavirus protein or protein fragment to stimulate the immune system; and
•Whole-virus vaccines that use a weakened or inactivated version of the coronavirus.
At least 27 potential vaccines are currently in human clinical trials and in order to accelerate vaccine development, a number of these potential vaccines are in combined Phase I/II trials. Phase I trials typically include a small number of participants to test safety and dosage as well as to confirm that the vaccine stimulates the immune system. Phase II trials involve hundreds of participants split into groups, such as children and the elderly, to determine whether the vaccine acts differently in each subpopulation. Phase III trials involve delivering the vaccine to tens of thousands of people and waiting to see how many become infected, and the severity of symptoms, compared with volunteers who receive a placebo. Regulators in each country will review the trial results to make a determination as to whether the drug or vaccine should be approved. As of July 24, 2020, there are four potential vaccines in Phase III trials.
Regulators around the world are expected to expedite approvals or to allow for emergency use authorizations before issuing formal approvals for vaccines that prove successful in clinical trials. Vaccine candidates that demonstrate significant safety and efficacy in Phase II or Phase III trials may become available as early as year-end 2020 or in early 2021. Furthermore, the U.S. government’s Operation Warp Speed program has announced a handful of company partners to which it will allocate billions of dollars in federal funding to help expedite the development and manufacturing of coronavirus vaccines and treatments.
Shelter-in-place and stay-at-home orders
On March 19, 2020, California became the first state to set mandatory stay-at-home restrictions to help combat the spread of the coronavirus. The order included the shutdown of all nonessential services, such as dine-in restaurants, bars, gyms, conference or convention centers, and other businesses not deemed to support critical infrastructure. Exceptions for essential services, such as grocery stores, pharmacies, gas stations, food banks, convenience stores, and delivery restaurants, have allowed these services to remain open. Subsequently, almost all states issued similar orders, including New York, Massachusetts, Washington, Maryland, and North Carolina, where our remaining properties outside California are located. Countries around the world also implemented measures to slow the spread of the coronavirus, from national quarantines to school closures or similar types of stay-at-home orders or movement limitations.
Most state orders expired or were rescinded between May and early June 2020, and authorities began reopening businesses, including retail stores, restaurants, bars, salons, houses of worship, entertainment venues such as movie theaters and museums, and manufacturing facilities and offices. Daily new COVID-19 cases in the U.S., which declined to approximately 18,000 new cases by June 9, 2020, from the low- to mid-30,000 daily range in April 2020, began to increase after reopenings commenced across the country. On July 19, 2020, a new daily record of 74,000 new cases was reported, with daily case numbers rising significantly, particularly in South and Southwest states, including Alabama, Arizona, Florida, Mississippi, North Carolina, Texas, Tennessee, and California, all of which reported single-day records for new cases and deaths. As a result of the resurgence of new infections, states have begun to reconsider their reopenings and have warned that new lockdowns may be needed to reverse the increasing trend of infections.
Impact to the global and U.S. economy
As a result of the unprecedented measures taken in the U.S. and around the world, the disruption and impact to the U.S. and global economies and financial markets by the COVID-19 pandemic have been significant. It is feared that this pandemic could trigger, or has already triggered, a period of prolonged global economic slowdown or global recession. The International Monetary Fund (“IMF”) estimated in April 2020 that the global economy could be facing its worst recession since the Great Depression of the 1930s, with a 3% negative growth in 2020 rather than an expansion of 3.3% as it projected in January 2020.
In June 2020, the IMF revised its April forecast downward, projecting global growth to shrink by 4.9% in 2020, or 1.9% below the April 2020 forecast. The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast according to the IMF. In 2021, global growth is projected at 5.4%. Overall, this would leave 2021 U.S. gross domestic product some 6.5% lower than in the pre-COVID-19 projections of January 2020. The adverse impact on low-income households is particularly acute, imperiling the significant progress made in reducing extreme poverty in the world since the 1990s.
The IMF is currently projecting all advanced economies will contract in 2020, including an 8% contraction in the U.S. Based on the data provided by the U.S. Bureau of Labor Statistics on July 2, 2020, the unemployment rate in the U.S. is up by 7.6% since February 2020 to 11.1%, although down from the 13.3% from the month before. The July 2020 data reported 4.8 million jobs created in June 2020; however, the recent surge in new COVID-19 cases could make these job gains temporary. Stock markets around the globe have rebounded substantially since March 2020; however, since the pandemic was declared, access to capital has become much more challenging for most companies or non-existent for some.
The unprecedented disruption and impact to the U.S. and global economies and financial markets by the COVID-19 pandemic resulted in the U.S. President’s signing into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, a $2 trillion economic stimulus package. The CARES Act allocated over $140 billion to the U.S. health system to support COVID-19-related manufacturing, production, diagnostics, and treatments, and to accelerate the market entrance of necessary vaccines and cures. The CARES Act also designated $945.4 million specifically to the NIH, which is a tenant of ours in our Maryland market, to combat COVID-19, which includes, but is not limited to, providing support for research, construction, and acquisition of equipment for vaccine and infectious disease research facilities, including the acquisition of real property. In addition, on April 24, 2020, the U.S. President signed the Paycheck Protection Program and Health Care Enhancement Act into law, which provided an additional $484 billion relief package to primarily assist distressed small businesses and to prevent them from shutting their operations and laying off their employees. This package designated $75 billion to hospitals and $25 billion for a new COVID-19 testing program. It is too early to determine if the CARES Act and the $484 billion relief package were effective or sufficient to offset some of the most severe economic effects of the pandemic. Furthermore, the programs initiated under the aforementioned COVID-19 relief and stimulus packages are set to expire in the coming weeks. Unless the government extends the deadlines or introduces new relief measures, the impact of expirations on the U.S. economy could be severe and could lead to further deterioration of economic conditions, higher unemployment rates, and prolonged recession, which in turn could materially affect our (or our tenants’) performance, financial condition, results of operations, and cash flows.
See “Item 1A. Risk factors” within “Part II – Other information” of this quarterly report, for additional discussion of the risks posed by the COVID-19 pandemic, and uncertainties we, our tenants, and the national and global economies face as a result.
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 an S&P 500® urban office REIT and the first, longest-tenured, and pioneering owner, operator, and developer uniquely focused on collaborative life science, technology, and technologyagtech campuses in AAA innovation cluster locations, with a total market capitalization of $16.1$27.7 billion and an asset base in North America of 28.643.0 million SF as of SeptemberJune 30, 2017.2020. The asset base in North America includes 20.628.8 million RSF of operating properties including 1.5and 2.3 million RSF of Class A properties undergoing construction, 6.6 million RSF of near-term and intermediate-term development and redevelopment of new Class A properties currently undergoing construction. Additionally, the asset base in North America includes 8.0projects, and 5.3 million SF of future development projects, including 1.1 million SF of near-term projects undergoing marketing for lease and pre-construction activities and 3.3 million SF of intermediate-term development projects. Founded in 1994, we pioneered this niche and have since established a significant market presence in key locations, including Greater Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and Research Triangle Park.Triangle. We have a longstanding and proven track record of developing Class A properties clustered in urban life science, technology, and technologyagtech campuses that provide our innovative 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. Alexandria also provides strategic capital to transformative life science, technology, and agtech companies through our venture capital arm. We believe these advantages result in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value.
As of SeptemberJune 30, 2017:2020:
•Investment-grade or publicly traded large cap tenants represented 50%51% of our total annual rental revenue;
•Approximately 97%94% of our leases (on an RSF basis) contained effective annual rent escalations that were either fixed (generally ranging from approximately 3.0% to 3.5%) or indexed based on a consumer price index or other index;
•Approximately 93% of our leases (on an RSF basis) were triple net leases, which require tenants to pay substantially all real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses (including increases thereto) in addition to base rent; and
•Approximately 95% of our leases (on an RSF basis) contained effective annual rent escalations that were either fixed (generally ranging from 3% to 3.5%) or indexed based on a consumer price index or other index; and
Approximately 94%92% of our leases (on an RSF basis) provided for the recapture of capital expenditures (such as HVACheating, ventilation, and air conditioning 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.
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 properties clustered in urban campuses. These key urban campus locations are characterized by high barriers to entry for new landlords, high barriers to exit for tenants, and a limited supply of available space. They generally represent highly desirable locations for tenancy by life science, technology, and technologyagtech 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, life science, technology, and technologyagtech relationships in order to identify and attract new and leading tenants and to source additional value-creation real estate.
Executive summary
“Green Star” designation from the Global Real Estate Sustainability Benchmark (“GRESB”)
During the three months ended September 30, 2017, we were awarded a “Green Star” designation by GRESB and recognized as the top-ranked company in the U.S. in the GRESB Health & Well-being Module for our practices promoting the health, safety, and well-being of our tenants, employees, and partners.
Increased common stock dividend
Common stock dividend for the three months ended September 30, 2017, of $0.86 per common share, up 6 cents, or 8%, over the three months ended September 30, 2016; continuation of our strategy to share growth in cash flows from operating activities with our stockholders while also retaining a significant portion for reinvestment.
Strong internal growth
Total revenues:
$285.4 million, up 23.9%, for the three months ended September 30, 2017, compared to $230.4 million for the three months ended September 30, 2016
$829.3 million, up 23.3%, for the nine months ended September 30, 2017, compared to $672.5 million for the nine months ended September 30, 2016
Executed key leases during the three months ended September 30, 2017:
199,846 RSF at our development project at 100 Binney Street in our Cambridge submarket, including 130,803 RSF leased to Facebook, Inc.
153,203 RSF renewal and expansion at 455 Mission Bay Boulevard South with Nektar Therapeutics in our Mission Bay/SoMa submarket
84,550 RSF at 10300 Campus Point Drive, in our University Town Center submarket
•Continued substantial leasing activity and strong rental rate growth, in light of minimal contractual lease expirations for 2017, and a highly leased value-creation pipeline: |
| | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
Total leasing activity – RSF | | 786,925 |
| | 3,189,483 |
|
Lease renewals and re-leasing of space: | | | | |
Rental rate increases | | 24.2% |
| | 25.2% |
|
Rental rate increases (cash basis) | | 10.0% |
| | 13.3% |
|
RSF (included in total leasing activity above) | | 448,472 |
| | 1,931,477 |
|
Same property net operating income growth:
2.2% and 7.8% (cash basis) for the three months ended September 30, 2017, compared to the three months ended September 30, 2016
2.3% and 6.2% (cash basis) for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016
Strong external growth; disciplined allocation of capital to visible, multiyear, highly leased value-creation pipeline
Key development projects placed into service during the three months ended September 30, 2017, weighted toward the end of the quarter:
341,776 RSF, 100% leased to Bristol-Myers Squibb Company and Facebook, Inc. at 100 Binney Street in our Cambridge submarket; expect delivery of the remaining 91,155 RSF, 100% leased in the first quarter of 2018; improvements in initial stabilized yield and initial stabilized yield (cash basis) of 50 and 40 bps to 8.2% and 7.4%, respectively, primarily driven by 18% cost savings from (i) redesign of space, (ii) competitive bidding and project management, and (iii) lower amount of office/laboratory space and higher office space; and
17,620 RSF leased to ClubCorp Holdings, Inc. at 400 Dexter Avenue North in our Lake Union submarket.
81% leased on 1.5 million RSF development and redevelopment projects undergoing construction.
Deliveries of new Class A properties drive significant growth in net operating income:
|
| | | | | | | | | |
Delivery Date | | RSF | | Percentage Leased | | Incremental Annual Net Operating Income |
YTD 3Q17 | | 663,672 | | 100% | | | $51 million | | |
4Q17 | | 651,738 | | 95% | | $38 million to $42 million | |
|
Development and redevelopment projects recently placed into service will drive contractual growth in cash rents aggregating $70 million, of which $60 million will commence through the third quarter of 2018 ($10 million in the fourth quarter of 2017, $23 million in first quarter of 2018, $14 million in the second quarter of 2018, and $13 million in the third quarter of 2018).
Completed strategic acquisitions of four development and redevelopment properties during the three months ended September 30, 2017, for an aggregate purchase price of $110.7 million, consisting of: (i) a future development project aggregating 280,000 RSF in our South San Francisco submarket, (ii) two properties aggregating 203,757 RSF, including 59,173 RSF of space undergoing redevelopment in our Route 128 submarket, and (iii) a redevelopment project consisting of 45,039 RSF in our Rockville submarket.
Operating results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | | | Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | | | | | 2020 | | 2019 | | | | |
Net income attributable to Alexandria’s common stockholders – diluted: | | | | | | | | | | | | | | | |
In millions | $ | 226.6 | | | $ | 76.3 | | | | | | | $ | 244.8 | | | $ | 200.2 | | | | | |
Per share | $ | 1.82 | | | $ | 0.68 | | | | | | | $ | 1.99 | | | $ | 1.80 | | | | | |
Funds from operations attributable to Alexandria’s common stockholders – diluted, as adjusted: | | | | | | | | | | | | | | | |
In millions | $ | 225.0 | | | $ | 192.7 | | | | | | | $ | 446.4 | | | $ | 382.5 | | | | | |
Per share | $ | 1.81 | | | $ | 1.73 | | | | | | | $ | 3.63 | | | $ | 3.44 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Net income (loss) attributable to Alexandria’s common stockholders – diluted: |
In millions | $ | 51.3 |
| | $ | 5.5 |
| | $ | 45.8 |
| | N/A |
| | $ | 108.6 |
| | $ | (126.0 | ) | | $ | 234.6 |
| | N/A |
|
Per share | $ | 0.55 |
| | $ | 0.07 |
| | $ | 0.48 |
| | N/A |
| | $ | 1.20 |
| | $ | (1.69 | ) | | $ | 2.89 |
| | N/A |
|
Funds from operations attributable to Alexandria’s common stockholders – diluted, as adjusted: |
In millions | $ | 140.8 |
| | $ | 107.6 |
| | $ | 33.1 |
| | 30.8 | % | | $ | 407.5 |
| | $ | 305.8 |
| | $ | 101.7 |
| | 33.3 | % |
Per share | $ | 1.51 |
| | $ | 1.39 |
| | $ | 0.12 |
| | 8.6 | % | | $ | 4.49 |
| | $ | 4.09 |
| | $ | 0.40 |
| | 9.8 | % |
The operating results shown above include certain items related to corporate-level investing and financing decisions. Refer to the tabular presentation of these items at the beginning of the “Results of Operations”operations” section within this Item 2 for additional information.
Core operating metricsAlexandria and internal growthits tenants at the vanguard of advancing solutions for COVID-19
Safe and effective vaccines and therapies, in addition to widespread testing, are desperately needed to combat the global COVID-19 pandemic. Over 80 of our life science tenants are advancing solutions for COVID-19. By maintaining essential business operations across our campuses, Alexandria has enabled several of our life science tenants to continue mission-critical COVID-19-related research and development. Refer to the “Alexandria and its innovative tenants are at the vanguard of the life science ecosystem advancing solutions for COVID-19” section within this Item 2 for additional information.
Strong and flexible balance sheet with significant liquidity
•$4.2 billion of liquidity as of June 30, 2020, pro forma for our $1.1 billion forward equity sales agreements entered into in July 2020.
•Zero debt maturing until 2023.
•9.9 years weighted-average remaining term of debt as of June 30, 2020.
•Investment-grade credit rating, which ranks in the top 10% among all publicly traded REITs, of Baa1/Stable from Moody’s Investors Service and BBB+/Stable from S&P Global Ratings, both as of June 30, 2020.
Continued dividend strategy to share cash flows with stockholders
Common stock dividend declared for the three months ended SeptemberJune 30, 20172020, of $1.06 per common share, aggregating $4.12 per common share for the twelve months ended June 30, 2020, up 25 cents, or 6%, over the twelve months ended June 30, 2019. Our FFO payout ratio of 59% for the three months ended June 30, 2020, allows us to share cash flows from operating activities with our stockholders while also retaining a significant portion for reinvestment.
PercentageA REIT industry-leading, high-quality tenant roster
•51% of annual rental revenue in effect from:from investment-grade or publicly traded large cap tenants.
Investment-grade tenants: 50%
Class A properties in AAA locations: 78%
Occupancy in North America: 96.1%
Operating margin: 71%
Adjusted EBITDA margin: 68%
•Weighted-average remaining lease term of Top 20 tenants: 13.27.8 years.
Continued strength in collections drives lowest tenant receivables balance since 2012
•As of July 24, 2020, we have collected 99% of July 2020 rents and tenant recoveries.
•We have collected 99.4% of June 2020 rents and tenant recoveries.
•As of June 30, 2020, our tenant receivables balance was $7.2 million, our lowest balance since 2012.
High-quality revenues and cash flows, strong Adjusted EBITDA margin, and operational excellence
| | | | | | | | | | | | | | |
Percentage of annual rental revenue in effect from: | | | | |
Investment-grade or publicly traded large cap tenants | | | 51 | % | |
Class A properties in AAA locations | | | 74 | % | |
Occupancy of operating properties in North America | | | 94.8 | % | (1) |
Operating margin | | | 72 | % | |
Adjusted EBITDA margin | | | 69 | % | |
Weighted-average remaining lease term: | | | | |
All tenants | | | 7.8 | years |
Top 20 tenants | | | 11.2 | years |
| | | | |
(1)Includes 647,771 RSF, or 2.3%, of vacancy in our North America markets, representing lease-up opportunities at properties recently acquired, primarily at our SD Tech by Alexandria campus (joint venture), 601, 611, and 651 Gateway Boulevard (joint venture), and 5505 Morehouse Drive. Excluding these vacancies, occupancy of operating properties in North America was 97.1% as of June 30, 2020. Refer to “Summary of occupancy percentages in North America” within this Item 2 for additional information regarding vacancy from recently acquired properties.
Strong leasing activity during the second quarter of 2020 and continued rental rate growth
•Continued strong leasing activity and rental rate growth in light of modest contractual lease expirations at the beginning of 2020 and a highly leased value-creation pipeline; continued rental rate growth during the six months ended June 30, 2020, over expiring rates on renewed and re-leased space:
| | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | |
| | Three Months Ended | | | Six Months Ended |
Total leasing activity – RSF | | 1,077,510 | | | | 1,780,865 | |
Leasing of development and redevelopment space – RSF | | 196,039 | | | | 210,271 | |
Lease renewals and re-leasing of space: | | | | | |
RSF (included in total leasing activity above) | | 699,130 | | | | 1,251,152 | |
Rental rate increases | | 37.2% | | | 41.1% |
Rental rate increases (cash basis) | | 15.0% | | | 17.9% |
Guidance for unique and opportunistic value-creation acquisitions and construction
•Our initial 2020 guidance issued on December 3, 2019, included guidance midpoint for our 2020 construction spending and acquisitions of $1.6 billion and $950 million, respectively, and reflected a strong outlook for 2020, including continued strong demand for our value-creation development and redevelopment projects.
•Our guidance issued on April 27, 2020, reduced our 2020 forecasted construction spend, acquisitions, real estate dispositions and partial interest sales, and issuance of common equity. These reductions were deemed necessary while we monitored the impact of COVID-19 on many areas of our business, including the overall macro and capital market environments.
•Our guidance issued on July 27, 2020, was updated to address the continuing tenant demand for our development and redevelopment pipeline in part due to COVID-19 requirements, as well as existing and anticipated attractive acquisition opportunities in our markets, which will be partially funded through forecasted real estate dispositions and partial interest sales. Key updates to our sources and uses include:
•Increased midpoint for our 2020 construction spending guidance range from $960.0 million to $1.35 billion.
•An additional $900 million to $1.3 billion of real estate acquisitions in the second half of 2020, including acquisitions completed in July 2020.
•Increased midpoint of our real estate dispositions and partial interest sales from $50.0 million to $1.25 billion, which is expected to fund a portion of the increase in construction spending and acquisitions in addition to providing significant capital for growth over the next two to three quarters.
•See “Key capital events” below for additional details on our July 2020 forward equity offering.
•Refer to “Projected results” and “Capital resources” within this Item 2 for detailed assumptions for our updated 2020 guidance.
2020 Nareit Gold Investor CARE Award winner
2020 recipient of the Nareit Gold Investor CARE (Communications and Reporting Excellence) Award in the Large Cap Equity REIT category as the best-in-class REIT that delivers transparent, quality, and efficient communications and reporting to the investment community; our fifth Nareit Gold Investor CARE Award over the last six years, and our third consecutive Gold Award.
Continued strong net operating income and internal growth
•Total revenues:
•$437.0 million, up 16.9%, for the three months ended June 30, 2020, compared to $373.9 million for the three months ended June 30, 2019.
•$876.9 million, up 19.7%, for the six months ended June 30, 2020, compared to $732.7 million for the six months ended June 30, 2019.
•Net operating income (cash basis) of $1.1 billion for the three months ended June 30, 2020 annualized, increased by $165.0 million, or 17.6%, compared to the three months ended June 30, 2019 annualized.
•94% of our leases contain contractual annual rent escalations approximating 3.0%.
•Same property net operating income growth:
•1.6% and 4.5% (cash basis) for the six months ended June 30, 2020, over the six months ended June 30, 2019.
•0.6% and 2.5% (cash basis) for the three months ended June 30, 2020, over the three months ended June 30, 2019.
•Includes the effect of temporary reduction in same property occupancy of 80 basis points related to downtime in connection with leases aggregating 152,045 RSF, with 63% already leased for delivery in the third quarter of 2020 at significantly higher rental rates. Excluding the impact of the temporary vacancies, the same property net operating income growth for the three months ended June 30, 2020, would have been 1.6% and 4.2% (cash basis), respectively. We expect occupancy and other contractual rental increases in the second half of 2020 will increase same property NOI and same property NOI (cash basis) to within our guidance range for the year ending December 31, 2020.
•Minimal remaining 2020 contractual lease expirations, aggregating 2.3% of annual rental revenue.
Highly leased value-creation pipeline, including COVID-19-focused R&D space
•Current projects aggregating 3.3 million RSF, including COVID-19-focused R&D spaces, are highly leased at 61% and will generate significant revenues and cash flows.
•As of July 27, 2020, construction activities were in process at all of our active value-creation projects.
•Significant pre-leasing at two new value-creation projects in our Sorrento Mesa submarket:
•Near-term development project at SD Tech by Alexandria, aggregating 176,428 RSF, is 59% pre-leased; and
•Active redevelopment project at 9877 Waples Street, a recently acquired property aggregating 63,774 RSF, is 100% pre-leased.
•Annual net operating income (cash basis), including our share of unconsolidated real estate joint ventures, is expected to increase $29 million upon the burn-off of initial free rent on recently delivered projects.
Completed acquisitions
Refer to the “Acquisitions” subsection of the “Investments in real estate” section within this Item 2 for information on our strategic acquisitions.
Balance sheet management
Key metrics as of June 30, 2020
|
| | | | | |
| | As of | |
| | September 30, 2017 | |
Total market capitalization | | $ | 16.1 | billion | |
Liquidity | | $ | 1.7 | billion | |
| | | |
Net debt to Adjusted EBITDA: | | | |
Quarter annualized | | 6.1x |
| |
Trailing 12 months | | 6.4x |
| |
| | | |
Fixed-charge coverage ratio: | | | |
Quarter annualized | | 4.1x |
| |
Trailing 12 months | | 4.0x |
| |
| | | |
Unhedged variable-rate debt as a percentage of total debt | | 12% |
| |
Current and future value-creation pipeline as a percentage of gross investments in real estate in North America | | 12% |
| |
•$27.7 billion of total market capitalization.
•$20.2 billion of total equity capitalization.
Key capital events
In August 2017, we•$4.2 billion of liquidity as of June 30, 2020, pro forma for our $1.1 billion forward equity sales agreements entered into an ATM common stock program that allows us to sell up to an aggregate of $750.0 million of our common stock. During the three months ended September 30, 2017, we sold an aggregate of 2.1 million shares of common stock for gross proceeds of $249.9 million, or $119.94 per share, and received net proceeds of $245.8 million. As of September 30, 2017, we had $500.1 million available for future sales of common stock under the ATM program.in July 2020.
Corporate social responsibility and industry leadership
| | | | | | | | | | | | | | | | | | | | | | | | | | |
• | 48%
| As of total annual rental revenue is expected from LEED® certified projects upon completionJune 30, 2020 | | | | | Goal for Fourth Quarter of 13 in-process projects.2020, Annualized | |
During the three months ended September 30, 2017, we were awarded a “Green Star” designation by GRESB and recognized as the top-ranked company in the U.S. in the GRESB Health & Well-being Module for our practices promoting the health, safety, and well-being of our tenants, employees, and partners. Our GRESB score exceeded that of both the U.S. listed average REIT and the global GRESB average.
During three months ended September 30, 2017, we expanded our support of the U.S. military with the kickoff of the future headquarters of The Honor Foundation in San Diego, in partnership with the Navy SEAL Foundation. We will provide 8,000 RSF of collaborative and innovative space at 11055 Roselle Street located in our Sorrento Valley submarket, where the organization will offer programs and events to help transition Navy SEALs and other U.S. Special Operations personnel back into private-sector jobs and careers.
Incremental annual net operating income from development and redevelopment of new Class A properties
| | Quarter Annualized | | | Trailing 12 Months | | | |
(1)Net debt and preferred stock to Adjusted EBITDA | RSF and percentage leased represent 100% of each property. Incremental annual net operating income represents incremental annual net operating income upon stabilization of our development and redevelopment | 5.8x | | | 6.2x | | Less than or equal to 5.3x | |
Fixed-charge coverage ratio | | 4.2x | | | 4.2x | | Greater than or equal to 4.4x | |
| | | | | | | | |
| | | | | | | | | | |
Value-creation pipeline of new Class A properties, including only our sharedevelopment and redevelopment projects as a percentage of gross investments in real estate joint venture projects. Deliveries of space with multi-tenant development projects are included in each respective period of delivery. |
| June 30, 2020 | | |
(2)Current projects 65% leased/negotiating | Expected deliveries of projects are weighted toward the middle of the quarter. 91,155 RSF at 100 Binney Street in our Cambridge submarket will be placed in service in the first quarter of 2018. |
Operating summary
|
| | | | | | | | | | |
Favorable Lease Structure(1) | | Same Property Net Operating Income Growth | |
| | | | |
Stable cash flows | | | | |
Percentage of triple net leases | 97% | | |
Increasing cash flows | | | | |
Percentage of leases containing annual rent escalations | 95% | | |
Lower capex burden | | | | |
Percentage of leases providing for the recapture of capital expenditures | 94% | | |
| | | | | | | | | |
| | | | |
Margins(2) | | Rental Rate Growth: Renewed/Re-Leased Space | |
| | | | | | | | | | |
Adjusted EBITDA | | | | Operating | | |
68% | | | | 71% | | |
| | | | |
| | | | | | | | |
| | | | | | | | | |
7% | | |
Income-producing/potential cash flows/covered land play(1) | Percentages calculated based on RSF as of September 30, 2017. |
6% | | |
(2)Land | Represents the three months ended September 30, 2017. |
(1)Includes projects that have existing buildings that are generating or can generate operating cash flows. Also includes development rights associated with existing operating campuses.
Key capital events
•In April 2020, we closed an additional unsecured senior line of credit with $750.0 million of available commitments. The new unsecured senior line of credit matures on April 14, 2022, and bears interest at LIBOR plus 1.05%. Pursuant to the terms of the agreement, the outstanding commitments and any outstanding borrowings from the $750 million unsecured senior line of credit will be reduced by 100% of net cash proceeds from certain new debt transactions and 50% of net cash proceeds from new equity offerings as defined in the agreement, which includes any net proceeds from the settlement of our July 2020 forward equity sales agreements. Including our existing $2.2 billion unsecured senior line of credit, we have $2.95 billion in aggregate commitments under our unsecured senior lines of credit as of June 30, 2020.
•In 2020, we entered into forward equity sales agreements to sell an aggregate 13.8 million shares of our common stock (including the exercise of an underwriters’ option). As of the date of this report, our outstanding forward equity agreements are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Public Offering Price | | Shares (in thousands) | | | | Net Proceeds (in thousands) | | |
Date | | | | Settled | | Outstanding | | Received | | Remaining |
January 2020 | | $ | 155.00 | | | 3,356 | | | 3,544 | | | $ | 500,001 | | | $ | 519,621 | |
July 2020 | | $ | 160.50 | | | — | | | 6,900 | | | — | | | 1,061,952 | |
| | | | 3,356 | | | 10,444 | | | $ | 500,001 | | | $ | 1,581,573 | |
| | | | | | | | | | |
•During the three months ended June 30, 2020, and through the date of this report, there was no sale activity under our ATM common stock offering program. As of the date of this report, we have $843.7 million remaining available under our ATM program.
Investments
•Our investments in publicly traded companies and privately held entities aggregated a carrying amount of $1.3 billion, including an adjusted cost basis of $762.3 million and unrealized gains of $556.2 million, as of June 30, 2020.
•Investment income included $184.7 million during the three months ended June 30, 2020, which consisted of $17.7 million in realized gains, $4.7 million in impairments related to investments in privately held entities that do not report NAV, and $171.7 million in unrealized gains.
Leader in corporate responsibility: philanthropic activities and partnerships to positively impact our communities
At the vanguard of fighting COVID-19 by aiding communities adversely affected by the global pandemic
•Alexandria has sourced and donated over 54,000 pieces of much-needed personal protective equipment to 12 hospitals and other entities in need in New York City, Boston, Seattle, San Diego, Dayton, and Los Angeles for use by medical professionals working on the front lines of the COVID-19 response. Through strategic philanthropic giving and the Company’s matching gift programs, Alexandria donated, in aggregate, over $700,000 to several highly impactful national and regional organizations performing important work to support a myriad of efforts in communities affected by this global public health emergency, including the following:
•Feeding America – COVID-19 Response Fund, the fund from the nation’s largest hunger-relief organization with a network of 200 member food banks, is supporting the food banks that help people feed their families during the school closures, job disruptions, and health risks related to the COVID-19 pandemic.
•First Responders Children’s Foundation COVID-19 Emergency Response Fund is providing support to the families of first responders on the front lines of the COVID-19 pandemic, who are enduring financial hardship due to the outbreak.
•Robin Hood’s COVID-19 Relief Fund, from New York City’s largest poverty-fighting organization, is providing immediate, short-term grants to support non-profits that are on the front lines in the fight against COVID-19 so they can move swiftly to serve affected communities.
•Relief Opportunities for All Restaurants (ROAR) is providing financial relief directly to employees of restaurants who have lost their jobs as a result of the COVID-19 pandemic.
•City of Cambridge Disaster Fund for COVID-19 is providing emergency assistance in partnership with non-profit organizations to individuals and families in Cambridge experiencing extreme financial hardship caused by the COVID-19 crisis.
•Project Angel Food is committed to providing uninterrupted deliveries of nutritious medically tailored meals to people impacted by serious illness in the Los Angeles area throughout the duration of the COVID-19 pandemic.
Driving educational opportunity and providing resources to underserved communities
•We regard education as one of the most fundamental foundations to achieving a safe, healthy, and good life. As a result, we have forged deep partnerships with inspiring community organizations focused on providing educational resources to underserved communities in a multitude of ways. Working closely with these organizations, we have helped open the doors of opportunity for countless students.
•During 2Q20, we announced Alexandria’s 2020 scholarship recipients, 11 high-achieving public school students in San Francisco and Maryland who will each receive $5,000 annually to attend either a two- or four-year program at a college/university of their choice to study one of the STEM (science, technology, engineering, and mathematics) fields.
•As both a founding and sustaining donor, we have been passionate longtime supporters of Computer Science for All (CS4ALL) — a 10-year initiative launched in 2015 to provide high-quality computer science education for New York City’s 1.1 million public school students. Alexandria volunteers have worked alongside NYC high school students to rebuild computers donated by Alexandria for use in the CS4ALL program; served as judges for CS4ALL’s Hack League, a citywide coding competition involving students from 62 middle and high schools across New York City; participated in multiple Computer Science Education Weeks, a global effort encouraging computer science education; and hosted CS4ALL students at the Alexandria Center® for Life Science – NYC for them to learn about the vast array of jobs that computer science touches and the career paths available to them. Our ongoing partnership with CS4ALL has helped ensure that NYC’s public school students have the skills they need to achieve success in higher education, the 21st-century job market, and beyond.
•Through our very hands-on work with, and mission-critical funding support for, the Emily Krzyzewski Center in Durham, North Carolina, we are helping propel academically focused, low-income K–12 students and graduates toward success in college. Emily K programs begin in elementary and middle school to build and accelerate academic skills that lay the foundation for future college success. As students move on to high school, they receive holistic support in the areas of college planning, personal management and leadership, academic skills development, and career exploration, leading to graduating seniors who are scholarship eligible and college ready. After 12 years, the success rate for admittance to a four-year college is 100%.
•Robin Hood, New York City’s largest poverty fighting organization, has an intense focus on education and works to ensure that low-income students at risk of not finishing high school graduate ready to succeed in college and career. Robin Hood has provided over $29 million in funding to impactful tutoring and mentorship programs, college prep programs, mental health and counseling services, and teacher training initiatives and has helped more than 55,000 students across the city last year alone. We have very actively worked with CEO Wes Moore, as well as offered significant financial support, to make a huge impact in the underserved communities of New York City through highly important programs that have measurable outcomes.
•Alexandria has worked closely with Breakthrough Greater Boston (BTGB) over many years to prepare low-income students for success in college and train the next generation of urban teachers. Through six years of intensive, tuition-free, out-of-school-time programming, BTGB changes students’ academic trajectories and supports them along the path to college. Students gain a passion for learning and the perseverance and tools needed to succeed in college and beyond. BTGB also works to build the next generation of teachers through competitive recruitment, research-based training, and coaching from master teachers. Teaching Fellows gain intensive in-classroom experience, expert training, and 1:1 coaching.
Pioneering a uniquely comprehensive care model to tackle opioid addiction
•Against the backdrop of the COVID-19 pandemic, the U.S. opioid epidemic remains one of the most devastating public health issues of our time. With many people confronting additional stresses such as isolation, unemployment, anxiety, and loss, monthly drug overdose deaths, which decreased in 2018 for the first time in 25 years, have skyrocketed to record numbers during the pandemic, up 42% in May 2020 relative to May 2019. This alarming spike in drug overdoses highlights the urgent unmet need for evidence-based holistic treatment systems for addiction.
•As a key component of Alexandria’s mission to advance human health, we partnered with Verily, an Alphabet company, to pioneer a comprehensive care model for the full and sustained recovery of people suffering from opioid addiction. The 59,000 RSF campus, situated on 4.3 acres in Dayton, Ohio, includes dedicated facilities and services for treatment, residential housing, group therapy, family reunification, fitness, workforce development programs, job placement, and community transition. Alexandria has led the design and development of the campus, which opened to patients in the fall of 2019. In July 2020, we completed OneFifteen Living, the campus's three-story residential facility designed to serve as a safe place for individuals suffering from opioid addiction to live while accessing on-campus treatment services.
•As overdose deaths in 1H20 are up 34% compared to 1H19 in Montgomery County, Ohio, where our state-of-the-art OneFifteen campus is located, OneFifteen's doors are open to those ready to make a change and it has also successfully ramped up telehealth services to ensure those needing its addiction services do not experience a gap in care during this critical time. It is our sincerest hope that OneFifteen will not only provide hope for the Dayton community, but that is also serves as a blueprint for rest of the country.
Industry and ESG leadership
•In June 2020, our executive chairman and founder, Joel S. Marcus, had the honor of serving as the keynote speaker for a special fireside chat at the virtual BIO Health Caucus hosted by the Association of University Research Parks, an organization dedicated to guiding leaders to cultivate communities of innovation at global anchor institutions. The virtual fireside, titled “Three Decades of Building Bio Health Facilities and Companies,” covered a broad array of topics that provided a comprehensive view of our essential business, our dynamic cluster locations, and our critical role at the vanguard of the life science ecosystem fighting COVID-19.
•In June 2020, we released our 2019 Corporate Responsibility Report, which reinforces Alexandria’s longstanding environmental, social, and governance commitment, strong progress toward our 2025 environmental impact goals, and critical role at the vanguard of the life science ecosystem advancing solutions for COVID-19.
•In June 2020, we announced that Alexandria LaunchLabs® – AgTech awarded its inaugural $100,000 AgTech Innovation Prize to TerMir Inc., an early-stage agtech company aiming to address key, unresolved agricultural, environmental, and human health challenges.
(1)Represents an illustrative subset of over 80 tenants focused on COVID-19-related efforts, with some of these companies working on multiple efforts that span testing, treatment, and/or vaccine development.
(1)Source: FierceBiotech, “NIAID creates new COVID-19 drug and vaccine trial network through Trump's Warp Speed program,” July 9, 2020.
(2)Announced award value and clinical trial stage as of July 24, 2020.
Alexandria and its innovative tenants are at the vanguard of the life science ecosystem advancing solutions for COVID-19
Safe and effective vaccines and therapies, in addition to widespread testing, are desperately needed to combat the global COVID-19 pandemic. By maintaining essential business operations across our campuses, Alexandria has enabled several of our life science tenants to continue mission-critical COVID-19-related research and development. The heroic work being done by so many of our tenants and campus community members to help test for, treat, and prevent COVID-19, as well as provide medical supplies and protective equipment to neighboring hospitals, is profound and inspiring. We are currently tracking over 80 tenants across our cluster markets who are advancing solutions for COVID-19.
Developing preventative vaccines
•A prophylactic vaccine should help bring about the effective end of the global COVID-19 pandemic. As such, researchers around the world are developing over 165 vaccines against the coronavirus, with at least 27 vaccine candidates in human trials.
•In an effort to expedite the development, manufacturing, and distribution of COVID-19 vaccines, the U.S. government has allocated $10 billion to its Operation Warp Speed (OWS) initiative, calling for unprecedented public-private collaboration. OWS has awarded grants to a handful of company partners to date, including tenants AstraZeneca plc, Emergent BioSolutions Inc, Johnson & Johnson, Inc., Moderna, Inc., Novavax, Inc., and Pfizer Inc. Clinical trial data will continue to be reported by each company over the coming months, and the first COVID-19 vaccine could receive emergency use authorization from the FDA by year-end 2020 or early 2021.
•Other tenants, including GlaxoSmithKline, GreenLight Biosciences, Inc., Medicago Inc., Merck & Co., and Sanofi, are similarly leveraging their vaccine development expertise and technology platforms to bring vaccine candidates into clinical trials, with the goal of expediting the delivery of a safe and effective vaccine to the public within the next 12 months.
Advancing new and repurposed therapies
•Over 350 experimental drug treatments are being studied in over 500 clinical trials around the world in addition to more than 250 therapeutic candidates in preclinical development. A substantial number of these programs are sponsored by our tenants, including the following notable efforts:
•Eli Lilly and Company, in collaboration with AbCellera, began its Phase I study ahead of schedule to test a novel antibody targeted against the SARS-CoV-2 virus, the first COVID-19-specific antibody program of its kind to enter the clinic.
•Gilead Sciences, Inc.’sremdesivir is in late-stage studies for the treatment of moderate and severe COVID-19 patients. Based on positive safety and efficacy data, the FDA granted emergency use authorization for remdesivir in the treatment of hospitalized patients with severe COVID-19.
•Adaptive Biotechnologies Corporation and Amgen are working together to identify and develop therapeutic antibodies from the blood of patients who are actively fighting or have recently recovered from COVID-19.
•Vir Biotechnology, Inc. has announced unique partnerships with Alnylam Pharmaceuticals, Inc. and GlaxoSmithKline to utilize its neutralizing antibody platform to identify novel drug candidates that could be used as therapeutic or preventative COVID-19 treatments.
•Many other Alexandria tenants, including AbbVie Inc., Atreca Inc., Corvus Pharmaceuticals, Inc., Enanta Pharmaceuticals, Inc., Novartis AG, and Pfizer Inc.,are similarly endeavoring to develop novel therapies and repurpose existing and investigational drugs to provide near-term treatments for moderate and severe COVID-19 patients and those at highest risk.
Improving testing quality and capacity
•Color Genomics, Laboratory Corporation of America Holdings, Quest Diagnostics, Roche, Thermo Fisher Scientific Inc., Verily Life Sciences, and others are working to improve testing quality, capacity, and turnaround time to more effectively determine who has an active COVID-19 infection, who has been exposed to the virus, and who has developed immunity against it. The increased availability of widespread COVID-19 testing is critical for curtailing the pandemic and facilitating a safer reopening for workplaces, communities, and society overall.
Operating summary
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Historical Same Property Net Operating Income | | | Favorable Lease Structure(1) | | | | | | | |
| | | Strategic Lease Structure by Owner and Operator of Collaborative Life Science, Technology, and Agtech Campuses | | | | | | | |
| | | Increasing cash flows | | | | | | | |
| | | Percentage of leases containing annual rent escalations | | | | | | 94 | % | |
| | | Stable cash flows | | | | | | | |
| | | Percentage of triple net leases | | | | | | 93 | % | |
| | | Lower capex burden | | | | | | | |
| | | Percentage of leases providing for the recapture of capital expenditures | | | | | | 92 | % | |
| | | | | | | | | | |
| | | | | | | | | | |
Historical Rental Rate: Renewed/Re-Leased Space | | | Margins(2) | | | | | | | |
| | | | | | | | | | |
| | | Operating | | | | | Adjusted EBITDA | | |
| | | 72% | | | | | 69% | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(1)Percentages calculated based on RSF as of June 30, 2020.
(2)Represents percentages for the three months ended June 30, 2020.
| | | | | | | | |
Long-Duration Cash Flows fromFrom High-Quality, Diverse, and Innovative Tenants | | |
| | | |
Investment-Grade or Publicly Traded Large Cap Tenants | | Long-Duration Lease Terms |
| | |
| | |
51% | | 7.8 Years |
of ARE’s | | Weighted-Average |
Annual Rental Revenue from Investment-Grade Tenants(1) | |
Remaining TermA REIT Industry-Leading Tenant Roster(2) |
| | |
Tenant Mix | 50 | % | | |
| | |
| Tenant Mix | |
| | |
| | |
| | |
|
|
| Percentage of ARE’s Annual Rental Revenue(1)
| | |
(1)Represents annual rental revenue in effect as of June 30, 2020. Refer to the “Non-GAAP measures and definitions” section within this Item 2 for additional information.
(2)Based on aggregate annual rental revenue in effect as of June 30, 2020. Refer to definition of “Annual rental revenue” in the “Non-GAAP measures and definitions” section within this Item 2 for additional information on our methodology on annual rental revenue for unconsolidated real estate joint ventures.
(3)67% of our annual rental revenue from technology tenants is from investment-grade or publicly traded large cap tenants. The weighted-average remaining term of leases with our technology tenants is 15.5 years.
(4)Revenues from our other tenants, aggregating 5.0% of our annual rental revenue, comprise 4.3% of annual rental revenue from professional services, finance, telecommunications, and construction/real estate companies and only 0.7% from retail-related tenants.
| | | | | |
(1) | Represents annual rental revenueHigh-Quality Cash Flows From Class A Properties in effect as of September 30, 2017.AAA Locations |
|
| |
High-Quality Cash Flows from Class A Properties in AAA Locations | AAA Locations |
| |
74% | |
Class A Properties in
AAA Locations
| AAA Locations |
| |
78% |
of ARE’s
Annual Rental Revenue(1) | |
| Percentage of ARE’s Annual Rental Revenue(1)
|
Solid Demand for Class A Properties
in AAA Locations Drives Solid Occupancy
|
|
Solid Historical
Occupancy(2)
| Occupancy across Key Locations |
| |
95% |
Over 10 Years |
| Occupancy of Operating Properties as of
September 30, 2017
|
| |
(1) | Represents annual rental revenue in effect as of September 30, 2017. |
| |
Solid Historical Occupancy(2) | Average occupancy of operating properties in North America as of each December 31 for the last 10 years and as of September 30, 2017.Occupancy Across Key Locations(3) |
| |
96% | |
(3)Over 10 Years | In December 2016, Eli Lilly and Company vacated 125,409 RSF, or 3% of RSF in San Diego, at 10300 Campus Point Drive in our University Town Center submarket and relocated and expanded into 305,006 RSF at 10290 Campus Point Drive. |
(1)Represents annual rental revenue in effect as of June 30, 2020. Refer to the “Non-GAAP measures and definitions” section within this Item 2 for additional information.
(2)Represents average occupancy of operating properties in North America as of each December 31 for the last 10 years and as of June 30, 2020.
(3)As of June 30, 2020.
(4)Refer to the “Summary of occupancy percentages in North America” section within this Item 2 for additional information.
Leasing
The following table summarizes our leasing activity at our properties: | | | | Three Months Ended | | Nine Months Ended | | Year Ended | | Three Months Ended | | | Six Months Ended | | | Year Ended | |
| | September 30, 2017 | | September 30, 2017 | | December 31, 2016 | | June 30, 2020 | | | June 30, 2020 | | | December 31, 2019 | |
| | Including Straight-Line Rent | | Cash Basis | | Including Straight-Line Rent | | Cash Basis | | Including Straight-Line Rent | | Cash Basis | | Including Straight-Line Rent | | | Cash Basis | | Including Straight-Line Rent | | | Cash Basis | | Including Straight-Line Rent | | | Cash Basis |
(Dollars per RSF) | | | | | | | | | | | | | (Dollars per RSF) | | | | | | | | | | | | |
Leasing activity: | | | | | | | | | | | | | Leasing activity: | |
Renewed/re-leased space (1) | | |
| | |
| | |
| | |
| | |
| | |
| Renewed/re-leased space(1) | | | | | | | | | | | | |
Rental rate changes | | 24.2% |
| | 10.0% |
| | 25.2% |
| | 13.3% |
| | 27.6% |
| | 12.0% |
| Rental rate changes | | 37.2% | | 15.0% | | 41.1% | | 17.9% | | 32.2% | | 17.6% |
New rates | | $ | 59.84 |
| | $ | 57.59 |
| | $ | 51.30 |
| | $ | 48.24 |
| | $ | 48.60 |
| | $ | 45.83 |
| New rates | | $55.34 | | | $53.15 | | | $51.78 | | | $49.07 | | | $58.65 | | | $56.19 | |
Expiring rates | | $ | 48.19 |
| | $ | 52.37 |
| | $ | 40.97 |
| | $ | 42.56 |
| | $ | 38.09 |
| | $ | 40.92 |
| Expiring rates | | $40.34 | | | $46.20 | | | $36.71 | | | $41.61 | | | $44.35 | | | $47.79 | |
Rentable square footage | | 448,472 |
| | | | 1,931,477 |
| | | | 2,129,608 |
| | | |
RSF | | RSF | | 699,130 | | | 1,251,152 | | | 2,427,108 | | |
Tenant improvements/leasing commissions | | $ | 18.52 |
| | | | $ | 19.54 |
| (2) | | | $ | 15.69 |
| | | Tenant improvements/leasing commissions | | $16.86 | | | $19.52 | | | $20.28 | | |
Weighted-average lease term | | 6.4 years |
| | | | 6.2 years |
| | | | 5.5 years |
| | | Weighted-average lease term | | 5.3 years | | 5.4 years | | 5.7 years | |
| | | | | | | | | | | | | |
Developed/redeveloped/previously vacant space leased | | | | | | | | | | | | | |
Developed/redeveloped previously vacant space leased | | Developed/redeveloped previously vacant space leased | |
New rates | | $ | 57.81 |
| | $ | 56.65 |
| | $ | 36.19 |
| | $ | 32.92 |
| | $ | 50.24 |
| | $ | 38.72 |
| New rates | | $58.18 | | | $54.31 | | | $56.12 | | | $53.37 | | | $55.95 | | | $52.19 | |
Rentable square footage | | 338,453 |
| | | | 1,258,006 |
| | | | 1,260,459 |
| | | |
RSF | | RSF | | 378,380 | | (2) | | 529,713 | | | 2,635,614 | | |
Tenant improvements/leasing commissions | | $ | 11.95 |
| | | | $ | 8.57 |
| | | | $ | 12.42 |
| | | Tenant improvements/leasing commissions | | $19.79 | | | $17.73 | | | $13.74 | | |
Weighted-average lease term | | 8.0 years |
| | | | 9.5 years |
| | | | 32.6 years |
| (3) | | Weighted-average lease term | | 10.2 years | | 8.9 years | | 9.8 years | |
| | | | | | | | | | | | | |
Leasing activity summary (totals): | | | | | | | | | | | | | Leasing activity summary (totals): | |
New rates | | $ | 58.97 |
| | $ | 57.19 |
| | $ | 45.34 |
| | $ | 42.20 |
| | $ | 49.21 |
| | $ | 43.19 |
| New rates | | $56.33 | | | $53.56 | | | $53.07 | | | $50.35 | | | $57.25 | | | $54.11 | |
Rentable square footage | | 786,925 |
| | | | 3,189,483 |
| (4) | | | 3,390,067 |
| | | |
RSF | | RSF | | 1,077,510 | | (3) | | 1,780,865 | | (3) | | 5,062,722 | | |
Tenant improvements/leasing commissions | | $ | 15.70 |
| | | | $ | 15.21 |
| | | | $ | 14.48 |
| | | Tenant improvements/leasing commissions | | $17.89 | | | $18.99 | | | $16.88 | | |
Weighted-average lease term | | 7.1 years |
| | | | 7.5 years |
| | | | 15.6 years |
| | | Weighted-average lease term | | 7.0 years | | 6.4 years | | 7.8 years | |
| | | | | | | | | | | | | |
Lease expirations: (1) | | | | | | | | | | | | | |
Lease expirations(1) | | Lease expirations(1) | |
Expiring rates | | $ | 49.19 |
| | $ | 53.16 |
| | $ | 40.27 |
| | $ | 41.75 |
| | $ | 36.70 |
| | $ | 39.32 |
| Expiring rates | | $39.25 | | | $44.04 | | | $36.36 | | | $40.67 | | | $43.43 | | | $46.59 | |
Rentable square footage | | 470,165 |
| | | | 2,228,871 |
| | | | 2,484,169 |
| | | |
RSF | | RSF | | 1,081,504 | | | 1,879,355 | | | 2,822,434 | | |
Leasing activity includes 100% of results for properties managed by us. Refereach property in which we have an investment in North America.
(1)Excludes month-to-month leases aggregating 65,592 RSF and 41,809 RSF as of June 30, 2020, and December 31, 2019, respectively.
(2)As of the date of this report, our value-creation pipeline was 65% leased or negotiating.
(3)During the six months ended June 30, 2020, we granted tenant concessions/free rent averaging 1.7 months with respect to the “Non-GAAP Measures and Definitions” section within this Item 2 for a description1,780,865 RSF leased. Approximately 66% of the basis used to computeleases executed during the measures above.six months ended June 30, 2020, did not include concessions for free rent.
| |
(1) | Excludes 29 month-to-month leases for 51,968 RSF and 20 month-to-month leases for 31,207 RSF as of September 30, 2017, and December 31, 2016, respectively.
|
| |
(2) | Includes approximately $9.7 million, or $17.40 per RSF, of leasing commissions related to lease renewals and re-leasing space for five leases in our Greater Boston and San Francisco markets with a weighted average lease term of 10 years and rental rate increases of 28.1% and 20.5% (cash basis). |
| |
(3) | 2016 information includes the 75-year ground lease with Uber at 1455 and 1515 Third Street. The average lease term excluding this ground lease was 10.7 years. |
| |
(4) | During the nine months ended September 30, 2017, we granted tenant concessions/free rent averaging 2.1 months with respect to the 3,189,483 RSF leased. Approximately 70% of the leases executed during the nine months ended September 30, 2017, did not include concessions for free rent. |
Summary of contractual lease expirations
The following table summarizes information with respect to the contractual lease expirations at our properties as of June 30, 2020:
September | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year | | | | RSF | | | | Percentage of Occupied RSF | | | | Annual Rental Revenue (Per RSF)(1) | | | | Percentage of Total Annual Rental Revenue | | |
| | | | | | | | | | | | | | | | | | |
| 2020 | (2) | | | 807,485 | | | | | 3.0 | % | | | | $ | 38.40 | | | | | 2.3 | % | |
| 2021 | | | | 1,550,450 | | | | | 5.7 | % | | | | $ | 42.80 | | | | | 4.8 | % | |
| 2022 | | | | 2,439,487 | | | | | 9.0 | % | | | | $ | 42.06 | | | | | 7.5 | % | |
| 2023 | | | | 2,815,546 | | | | | 10.4 | % | | | | $ | 45.65 | | | | | 9.3 | % | |
| 2024 | | | | 2,316,246 | | | | | 8.6 | % | | | | $ | 45.58 | | | | | 7.7 | % | |
| 2025 | | | | 1,979,757 | | | | | 7.3 | % | | | | $ | 48.43 | | | | | 7.0 | % | |
| 2026 | | | | 1,680,093 | | | | | 6.2 | % | | | | $ | 48.20 | | | | | 5.9 | % | |
| 2027 | | | | 2,481,628 | | | | | 9.2 | % | | | | $ | 50.78 | | | | | 9.2 | % | |
| 2028 | | | | 1,842,786 | | | | | 6.8 | % | | | | $ | 59.34 | | | | | 8.0 | % | |
| 2029 | | | | 1,474,769 | | | | | 5.4 | % | | | | $ | 57.38 | | | | | 6.2 | % | |
Thereafter | | | | | 7,698,120 | | | | | 28.4 | % | | | | $ | 57.69 | | | | | 32.1 | % | |
| | | | | | | | | | | | | | | | | | |
(1)Represents amounts in effect as of June 30, 2017:2020.
(2)Excludes month-to-month leases aggregating 65,592 RSF as of June 30, 2020. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year | | Number of Leases | | RSF | | Percentage of Occupied RSF | | Annual Rental Revenue (per RSF) | | Percentage of Total Annual Rental Revenue |
| | | | | | | | | | | | | | | | | | | | | | |
| 2017 | (1) | | | 12 |
| | | | 160,013 |
| | | | 0.9 | % | | | | $ | 49.71 |
| | | | 0.9 | % | |
| 2018 | | | | 105 |
| | | | 1,349,740 |
| | | | 7.4 | % | | | | $ | 38.46 |
| | | | 6.1 | % | |
| 2019 | | | | 84 |
| | | | 1,419,777 |
| | | | 7.7 | % | | | | $ | 41.06 |
| | | | 6.9 | % | |
| 2020 | | | | 104 |
| | | | 1,861,344 |
| | | | 10.1 | % | | | | $ | 38.48 |
| | | | 8.4 | % | |
| 2021 | | | | 85 |
| | | | 1,665,047 |
| | | | 9.1 | % | | | | $ | 42.01 |
| | | | 8.2 | % | |
| 2022 | | | | 72 |
| | | | 1,325,010 |
| | | | 7.2 | % | | | | $ | 44.54 |
| | | | 6.9 | % | |
| 2023 | | | | 40 |
| | | | 1,703,829 |
| | | | 9.3 | % | | | | $ | 42.50 |
| | | | 8.5 | % | |
| 2024 | | | | 29 |
| | | | 1,349,860 |
| | | | 7.4 | % | | | | $ | 48.49 |
| | | | 7.7 | % | |
| 2025 | | | | 18 |
| | | | 545,918 |
| | | | 3.0 | % | | | | $ | 50.38 |
| | | | 3.2 | % | |
| 2026 | | | | 16 |
| | | | 699,825 |
| | | | 3.8 | % | | | | $ | 45.68 |
| | | | 3.8 | % | |
Thereafter | | | 61 |
| | | | 6,267,531 |
| | | | 34.1 | % | | | | $ | 53.27 |
| | | | 39.4 | % | |
| | | | | | | | | | | | | | | | | | | | | | |
Lease expirations include 100% of the RSF for each property managed by us in North America.
|
| |
(1) | Excludes 29 month-to-month leases for 51,968 RSF as of September 30, 2017. |
The following tables present information by market with respect to our lease expirations in North America as of SeptemberJune 30, 2017,2020, for the remainder of 20172020, and all of 2018:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 Contractual Lease Expirations (in RSF) | | | | | | | | | | Annual Rental Revenue (Per RSF)(3) |
Market | | Leased | | Negotiating/ Anticipating | | Targeted for Development/ Redevelopment | | Remaining Expiring Leases(1) | | Total(2) | | |
| | | | | | | | | | | | |
Greater Boston | | 79,736 | | | 38,834 | | | 75,754 | | (4) | 69,051 | | | 263,375 | | | $ | 44.68 | |
San Francisco | | 15,128 | | | — | | | — | | | 106,540 | | | 121,668 | | | 45.86 | |
New York City | | 3,407 | | | — | | | — | | | 21,581 | | | 24,988 | | | 59.81 | |
San Diego | | 36,038 | | | 71,961 | | (5) | — | | | 126,643 | | | 234,642 | | | 33.69 | |
Seattle | | 15,835 | | | — | | | — | | | 8,397 | | | 24,232 | | | 54.24 | |
Maryland | | 10,820 | | | — | | | — | | | 12,477 | | | 23,297 | | | 32.29 | |
Research Triangle | | 34,226 | | | 1,592 | | | — | | | 41,778 | | | 77,596 | | | 15.95 | |
Canada | | — | | | 2,587 | | | — | | | 20,953 | | | 23,540 | | | 11.23 | |
Non-cluster markets | | 6,285 | | | — | | | — | | | 7,862 | | | 14,147 | | | 46.59 | |
Total | | 201,475 | | | 114,974 | | | 75,754 | | | 415,282 | | | 807,485 | | | $ | 38.40 | |
Percentage of expiring leases | | 25 | % | | 14 | % | | 9 | % | | 52 | % | | 100 | % | | |
| | | | | | | | | | | | |
| | 2021 Contractual Lease Expirations (in RSF) | | | | | | | | | | Annual Rental Revenue (per RSF)(3) |
Market | | Leased | | Negotiating/ Anticipating | | Targeted for Development/ Redevelopment | | Remaining Expiring Leases(6) | | Total | | |
| | | | | | | | | | | | |
Greater Boston | | — | | | 11,897 | | | 79,101 | | (4) | 241,230 | | | 332,228 | | | $ | 43.69 | |
San Francisco | | 35,798 | | | 2,843 | | | 26,738 | | (7) | 403,952 | | | 469,331 | | | 52.39 | |
New York City | | 13,101 | | | — | | | — | | | 2,315 | | | 15,416 | | | 116.82 | |
San Diego | | 89,780 | | | 44,681 | | | 41,475 | | (8) | 198,447 | | | 374,383 | | | 36.18 | |
Seattle | | 15,704 | | | — | | | — | | | 54,514 | | | 70,218 | | | 51.17 | |
Maryland | | — | | | 14,323 | | | — | | | 107,770 | | | 122,093 | | | 24.58 | |
Research Triangle | | 16,942 | | | 22,634 | | | — | | | 91,517 | | | 131,093 | | | 28.45 | |
Canada | | — | | | 4,722 | | | — | | | 13,672 | | | 18,394 | | | 23.40 | |
Non-cluster markets | | — | | | — | | | — | | | 17,294 | | | 17,294 | | | 67.08 | |
Total | | 171,325 | | | 101,100 | | | 147,314 | | | 1,130,711 | | | 1,550,450 | | | $ | 42.80 | |
Percentage of expiring leases | | 11 | % | | 7 | % | | 10 | % | | 72 | % | | 100 | % | | |
| | | | | | | | | | | | |
(1)The largest remaining contractual lease expiration in 2020 is 93,521 RSF related to a recently acquired property in our South San Francisco submarket.
(2)Excludes month-to-month leases aggregating 65,592 RSF as of June 30, 2020.
(3)Represents amounts in effect as of June 30, 2020.
(4)Represents office space aggregating 154,855 RSF at The Arsenal on the Charles, a campus acquired on December 17, 2019, in our Cambridge/Inner Suburbs submarket, that is targeted for redevelopment into office/laboratory space upon expiration of the respective existing leases.
(5)Includes 71,961 RSF at 9363 and 9393 Towne Centre Drive in our University Town Center submarket, a future development site.
(6)The largest remaining contractual lease expiration in 2021 is 89,576 RSF at a Class A office/laboratory building in our University Town Center submarket.
(7)Represents two retail leases aggregating 26,738 RSF at our recently acquired properties at 987 and 1075 Commercial Street. Upon expiration of these leases, we expect to demolish the existing building to allow for the future development of 700,000 RSF of an office/laboratory building on the site.
(8)Represents 41,475 RSF at the recently acquired property at 4555 Executive Drive in our University Town Center submarket. Upon expiration of the existing lease during the third quarter of 2021, we expect to demolish the existing building to allow for the future development of a new office/laboratory building on the site.
|
| | | | | | | | | | | | | | | | | | | |
| | 2017 Contractual Lease Expirations | | Annual Rental Revenue (per RSF) |
| | Leased | | Negotiating/ Anticipating | | Targeted for Development/Redevelopment | | Remaining Expiring Leases | | Total (1) | |
Market | | | | | | |
Greater Boston | | 33,291 |
| | 11,894 |
| | — |
| | 36,506 |
| | 81,691 |
| | $ | 46.78 |
|
San Francisco | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
New York City | | 9,131 |
| | — |
| | — |
| | — |
| | 9,131 |
| | N/A |
|
San Diego | | 3,514 |
| | — |
| | — |
| | 24,581 |
| | 28,095 |
| | 37.79 |
|
Seattle | | — |
| | — |
| | — |
| | 6,180 |
| | 6,180 |
| | 52.89 |
|
Maryland | | 14,141 |
| | — |
| | — |
| | — |
| | 14,141 |
| | 22.27 |
|
Research Triangle Park | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Canada | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Non-cluster markets | | — |
| | — |
| | — |
| | 20,775 |
| | 20,775 |
| | 24.45 |
|
Total | | 60,077 |
| | 11,894 |
| | — |
| | 88,042 |
| | 160,013 |
| | $ | 49.71 |
|
Percentage of expiring leases | | 38 | % | | 7 | % | | — | % | | 55 | % | | 100 | % | | |
| | | | | | | | | | | | |
| | 2018 Contractual Lease Expirations | | Annual Rental Revenue (per RSF) |
| | Leased | | Negotiating/ Anticipating | | Targeted for Development/Redevelopment | | Remaining Expiring Leases | | Total | |
Market | | | | | | |
Greater Boston | | 23,419 |
| | 57,160 |
| | — |
| | 209,405 |
| (2) | 289,984 |
| | $ | 58.15 |
|
San Francisco | | 35,562 |
| | 54,569 |
| | 321,971 |
| (3) | 73,502 |
| | 485,604 |
| | 35.26 |
|
New York City | | — |
| | — |
| | — |
| | 6,821 |
| | 6,821 |
| | N/A |
|
San Diego | | 15,741 |
| | 20,220 |
| | — |
| | 274,570 |
| (4) | 310,531 |
| | 34.04 |
|
Seattle | | — |
| | 15,264 |
| | — |
| | — |
| | 15,264 |
| | 43.66 |
|
Maryland | | 5,104 |
| | 49,852 |
| | — |
| | 31,986 |
| | 86,942 |
| | 20.45 |
|
Research Triangle Park | | — |
| | — |
| | — |
| | 62,760 |
| | 62,760 |
| | 25.94 |
|
Canada | | — |
| | 19,992 |
| | — |
| | 60,697 |
| | 80,689 |
| | 21.00 |
|
Non-cluster markets | | — |
| | — |
| | — |
| | 11,145 |
| | 11,145 |
| | 26.02 |
|
Total | | 79,826 |
| | 217,057 |
| | 321,971 |
| | 730,886 |
| | 1,349,740 |
| | $ | 38.46 |
|
Percentage of expiring leases | | 6 | % | | 16 | % | | 24 | % | | 54 | % | | 100 | % | | |
| | | | | | | | | | | | |
Lease expirations include 100% of the RSF for each property managed by us in North America. Annual rental revenue (per RSF) represents amounts in effect as of September 30, 2017. |
59
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(1) | Excludes 29 month-to-month leases for 51,968 RSF as of September 30, 2017. |
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(2) | Includes 186,769 RSF located in our Cambridge submarket for the remaining expiring leases in 2018, of which no single expiring lease is greater than 30,000 RSF. Lease expirations aggregating 46,356 RSF at 161 First Street will remain unoccupied until the completion of the adjacent 50 Rogers Street residential development project. |
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(3) | Includes 195,000 RSF expiring during the three months ended March 31, 2018, at 960 Industrial Road, a recently acquired property located in our Greater Stanford submarket. We are pursuing entitlements aggregating 500,000 RSF for a multi-building development. Also includes 126,971 RSF of office space targeted for redevelopment into office/laboratory space upon expiration of the existing lease in the three months ended September 30, 2018, at 681 Gateway Boulevard in our South San Francisco submarket. Concurrent with our redevelopment, we anticipate expanding the building by an additional 15,000 to 30,000 RSF and expect the project to be delivered in 2019. |
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(4) | The two largest expiring leases in 2018 are 71,510 RSF in January 2018 at 9880 Campus Point Drive in our University Town Center submarket, which is under evaluation for options to renovate the building to create a Class A office/laboratory property, and 56,698 RSF at 6138/6150 Nancy Ridge Drive in our Sorrento Mesa submarket, which we are currently marketing. |
Top 20 tenants
77%81% of Top 20 Annual Rental Revenue fromFrom Investment-Grade
or Publicly Traded Large Cap Tenants(1)
Our properties are leased to a high-quality and diverse group of tenants, with no individual tenant accounting for more than 4.0%3.9% of our annual rental revenue in effect as of SeptemberJune 30, 2017.2020. The following table sets forth information regarding leases with our 20 largest tenants in North America based upon annual rental revenue in effect as of SeptemberJune 30, 20172020 (dollars in thousands)thousands, except average market cap amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Remaining Lease Term(1) (in Years) | | | | | Aggregate RSF | | | Annual Rental Revenue(1) | | | | Percentage of Aggregate Annual Rental Revenue (1) | | | Investment-Grade Credit Ratings | | | | Average Market Cap(1) (in billions) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Tenant | | | | | | | | | | | | | | | | | Moody’s | | S&P | | | |
1 | | | Bristol-Myers Squibb Company | | | 8.2 | | | | | 900,050 | | | | $ | 52,243 | | | | 3.9 | % | | | A2 | | A+ | | $ | 116.5 | | |
2 | | | Takeda Pharmaceutical Company Ltd. | | | 9.1 | | | | | 606,249 | | | | | 39,342 | | | | 2.9 | | | | Baa2 | | BBB+ | | $ | 57.2 | | |
3 | | | Facebook, Inc. | | | 11.5 | | | | | 903,786 | | | | | 38,951 | | | | 2.9 | | | | — | | — | | $ | 562.6 | | |
4 | | | Illumina, Inc. | | | 10.1 | | | | | 891,495 | | | | | 35,907 | | | | 2.7 | | | | — | | BBB | | $ | 45.4 | | |
5 | | | Sanofi | | | 8.0 | | | | | 494,693 | | | | | 33,845 | | | | 2.5 | | | | A1 | | AA | | $ | 116.9 | | |
6 | | | Eli Lilly and Company | | | 9.0 | | | | | 531,784 | | | | | 33,527 | | | | 2.5 | | | | A2 | | A+ | | $ | 124.4 | | |
7 | | | Novartis AG | | | 7.8 | | | | | 441,894 | | | | | 31,216 | | | | 2.3 | | | | A1 | | AA- | | $ | 223.9 | | |
8 | | | Roche | | | 2.7 | | (2) | | | 649,482 | | | | | 28,298 | | | | 2.1 | | | | Aa3 | | AA | | $ | 270.2 | | |
9 | | | Uber Technologies, Inc. | | | 62.4 | | (3) | | | 1,009,188 | | | | | 27,379 | | | | 2.0 | | | | — | | — | | $ | 56.3 | | |
10 | | | bluebird bio, Inc. | | | 6.9 | | | | | 312,805 | | | | | 23,169 | | | | 1.7 | | | | — | | — | | $ | 4.7 | | |
11 | | | Maxar Technologies(4) | | | 5.0 | | | | | 478,000 | | | | | 21,577 | | | | 1.6 | | | | — | | — | | $ | 0.7 | | |
12 | | | Massachusetts Institute of Technology | | | 8.5 | | | | | 257,626 | | | | | 21,145 | | | | 1.6 | | | | Aaa | | AAA | | $ | — | | |
13 | | | Moderna, Inc. | | | 10.6 | | | | | 354,396 | | | | | 21,054 | | | | 1.6 | | | | — | | — | | $ | 9.9 | | |
14 | | | Merck & Co., Inc. | | | 13.1 | | | | | 321,063 | | | | | 20,075 | | | | 1.5 | | | | A1 | | AA- | | $ | 211.3 | | |
15 | | | New York University | | | 11.3 | | | | | 201,284 | | | | | 19,126 | | | | 1.4 | | | | Aa2 | | AA- | | $ | — | | |
16 | | | Pfizer Inc. | | | 4.7 | | | | | 416,979 | | | | | 17,762 | | | | 1.3 | | | | A1 | | AA- | | $ | 204.9 | | |
17 | | | Stripe, Inc. | | | 7.3 | | | | | 295,333 | | | | | 17,736 | | | | 1.3 | | | | — | | — | | $ | — | | |
18 | | | athenahealth, Inc.(4) | | | 12.0 | | | | | 409,710 | | | | | 17,686 | | | | 1.3 | | | | — | | — | | $ | — | | |
19 | | | Amgen Inc. | | | 3.8 | | | | | 407,369 | | | | | 16,838 | | | | 1.3 | | | | Baa1 | | A- | | $ | 127.8 | | |
20 | | | United States Government | | | 7.4 | | | | | 287,638 | | | | | 16,521 | | | | 1.2 | | | | Aaa | | AA+ | | $ | — | | |
| | Total/weighted-average | | | 11.2 | | (3) | | | 10,170,824 | | | | $ | 533,397 | | | | 39.6 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Remaining Lease Term in Years (1) | | Aggregate RSF | | Annual Rental Revenue (1) | | Percentage of Aggregate Annual Rental Revenue (1) | | Investment-Grade Ratings | |
| | | | | | | | |
| | Tenant | | | | | | Moody’s | | S&P | |
1 |
| | Illumina, Inc. | | | 12.8 |
| | | 891,495 |
| | $ | 34,484 |
| | 4.0% | | — | | BBB | |
2 |
| | Takeda Pharmaceutical Company Ltd. | | | 12.5 |
| | | 386,111 |
| | 30,610 |
| | 3.5 | | A1 | | A- | |
3 |
| | Eli Lilly and Company | | | 12.1 |
| | | 469,266 |
| | 29,334 |
| | 3.4 | | A2 | | AA- | |
4 |
| | Bristol-Myers Squibb Company | | | 10.2 |
| | | 460,050 |
| | 28,758 |
| | 3.3 | | A2 | | A+ | |
5 |
| | Novartis AG | | | 9.1 |
| | | 377,831 |
| | 28,627 |
| | 3.3 | | Aa3 | | AA- | |
6 |
| | Sanofi | | | 10.5 |
| | | 446,975 |
| | 25,205 |
| | 2.9 | | A1 | | AA | |
7 |
| | Uber Technologies, Inc. | | | 75.2 |
| (2) | | 422,980 |
| | 22,130 |
| | 2.5 | | — | | — | |
8 |
| | New York University | | | 12.9 |
| | | 209,224 |
| | 20,651 |
| | 2.4 | | Aa2 | | AA- | |
9 |
| | bluebird bio, Inc. | | | 9.3 |
| | | 262,261 |
| | 20,101 |
| | 2.3 | | — | | — | |
10 |
| | Roche | | | 4.4 |
| | | 343,861 |
| | 17,597 |
| | 2.0 | | A1 | | AA | |
11 |
| | Amgen Inc. | | | 6.5 |
| | | 407,369 |
| | 16,838 |
| | 1.9 | | Baa1 | | A | |
12 |
| | Massachusetts Institute of Technology | | | 7.7 |
| | | 256,126 |
| | 16,729 |
| | 1.9 | | Aaa | | AAA | |
13 |
| | Celgene Corporation | | | 5.9 |
| | | 360,014 |
| | 15,276 |
| | 1.8 | | Baa2 | | BBB+ | |
14 |
| | United States Government | | | 7.8 |
| | | 264,358 |
| | 15,007 |
| | 1.7 | | Aaa | | AA+ | |
15 |
| | FibroGen, Inc. | | | 6.1 |
| | | 234,249 |
| | 14,198 |
| | 1.6 | | — | | — | |
16 |
| | Biogen Inc. | | | 11.0 |
| | | 305,212 |
| | 13,278 |
| | 1.5 | | Baa1 | | A- | |
17 |
| | Juno Therapeutics, Inc. | | | 11.5 |
| | | 241,276 |
| | 12,619 |
| | 1.5 | | — | | — | |
18 |
| | The Regents of the University of California | | | 5.9 |
| | | 233,527 |
| | 10,733 |
| | 1.2 | | Aa2 | | AA | |
19 |
| | Merrimack Pharmaceuticals, Inc. | | | 1.5 |
| (3) | | 141,432 |
| | 9,998 |
| | 1.2 | | — | | — | |
20 |
| | Foundation Medicine, Inc. (4) | | | 6.4 |
| | | 171,446 |
| | 9,910 |
| | 1.1 | | — | (4) | — | (4) |
| | Total/weighted average | | | 13.2 |
| (5) | | 6,885,063 |
| | $ | 392,083 |
| | 45.0% | | | | | |
Annual rental revenue and RSF include 100% of each property managed by us in North America.
| |
(1) | Based on percentage of aggregate annual rental revenue in effect as of September 30, 2017. |
| |
(2) | Represents a ground lease with Uber Technologies, Inc. at 1455 and 1515 Third Street. |
| |
(3) | Tenant added through the acquisition of a nine-building campus at Alexandria Center® at One Kendall Square, located in our Cambridge submarket.
|
| |
(4) | As of June 30, 2017, Roche (A1/AA) owned approximately 59% of the outstanding stock of Foundation Medicine, Inc. |
| |
(5) | Excluding the ground lease to Uber Technologies, Inc., the weighted-average remaining lease term for our top 20 tenants was 9.4 years as of September 30, 2017. |
(1)Based on aggregate annual rental revenue in effect as of June 30, 2020. Refer to the definitions of “Annual rental revenue” and “Investment-grade or publicly traded large cap tenants” in the “Non-GAAP measures and definitions” section within this Item 2 for our methodologies on annual rental revenue from unconsolidated real estate joint ventures and average daily market capitalization.
(2)Includes 197,787 RSF expiring in 2022 at our recently acquired property at 651 Gateway Boulevard in our South San Francisco submarket. Upon expiration of the lease, 651 Gateway Boulevard will be redeveloped into a Class A office/laboratory building.
(3)Includes (i) ground leases for land at 1455 and 1515 Third Street (two buildings aggregating 422,980 RSF), and (ii) leases at 1655 and 1725 Third Street (two buildings aggregating 586,208 RSF) owned by our unconsolidated joint venture in which we have an ownership interest of 10%. Annual rental revenue is presented using 100% of the annual rental revenue of our consolidated properties and our share of annual rental revenue for our unconsolidated real estate joint ventures. Refer to footnote 1 for additional details. Excluding the ground lease, the weighted-average remaining lease term for our top 20 tenants was 8.5 years as of June 30, 2020.
(4)Located at properties acquired during the three months ended December 31, 2019.
Locations of properties
The locations of our properties are diversified among a number of life science, technology, and technologyagtech cluster markets. The following table sets forth the total RSF, number of properties, and annual rental revenue in effect as of SeptemberJune 30, 2017,2020, in each of our markets in North America of our properties by market (dollars in thousands, except per RSF amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | RSF | | | | | | | | | | Number of Properties | | Annual Rental Revenue | | | | |
Market | | Operating | | Development | | Redevelopment | | Total | | % of Total | | | | Total | | % of Total | | Per RSF |
Greater Boston | | 7,591,334 | | | — | | | 205,690 | | | 7,797,024 | | | 25 | % | | 66 | | | $ | 475,672 | | | 35 | % | | $ | 63.82 | |
San Francisco | | 7,732,722 | | | 841,178 | | | 347,912 | | | 8,921,812 | | | 29 | | | 62 | | | 370,512 | | | 28 | | | 57.88 | |
New York City | | 1,127,580 | | | — | | | 140,098 | | | 1,267,678 | | | 4 | | | 5 | | | 77,766 | | | 6 | | | 71.91 | |
San Diego | | 5,990,151 | | | 199,621 | | | 63,774 | | | 6,253,546 | | | 20 | | | 77 | | | 216,032 | | | 16 | | | 39.31 | |
Seattle | | 1,538,465 | | | 100,086 | | | — | | | 1,638,551 | | | 5 | | | 17 | | | 77,640 | | | 6 | | | 53.07 | |
Maryland | | 2,799,682 | | | 261,096 | | | 20,998 | | | 3,081,776 | | | 10 | | | 43 | | | 76,413 | | | 6 | | | 29.35 | |
Research Triangle | | 1,224,904 | | | 160,000 | | | — | | | 1,384,904 | | | 4 | | | 17 | | | 33,186 | | | 2 | | | 28.00 | |
Canada | | 256,967 | | | — | | | — | | | 256,967 | | | 1 | | | 3 | | | 5,717 | | | — | | | 24.72 | |
Non-cluster markets | | 354,879 | | | — | | | — | | | 354,879 | | | 1 | | | 11 | | | 9,508 | | | 1 | | | 37.83 | |
Properties held for sale | | 184,621 | | | — | | | — | | | 184,621 | | | 1 | | | 3 | | | 942 | | | — | | | N/A |
North America | | 28,801,305 | | | 1,561,981 | | | 778,472 | | | 31,141,758 | | | 100 | % | | 304 | | | $ | 1,343,388 | | | 100 | % | | $ | 51.30 | |
| | | | 2,340,453 | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | RSF | | Number of Properties | | Annual Rental Revenue |
Market | | Operating | | Development | | Redevelopment | | Total | | % of Total | | | Total | | % of Total | | Per RSF |
Greater Boston | | 6,135,551 |
| | 91,155 |
| | 59,173 |
| | 6,285,879 |
| | 30 | % | | 53 |
| | $ | 360,005 |
| | 41 | % | | $ | 61.19 |
|
San Francisco | | 3,738,400 |
| | 750,930 |
| | — |
| | 4,489,330 |
| | 22 |
| | 34 |
| | 171,661 |
| | 20 |
| | 45.92 |
|
New York City | | 727,674 |
| | — |
| | — |
| | 727,674 |
| | 4 |
| | 2 |
| | 63,128 |
| | 7 |
| | 86.93 |
|
San Diego | | 3,892,451 |
| | 170,523 |
| | 163,648 |
| | 4,226,622 |
| | 21 |
| | 52 |
| | 137,174 |
| | 16 |
| | 38.16 |
|
Seattle | | 1,006,705 |
| | 31,215 |
| | — |
| | 1,037,920 |
| | 5 |
| | 11 |
| | 47,671 |
| | 5 |
| | 48.21 |
|
Maryland | | 2,085,196 |
| | — |
| | 45,039 |
| | 2,130,235 |
| | 10 |
| | 29 |
| | 50,706 |
| | 6 |
| | 25.99 |
|
Research Triangle Park | | 1,043,726 |
| | — |
| | 175,000 |
| | 1,218,726 |
| | 6 |
| | 16 |
| | 25,371 |
| | 3 |
| | 24.77 |
|
Canada | | 256,967 |
| | — |
| | — |
| | 256,967 |
| | 1 |
| | 3 |
| | 6,562 |
| | 1 |
| | 25.75 |
|
Non-cluster markets | | 268,689 |
| | — |
| | — |
| | 268,689 |
| | 1 |
| | 6 |
| | 6,060 |
| | 1 |
| | 25.46 |
|
North America | | 19,155,359 |
| | 1,043,823 |
| | 442,860 |
| | 20,642,042 |
| | 100 | % | | 206 |
| | $ | 868,338 |
| | 100 | % | | $ | 47.19 |
|
RSF, number of properties, and annual rental revenue include 100% of each property managed by us in North America.
Summary of occupancy percentages in North America
The following table sets forth the occupancy percentages for our operating assetsproperties and our assets underoperating and redevelopment properties in each of our North America markets, excluding properties held for sale, as of the following dates:
| | | | Operating Properties | | Operating and Redevelopment Properties | | | Operating Properties | | | Operating and Redevelopment Properties | |
Market | | 9/30/17 | | 6/30/17 | | 9/30/16 | | 9/30/17 | | 6/30/17 | | 9/30/16 | Market | | 6/30/20 | | 3/31/20 | | 6/30/19 | | 6/30/20 | | 3/31/20 | | 6/30/19 |
Greater Boston | | 95.9 | % | | 96.2 | % | | 98.3 | % | | 95.0 | % | | 96.2 | % | | 98.3 | % | Greater Boston | | 98.2 | % | | 98.9 | % | | 98.7 | % | | 95.6 | % | | 97.0 | % | | 98.4 | % |
San Francisco | | 100.0 |
| | 99.6 |
| | 99.8 |
| | 100.0 |
| | 99.6 |
| | 99.8 |
| San Francisco | | 94.7 | | (1) | 94.7 | | | 98.7 | | | 90.6 | | | 90.6 | | | 98.7 | |
New York City | | 99.8 |
| | 99.3 |
| | 95.0 |
| | 99.8 |
| | 99.3 |
| | 95.0 |
| New York City | | 97.1 | | (2) | 99.2 | | | 98.8 | | | 86.2 | | | 88.1 | | | 87.8 | |
San Diego | | 92.4 |
| (1) | 91.7 |
| | 93.0 |
| | 88.6 |
| | 88.0 |
| | 81.1 |
| San Diego | | 91.8 | | (1) | 90.9 | | | 95.2 | | | 90.8 | | | 90.9 | | | 95.2 | |
Seattle | | 98.2 |
| | 97.2 |
| | 98.4 |
| | 98.2 |
| | 97.2 |
| | 98.4 |
| Seattle | | 95.1 | | (3) | 97.8 | | | 97.3 | | | 95.1 | | | 97.8 | | | 97.3 | |
Maryland | | 93.6 |
| | 93.0 |
| | 97.4 |
| | 91.6 |
| | 93.0 |
| | 97.4 |
| Maryland | | 93.9 | | | 95.9 | | | 96.7 | | | 93.2 | | | 94.6 | | | 95.1 | |
Research Triangle Park | | 98.1 |
|
| 95.9 |
| | 98.7 |
| | 84.0 |
| | 82.1 |
| | 98.7 |
| |
Research Triangle | | Research Triangle | | 96.8 | |
| 96.5 | | | 97.9 | | | 96.8 | | | 96.5 | | | 94.2 | |
Subtotal | | 96.1 |
| | 95.7 |
| | 97.3 |
| | 93.9 |
| | 94.0 |
| | 94.4 |
| Subtotal | | 95.1 | | | 95.6 | | | 97.6 | | | 92.6 | | | 93.3 | | | 96.6 | |
Canada | | 99.2 |
| | 99.2 |
| | 99.3 |
| | 99.2 |
| | 99.2 |
| | 99.3 |
| Canada | | 90.0 | | | 93.6 | | | 93.7 | | | 90.0 | | | 93.6 | | | 93.7 | |
Non-cluster markets | | 88.6 |
| | 88.4 |
| | 88.2 |
| | 88.6 |
| | 88.4 |
| | 88.2 |
| Non-cluster markets | | 70.8 | | | 65.2 | | | 84.9 | | | 70.8 | | | 65.2 | | | 84.9 | |
North America | | 96.1 | % | | 95.7 | % | | 97.1 | % | | 93.9 | % | | 94.0 | % | | 94.4 | % | North America | | 94.8 | % | (1) | 95.1 | % | | 97.4 | % | | 92.3 | % | | 92.9 | % | | 96.4 | % |
|
Occupancy includes 100%(1)Includes 647,771 RSF, or 2.3%, of each property managed by usvacancy in our North America markets (noted below), representing lease-up opportunities at properties recently acquired. Excluding these vacancies, occupancy of operating properties in North America.America was 97.1% as of June 30, 2020.
| |
(1) | In December 2016, Eli Lilly and Company vacated 125,409 RSF or 3% of RSF in San Diego, at 10300 Campus Point Drive in our University Town Center submarket and relocated and expanded into 305,006 RSF at 10290 Campus Point Drive. |
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| | | | As of June 30, 2020 | | | | | | | | | | |
| | | | Vacant | | Occupancy Impact | | | | | | | | |
Property | | Submarket/Market | | RSF | | Region | | Consolidated | | | | | | |
601, 611, and 651 Gateway Boulevard | | South San Francisco/San Francisco | | 201,570 | | | 2.6 | % | | 0.7 | % | | | | | | |
SD Tech by Alexandria | | Sorrento Mesa/San Diego | | 182,484 | | | 3.0 | % | | 0.6 | | | | | | | |
5505 Morehouse Drive | | Sorrento Mesa/San Diego | | 71,016 | | | 1.2 | % | | 0.3 | | | | | | | |
Other acquisitions | | Various | | 192,701 | | | N/A | | 0.7 | | | | | | | |
| | | | 647,771 | | | | | 2.3 | % | | | | | | |
(2)The decrease in occupancy for the New York City market from March 31, 2020, was primarily related to one lease for 19,647 RSF that ended during the three months ended June 30, 2020. This space has been 100% re-leased to a new tenant with expected delivery by the end of 2020.
(3)The decrease in occupancy for the Seattle market from March 31, 2020, was related to recently acquired properties containing 31,518 RSF of vacant space.
Refer to the “Non-GAAP measures and definitions” section within this Item 2 for additional information.
Investments in real estate
A key component of our business model is our disciplined allocation of capital to the development and redevelopment of new Class A properties located in world-class collaborative life science, technology, and technologyagtech campuses in AAA urban innovation clusters. These projects are focused on providing high-quality, generic, and reusable spaces that meet the real estate requirements of, and are reusable by, a wide range of tenants. Upon completion, each value-creation project is expected to generate a significant increase in rental income, net operating income, and cash flows. Our development and redevelopment projects are generally in locations that are highly desirable to high-quality entities, which we believe results in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset values.value. Our pre-construction activities are undertaken in order to get the property ready for its intended use and include suchentitlements, permitting, design, site work, and other activities preceding commencement of construction of aboveground building improvements.
Our initial 2020 guidance issued on December 3, 2019, for our 2020 construction spending guidance included a range from $1.55 billion to $1.65 billion and reflected a strong outlook for 2020 and continued strong demand for our value-creation development and redevelopment projects. Beginning in March 2020 and into early April 2020, due to the moratoriums on construction in some cities and states where our ground-up development projects are located, construction in some of our projects had to pause. In addition, due to the initial dislocation of capital and other markets caused by COVID-19 in March and early April, we reduced the midpoint of our 2020 forecasted construction spending from $1.6 billion to $960.0 million to focus primarily on projects that were partially or fully pre-leased on our guidance issued on April 27, 2020. These reductions were deemed necessary while we monitored the impact of COVID-19 on many areas of our business, including the overall macro and capital market environments. By early May 2020, however, the moratoriums on construction were lifted or some of our ground-up development projects had received essential healthcare operations designation that allowed construction to resume. Since April 27, 2020, we have increased the midpoint of our 2020 construction spending guidance midpoint from $960.0 million to $1.35 billion to address the continuing tenant demand for our development and redevelopment pipeline. The increase is primarily related to:
•Near-term development project at SD Tech by Alexandria, aggregating 176,428 RSF, is 59% pre-leased;
•Active redevelopment project at 9877 Waples Street, a recently acquired property aggregating 63,774 RSF, is 100% pre-leased; and
•Development and redevelopment projects under construction that were 61% pre-leased as developing plansof June 30, 2020.
As of the date of this report, construction activities were in process at all of our active construction projects with no further delays due to the temporary mandates issued by state or obtaining permits. local ordinances arising from the COVID-19 pandemic. Construction workers continue to observe social distancing and follow rules that restrict gatherings of large groups of people in close proximity, as well as adhere to other appropriate measures that may slow the pace of construction.
Our investments in real estate consisted of the following as of SeptemberJune 30, 20172020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Development and Redevelopment | | | | | | | | | | |
| | Operating | | Under Construction | | Near Term | | Intermediate Term | | Future | | Subtotal | | Total |
Investments in real estate | | | | | | | | | | | | | | |
Book value as of June 30, 2020(1) | | $ | 16,283,753 | | | $ | 1,290,966 | | | $ | 539,568 | | | $ | 722,317 | | | $ | 382,015 | | | $ | 2,934,866 | | | $ | 19,218,619 | |
| | | | | | | | | | | | | | |
Square footage | | | | | | | | | | | | | | |
Operating | | 28,801,305 | | | — | | | — | | | — | | | — | | | — | | | 28,801,305 | |
New Class A development and redevelopment properties | | — | | | 2,340,453 | | | 2,144,353 | | | 5,435,186 | | | 6,124,302 | | | 16,044,294 | | | 16,044,294 | |
Value-creation square feet currently included in rental properties(2) | | — | | | — | | | — | | | (975,060) | | | (846,550) | | | (1,821,610) | | | (1,821,610) | |
Total square footage | | 28,801,305 | | | 2,340,453 | | | 2,144,353 | | | 4,460,126 | | | 5,277,752 | | | 14,222,684 | | | 43,023,989 | |
(1)Balances exclude our share of the cost basis associated with our unconsolidated properties, which is classified as investments in unconsolidated real estate joint ventures in our consolidated balance sheets.
(2)Refer to the definition of “Investments in real estate – value-creation square footage currently in rental properties” in the “Non-GAAP measures and definitions” section within this Item 2 for additional details on value-creation square feet currently included in rental properties.
|
| | | | | | | | | | | | |
| Investments in Real Estate | | Square Feet |
| | Consolidated | | Unconsolidated (1) | | Total |
Investments in real estate: | | | | | | | |
Rental properties | $ | 10,387,875 |
| | 18,944,650 |
| | 210,709 |
| | 19,155,359 |
|
| | | | | | | |
Development and redevelopment of new Class A properties: | | | | | | | |
Undergoing construction | | | | | | | |
Development projects – target delivery in 2017 | 466,047 |
| | 651,738 |
| | — |
| | 651,738 |
|
Development projects – target delivery in 2018 and 2019 | 143,038 |
| | 392,085 |
| | — |
| | 392,085 |
|
| | | 1,043,823 |
| | — |
| | 1,043,823 |
|
| | | | | | | |
Redevelopment projects – target delivery in 2018 and 2019 | 59,224 |
| | 442,860 |
| | — |
| | 442,860 |
|
| | | 20,431,333 |
| | 210,709 |
| | 20,642,042 |
|
| | | | | | | |
Near-term projects undergoing marketing and pre-construction: target delivery in 2018 and 2019 | 114,954 |
| | 1,148,000 |
| | — |
| | 1,148,000 |
|
Intermediate-term development projects | 333,870 |
| | 3,263,653 |
| | — |
| | 3,263,653 |
|
Future development projects | 289,314 |
| | 3,981,362 |
| | — |
| | 3,981,362 |
|
Portion of developable square feet that will replace existing RSF included in rental properties (2) | N/A |
| | (451,310 | ) | | — |
| | (451,310 | ) |
| | | 7,941,705 |
| | — |
| | 7,941,705 |
|
| | | | | | | |
Gross investments in real estate | 11,794,322 |
| | 28,373,038 |
| | 210,709 |
| | 28,583,747 |
|
| | | | | | | |
Less: accumulated depreciation | (1,785,115 | ) | | | | | | |
Net investments in real estate – North America | 10,009,207 |
| | | | | | |
Net investments in real estate – Asia | 37,314 |
| | | | | | |
Investments in real estate | $ | 10,046,521 |
| | | | | | |
| |
(1) | Our share of the cost basis associated with unconsolidated square feet is classified in investments in unconsolidated real estate joint ventures in our unaudited consolidated balance sheets. |
| |
(2) | Refer to footnotes 2 through 4 on the “Summary of Pipeline” section within this Item 2. |
(1) Upon completion of 13 projects pursuing LEED® certification.
(2) Upon completion of one project pursuing Fitwel certification.
Our real estate asset acquisitions during the ninesix months ended SeptemberJune 30, 2017,2020, consisted of the following (dollars in thousands):
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Property | | Submarket/Market | | Date of Purchase | | Number of Properties | | Operating Occupancy | | | Square Footage | | | | | | | | | Unlevered Yields | | | | | | Purchase Price | | |
| | | | | | | | | | | Future Development | | Active Redevelopment | | Operating With Future Development/ Redevelopment | | | Operating | | Initial Stabilized | | | Initial Stabilized (Cash) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six months ended June 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
275 Grove Street | | Route 128/ Greater Boston | | 1/10/20 | | 1 | | 99% | | | — | | | — | | | — | | | | 509,702 | | | 8.0% | | | 6.7% | | | $ | 226,512 | | |
601, 611, and 651 Gateway Boulevard (51% interest in consolidated JV) | | South San Francisco/ San Francisco | | 1/28/20 | | 3 | | 73% | (1) | | 260,000 | | | — | | | 300,010 | | | | 475,993 | | | (2) | | | (2) | | | | (2) | |
3330 and 3412 Hillview Avenue | | Greater Stanford/ San Francisco | | 2/5/20 | | 2 | | 100% | | | — | | | — | | | — | | | | 106,316 | | | 7.6% | | | 4.2% | | | | 105,000 | | |
987 and 1075 Commercial Street | | Greater Stanford/ San Francisco | | 4/14/20 | | 2 | | N/A | | | 700,000 | | (3) | — | | | 26,738 | | | | — | | | (4) | | | (4) | | | | 113,250 | | |
9808 and 9868 Scranton Road(5) | | Sorrento Mesa/ San Diego | | 1/10/20 | | 2 | | 88% | | | — | | | — | | | — | | | | 219,628 | | | 7.3% | | | 6.8% | | | | 102,250 | | |
4555 Executive Drive | | University Town Center/San Diego | | 6/2/20 | | 1 | | 100% | | | 200,000 | | (3) | — | | | 41,475 | | | | — | | | (4) | | | (4) | | | | 43,000 | | |
Other | | Various | | | | 4 | | 51% | | | 579,825 | | | 63,774 | | | 71,021 | | | | 180,960 | | | N/A | | | N/A | | | | 109,817 | | |
| | | | | | 15 | | 80% | | | 1,739,825 | | | 63,774 | | | 439,244 | | | | 1,492,599 | | | | | | | | | $ | 699,829 | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
Property | | Submarket/Market | | Date of Purchase | | Number of Properties | | Anticipated Use | | Occupancy | | Square Footage | | Purchase Price | |
| | | | Operating | | Redevelopment | | Future Development | | |
| | | | | | | |
First half of 2017 acquisitions: | | | | | | | | | | | | | | | | | | | |
325 Binney Street | | Cambridge/Greater Boston | | 3/29/17 | | — | | Office/lab, residential | | N/A | | — |
| | | — |
| | 208,965 |
| | | $ | 80,250 |
| |
88 Bluxome Street | | Mission Bay/SoMa/San Francisco | | 1/10/17 | | 1 | | Office/lab | | 100% | | 232,470 |
| | | — |
| | 1,070,925 |
| | | 130,000 |
| |
960 Industrial Road | | Greater Stanford/San Francisco | | 5/17/17 | | 1 | | Office/lab | | 100% | | 195,000 |
| | | — |
| | 500,000 |
| | | 64,959 |
| |
825 and 835 Industrial Road | | Greater Stanford/San Francisco | | 6/1/17 | | — | | Office/lab | | N/A | | — |
| | | — |
| | 530,000 |
| | | 85,000 |
| |
1450 Page Mill Road (1) | | Greater Stanford/San Francisco | | 6/1/17 | | 1 | | Office | | 100% | | 77,634 |
| | | — |
| | — |
| | | 85,300 |
| |
3050 Callan Road and Vista Wateridge | | Torrey Pines/Sorrento Mesa/ San Diego | | 3/24/17 | | — | | Office/lab | | N/A | | — |
| | | — |
| | 229,000 |
| | | 8,250 |
| |
5 Laboratory Drive | | Research Triangle Park/RTP | | 5/25/17 | | 1 | | Office/lab | | N/A | | — |
| | | 175,000 |
| | — |
| | | 8,750 |
| |
| | | | | | 4 | | | | | | 505,104 |
| | | 175,000 |
| | 2,538,890 |
| | | 462,509 |
| |
Third quarter of 2017 acquisitions: | | | | | | | | | | | | | | | | | | | |
266 and 275 Second Avenue | | Route 128/Greater Boston | | 7/11/17 | | 2 | | Office/lab | | 100% | | 144,584 |
| | | 59,173 |
| | — |
| | | 71,000 |
| |
201 Haskins Way | | South San Francisco/ San Francisco | | 9/11/17 | | 1 | | Office/lab | | 100% | | 23,840 |
| | | — |
| | 280,000 |
| | | 33,000 |
| |
9900 Medical Center Drive | | Rockville/Maryland | | 8/4/17 | | 1 | | Office/lab | | N/A | | — |
| | | 45,039 |
| | — |
| | | 6,700 |
| |
| | | | | | 4 | | | | | | 168,424 |
| | | 104,212 |
| | 280,000 |
| | | 110,700 |
| |
Pending: | | | | | | | | | | | | | | | | | | | | | |
1455 and 1515 Third Street (acquisition of remaining 49% interest) | | Mission Bay/SoMa/San Francisco | | 11/10/16 | | 2 | | Ground lease | | 100% | | 422,980 |
| | | — |
| | — |
| | | 37,800 |
| (2) |
Other | | | | | | | | | | | | | | | | | | | | 60,000 |
| |
| | | | | | | | | | | | | | | 279,212 |
| | 2,818,890 |
| | | $ | 671,009 |
| |
(1)Includes 201,570 RSF of vacancy as of June 30, 2020. Refer to the “Summary of occupancy percentages in North America” section earlier within this Item 2 for additional details.
(2)Refer to the Note 4 – “Consolidated and unconsolidated real estate joint ventures” to our unaudited consolidated financial statements under Item 1 of this report for additional details on this transaction.
(3)Represents total square footage upon completion of development or redevelopment of a new Class A property. Square footage presented includes RSF of buildings currently in operation. We intend to demolish the existing property upon expiration of the existing in-place leases and commencement of future construction. Refer to the definition of “Investments in real estate – value-creation square footage currently in rental properties” in the “Non-GAAP measures and definitions” section within this Item 2 for additional information.
(4)We expect to provide total estimated costs at completion and related yields offor development and redevelopment projects in the future.future, subsequent to the commencement of construction.
| |
(1) | Technology office building, subject to a 51-year ground lease, located in Stanford Research Park, a collaborative business community that supports innovative companies in their research and development pursuits. This recently constructed building is 100% leased to Infosys Limited for 12 years, and we expect initial stabilized yields of 7.3% and 5.8% (cash basis). |
| |
(2) | Acquisition of the remaining 49% interest in our unconsolidated real estate joint venture with Uber Technologies, Inc. (“Uber”) was completed in November 2016. A portion of the consideration is payable in three equal installments upon Uber’s completion of construction milestones. The first installment of $18.9 million was paid during the three months ended June 30, 2017. We expect the second and third installments to be paid during the three months ending December 31, 2017, and March 31, 2018, respectively. |
Real estate asset sales
Our(5)In April 2020, we completed the sale of a partial interest in properties at 9808 and 9868 Scranton Road to the existing SD Tech by Alexandria consolidated real estate asset sales completed duringjoint venture, of which we own 50%. We received proceeds of $51.1 million for the nine months ended September 30, 2017, consisted50% interest in the properties that our joint venture partner acquired through the joint venture. We continue to control and consolidate this joint venture; therefore, we accounted for the sale as an equity transaction with no gain or loss recognized in earnings.
Sustainability
(1)Relative to a 2015 baseline for buildings in operation that Alexandria directly manages.
(2)Relative to a 2015 baseline for buildings in operation that Alexandria indirectly and directly manages.
(3)Reflects sum of the following (dollarsannual like-for-like progress from 2015 to 2019.
(4)Reflects progress for all buildings in thousands):operation in 2019 that Alexandria indirectly and directly manages.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Net Operating Income (1) | | Net Operating Income (Cash Basis) (1) | | Contractual Sales Price | | Gain | |
Property/Market/Submarket | | Date of Sale | | RSF | | | | | |
6146 Nancy Ridge Drive/San Diego/Sorrento Mesa | | 1/6/17 | | 21,940 |
| | N/A | | N/A | | $ | 3,000 |
| | $ | 270 |
| |
1401/1413 Research Boulevard/Maryland/Rockville (2) | | 5/17/17 | | 90,000 |
| | N/A | | N/A | | | 7,937 |
| | 111 |
| |
360 Longwood Avenue/Greater Boston/Longwood Medical Area (3) | | 7/6/17 | | 203,090 |
| | $ | 4,313 |
| | $ | 4,168 |
| | | 65,701 |
| | 14,106 |
| |
| | | | | | | | | | $ | 76,638 |
| | $ | 14,487 |
| |
| |
(1) | Represents annualized amounts for the quarter ended prior to the date of sale. Net operating income (cash basis) excludes straight-line rent and amortization of acquired below-market leases. |
| |
(2) | In May 2017, we completed the sale of a partial interest in our land parcels at 1401/1413 Research Boulevard, located in our Rockville submarket. The sale was executed with a distinguished retail real estate developer for the development of a 90,000 RSF retail shopping center. We contributed the land parcels at a fair value of $7.9 million into a new entity, our partner contributed $3.9 million, and we received a distribution of $0.7 million. In addition, the real estate joint venture obtained a non-recourse secured construction loan with aggregate commitments of $25.0 million, which is expected to fund the remaining construction costs to complete the project, and we do not expect to make additional equity contributions to the real estate joint venture. |
| |
(3) | Represents the sale of a condominium interest for 49% of the building RSF, or 203,090 RSF, in our unconsolidated real estate joint venture property. Net operating income, net operating income (cash basis), contractual sales price, and gain represent our 27.5% share related to the sale of the condominium interest. In August 2017, the unconsolidated real estate joint venture entered into a mortgage loan agreement, secured by the remaining interest in the property. During the nine months ended September 30, 2017, we received a cash distribution of $38.8 million from the joint venture, primarily from the condominium sale and loan refinancing. |
(1)Projects targeting Fitwel or WELL certification.
Disciplined management of ground-up development
External growth – value-creationNew Class A development and redevelopment of new Class A properties placed into service in the last 12 months
properties: current projects
|
| | | | | | |
100 Binney Street | | 360 Longwood Avenue | | 1455 and 1515 Third Street | | ARE Spectrum |
Greater Boston/Cambridge | | Greater Boston/Longwood Medical Area | | San Francisco/Mission Bay/SoMa | | San Diego/Torrey Pines |
341,776 RSF | | 413,799 RSF | | 422,980 RSF | | 165,938 RSF |
Bristol-Myers Squibb Company
Facebook, Inc.
| | Dana-Farber Cancer Institute, Inc.
The Children’s Hospital Corporation
Brigham and Women’s Hospital
| | Uber Technologies, Inc. | | The Medicines Company
Celgene Corporation
Wellspring Biosciences LLC |
| | | | | | |
|
| | | | | | |
10290 Campus Point Drive | | 5200 Illumina Way, Parking Structure | | 4796 Executive Drive | | 400 Dexter Avenue North |
San Diego/University Town Center | | San Diego/University Town Center | | San Diego/University Town Center | | Seattle/Lake Union |
305,006 RSF | | N/A | | 61,755 RSF | | 258,896 RSF |
Eli Lilly and Company | | Illumina, Inc. | | Otonomy, Inc. | | Juno Therapeutics, Inc.
ClubCorp Holdings, Inc.
|
| | | | | | |
RSF represents the cumulative RSF that have been placed into service.
External growth – value-creation development and redevelopment of new Class A properties placed into service in the last 12 months (continued)
The following table presents value-creation development and redevelopment of new Class A properties placed into service during the 12 months ended September 30, 2017 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property/Market/Submarket | | Our Ownership Interest | | Date Delivered | | RSF in Service | | Total Project | | Unlevered Yields (1) |
| | | Prior to 10/1/16 | | Placed into Service | | Total | | | Average Cash | | Initial Stabilized Cash Basis | | Initial Stabilized |
| | | | 4Q16 | | 1Q17 | | 2Q17 | | 3Q17 | | | Leased | | RSF | | Investment | | | |
Consolidated development projects | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
100 Binney Street/Greater Boston/Cambridge | | 100% | | 9/21/17 | | — |
| | — |
| | — |
| | — |
| | 341,776 |
| | 341,776 |
| | 100% | | 432,931 | | $ | 439,000 |
| (2) | | 8.5 | % | (2) | | | 7.4 | % | (2) | | | 8.2 | % | (2) |
1455 and 1515 Third Street/ San Francisco/Mission Bay/SoMa | | 100% | | 11/10/16 | | — |
| | 422,980 |
| | — |
| | — |
| | — |
| | 422,980 |
| | 100% | | 422,980 | | $ | 155,000 |
| | | 14.5 | % | | | | 7.0 | % | | | | 14.4 | % | |
ARE Spectrum/San Diego/ Torrey Pines | | 100% | | Various | | 102,938 |
| | — |
| | 31,336 |
| | 31,664 |
| | — |
| | 165,938 |
| | 98% | | 336,461 | | $ | 278,000 |
| | | 6.9 | % | | | | 6.1 | % | | | | 6.4 | % | |
5200 Illumina Way, Parking Structure/San Diego/ University Town Center | | 100% | | 5/15/17 | | — |
| | — |
| | — |
| | N/A |
| | — |
| | N/A |
| | 100% | | N/A | | $ | 60,000 |
| | | 7.0 | % | | | | 7.0 | % | | | | 7.0 | % | |
4796 Executive Drive/ San Diego/ University Town Center | | 100% | | 12/1/16 | | — |
| | 61,755 |
| | — |
| | — |
| | — |
| | 61,755 |
| | 100% | | 61,755 | | $ | 41,000 |
| | | 8.0 | % | | | | 7.0 | % | | | | 7.4 | % | |
400 Dexter Avenue North/Seattle/ Lake Union | | 100% | | Various | | — |
| | — |
| | 241,276 |
| | — |
| | 17,620 |
| | 258,896 |
| | 89% | | 290,111 | | $ | 232,000 |
| | | 7.3 | % | | | | 6.9 | % | | | | 7.2 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated redevelopment projects | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
10290 Campus Point Drive/ San Diego/ University Town Center | | 55% | | 12/2/16 | | — |
| | 305,006 |
| | — |
| | — |
| | — |
| | 305,006 |
| | 100% | | 305,006 | | $ | 231,000 |
| | | 7.7 | % | | | | 6.8 | % | | | | 7.1 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unconsolidated joint venture development project | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
360 Longwood Avenue/ Greater Boston/ Longwood Medical Area (3) | | 27.5% | | Various | | 313,407 |
| | 100,392 |
| | — |
| | — |
| | — |
| | 413,799 |
| | 80% | | 413,799 | (3) | $ | 108,965 |
| | | 8.2 | % | | | | 7.3 | % | | | | 7.8 | % | |
Total | | | | | | 416,345 |
| | 890,133 |
| | 272,612 |
| | 31,664 |
| | 359,396 |
| | 1,970,150 |
| | | | | | | | | | | | | | | | | | |
Development and redevelopment projects recently placed into service will drive contractual growth in cash rents aggregating $70 million, of which $60 million will commence through the third quarter of 2018 ($10 million in the fourth quarter of 2017, $23 million in first quarter of 2018, $14 million in the second quarter of 2018, and $13 million in the third quarter of 2018).
| |
(1) | Upon stabilization of the property. |
| |
(2) | Improvement of our initial yields is due to 18% overall cost savings. Cost savings were driven primarily by: (i) the redesign of space for Bristol-Myers Squibb Company drove 61% of the cost savings, (ii) competitive bidding and project management drove 25% of the cost savings, and (iii) a slightly lower amount of office/laboratory space and higher office space drove 14% of the cost savings. Adjacent is our originally disclosed total project investment and unlevered yields: |
| |
(3) | Refer to the “Real Estate Asset Sales” section within this Item 2 for additional information. |
|
| | | | | | | | | | | | | | |
| | | | Unlevered Yields |
| | Investment | | Average Cash | | Initial Stabilized Cash Basis | | Initial Stabilized | |
Final | | $ | 439,000 |
| | 8.5 | % | | 7.4 | % | | 8.2 | % | |
Original | | $ | 535,000 |
| | 7.9 | % | | 7.0 | % | | 7.7 | % | |
Development of new Class A properties: 2017 deliveries (projects undergoing construction)
|
| | | | | | |
510 Townsend Street | | 505 Brannan Street, Phase I | | ARE Spectrum | | 400 Dexter Avenue North |
San Francisco/Mission Bay/SoMa | | San Francisco/Mission Bay/SoMa | | San Diego/Torrey Pines | | Seattle/Lake Union |
300,000 RSF | | 150,000 RSF | | 170,523 RSF | | 31,215 RSF |
Stripe, Inc. | | Pinterest, Inc. | | Vertex Pharmaceuticals Incorporated | | Negotiating/Juno Therapeutics, Inc. |
| | | | | | |
The following table sets forth a summary of our development of new Class A properties anticipated to be delivered in 2017, as of September 30, 2017 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| | Project RSF | | Percentage | | Occupancy |
Property/Market/Submarket | | In Service | | CIP | | Total | | Leased | | Negotiating | | Total | | Initial | | Stabilized |
ARE Spectrum/San Diego/Torrey Pines | | 165,938 |
| | 170,523 | | 336,461 | | 98 | % | | — | % | | 98 | % | | 1Q17 | | 4Q17 | |
400 Dexter Avenue North/Seattle/Lake Union | | 258,896 |
| | 31,215 | | 290,111 | | 89 | % | | 11 | % | | 100 | % | | 1Q17 | | 4Q17 | |
510 Townsend Street/San Francisco/Mission Bay/SoMa | | — |
| | 300,000 | | 300,000 | | 100 | % | | — | % | | 100 | % | | 4Q17 | | 4Q17 | |
505 Brannan Street, Phase I/San Francisco/Mission Bay/SoMa | | — |
| | 150,000 | | 150,000 | | 100 | % | | — | % | | 100 | % | | 4Q17 | | 4Q17 | |
Total | | 424,834 |
| | 651,738 | | 1,076,572 | | 97 | % | | 2 | % | | 99 | % | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Unlevered Yields |
Property/Market/Submarket | | Our Ownership Interest | | | | | | Cost to Complete | | Total at Completion | | Average Cash | | Initial Stabilized Cash Basis | | Initial Stabilized |
| | In Service | | CIP | | | | | |
ARE Spectrum/San Diego/Torrey Pines | | 100% | | $ | 103,170 |
| | $ | 143,149 |
| | $ | 31,681 |
| | $ | 278,000 |
| | | 6.9 | % | | | 6.1 | % | | | 6.4 | % | |
400 Dexter Avenue North/Seattle/Lake Union | | 100% | | 188,919 |
| | 19,243 |
| | 23,838 |
| | | 232,000 |
| | | 7.3 | % | | | 6.9 | % | | | 7.2 | % | |
510 Townsend Street/San Francisco/Mission Bay/SoMa | | 100% | | — |
| | 187,133 |
| | 50,867 |
| | | 238,000 |
| | | 7.9 | % | | | 7.0 | % | | | 7.2 | % | |
505 Brannan Street, Phase I/San Francisco/Mission Bay/SoMa | | 99.7% | | — |
| | 116,522 |
| | 24,478 |
| | | 141,000 |
| | | 8.6 | % | | | 7.0 | % | | | 8.2 | % | |
Total | | | | $ | 292,089 |
| | $ | 466,047 |
| | $ | 130,864 |
| | $ | 889,000 |
| | | | | | | | | | |
Development and redevelopment of new Class A properties: 2018 and 2019 deliveries (projects undergoing construction, and near-term projects undergoing marketing and pre-construction)
|
| | | | | | | | |
399 BinneyThe Arsenal on the Charles | | 945 Market Street | | 266 and 275 Second Avenue | | 1655 and 1715 Third Street | | 213 East Grand Avenue | | 279 East Grand Avenue201 Haskins Way |
Greater Boston/Cambridge Cambridge/Inner Suburbs | | Greater Boston/Route 128 | | San Francisco/Mission Bay/SoMa | | San Francisco/South San Francisco | | San Francisco/South San Francisco |
164,000 SF205,690 RSF | | 59,173255,765 RSF | | 580,000 SF | | 300,930315,000 RSF | | 199,000 SF |
Multi-Tenant | | Multi-Tenant | | Uber Technologies, Inc. | | Merck & Co., Inc. | | Multi-Tenant |
| | | | | | | | |
|
| | | | | | | | | | | | | |
681 Gateway BoulevardAlexandria District for Science and Technology | | 9625 Towne Centre3160 Porter Drive | | 1818 Fairview Avenue East | | 9900 MedicalAlexandria Center Drive | | 5 Laboratory Drive® –Long Island City |
San Francisco/South Greater Stanford | | San FranciscoFrancisco/Greater Stanford | | San Diego/University Town Center | | Seattle/Lake Union | | Maryland/Rockville | | Research Triangle Park/RTPNew York City/New York City |
126,971526,178 RSF | | 163,64892,147 RSF | | 205,000140,098 RSF | | 45,039 RSF | | 175,000 RSF |
Marketing | | Takeda Pharmaceuticals
Company Ltd. | | Multi-Tenant | | Multi-Tenant | | Multi-Tenant |
| | | | | | | | |
Development and redevelopment of new
New Class A properties: 2018 and 2019 deliveries (projects undergoing construction, and near-term projects undergoing marketing and pre-construction) (continued)
The following table sets forth a summary of our development and redevelopment and anticipated near-term commencements of new Class A properties projected to be delivered in 2018 and 2019, as of September 30, 2017 (dollars in thousands):
properties: current projects (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property/Market/Submarket | | Dev/Redev | | Project RSF | | Percentage | | Project Start (1) | | Occupancy (1) |
| | In Service | | CIP | | Total | | Leased | | Negotiating | | Total | | | Initial | | Stabilized |
Developments under construction | | | | | | | | | | | | | | | | | | | | | | |
100 Binney Street/Greater Boston/Cambridge | | Dev | | 341,776 |
| | 91,155 |
| | 432,931 |
| | 100 | % | | | — | % | | | 100 | % | | 3Q15 | | 3Q17 | | 1Q18 |
213 East Grand Avenue/San Francisco/South San Francisco | | Dev | | — |
| | 300,930 |
| | 300,930 |
| | 100 | % | | | — | % | | | 100 | % | | 2Q17 | | 1Q19 | | 2019 |
| | | | 341,776 |
| | 392,085 |
| | 733,861 |
| | 100 | % | | | — | % | | | 100 | % | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Redevelopments under construction | | | | | | | | | | | | | | | | | | | | | | |
266 and 275 Second Avenue/Greater Boston/Route 128 | | Redev | | 144,584 |
| | 59,173 |
| | 203,757 |
| | 84 | % | | | — | % | | | 84 | % | | 3Q17 | | 2Q18 | | 2018 |
5 Laboratory Drive/Research Triangle Park/RTP | | Redev | | — |
| | 175,000 |
| | 175,000 |
| | — | % | | | 39 | % | | | 39 | % | | 2Q17 | | 3Q18 | | 2019 |
9625 Towne Centre Drive/San Diego/University Town Center | | Redev | | — |
| | 163,648 |
| | 163,648 |
| | 100 | % | | | — | % | | | 100 | % | | 3Q15 | | 4Q18 | | 2018 |
9900 Medical Center Drive/Maryland/Rockville | | Redev | | — |
| | 45,039 |
| | 45,039 |
| | — | % | | | — | % | | | — | % | | 3Q17 | | 2Q18 | | 2018 |
| | | | 144,584 |
| | 442,860 |
| | 587,444 |
| | 57 | % | | | 12 | % | | | 69 | % | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Near-term projects undergoing marketing and pre-construction | | | | | | | | | | | | | | | | | | | | | | |
399 Binney Street/Greater Boston/Cambridge | | Dev | | — |
| | 164,000 |
| | 164,000 |
| | — | % | | | 73 | % | (2) | | 73 | % | | 4Q17 | | 4Q18 | | 2019 |
1655 and 1715 Third Street/San Francisco/Mission Bay/SoMa (3) | | Dev | | — |
| | 580,000 |
| | 580,000 |
| | 100 | % | (3) | | — | % | | | 100 | % | | 2Q18 | | 2019 | | 2019 |
279 East Grand Avenue/San Francisco/South San Francisco | | Dev | | — |
| | 199,000 |
| | 199,000 |
| | TBD | | TBD | | 2019 | | TBD |
1818 Fairview Avenue East/Seattle/Lake Union | | Dev | | — |
| | 205,000 |
| | 205,000 |
| | | TBD | | 2019 | | TBD |
681 Gateway Boulevard/San Francisco/South San Francisco (4) | | Redev | | 126,971 |
| | — |
| | 126,971 |
| | | 4Q18 | | 2019 | | TBD |
| | | | 126,971 |
| | 1,148,000 |
| | 1,274,971 |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Our Ownership Interest | | | | | | | | | | Unlevered Yields |
Property/Market/Submarket | | | In Service | | CIP | | Cost to Complete | | Total at Completion | | Average Cash | | Initial Stabilized Cash Basis | | Initial Stabilized |
| | | | | | | |
Developments under construction | | | | | | | | | | | | | | | | | | | | | | | | | |
100 Binney Street/Greater Boston/Cambridge | | 100% | | $ | 280,163 |
| | $ | 70,143 |
| | $ | 88,694 |
| | $ | 439,000 |
| (5) | | | 8.5 | % | (5) | | | 7.4 | % | (5) | | | 8.2 | % | (5) |
213 East Grand Avenue/San Francisco/South San Francisco | | 100% | | — |
| | 72,895 |
| | | 187,105 |
| | | 260,000 |
| | | | 7.8 | % | | | | 6.4 | % | | | | 7.2 | % | |
| | | | $ | 280,163 |
| | $ | 143,038 |
| | $ | 275,799 |
| | $ | 699,000 |
| | | | 8.2 | % | | | | 7.0 | % | | | | 7.8 | % | |
Redevelopments under construction | | | | | | | | | | | | | | | | | | | | | | | | | |
266 and 275 Second Avenue/Greater Boston/Route 128 | | | | $ | 60,596 |
| | $ | 9,646 |
| | TBD |
5 Laboratory Drive/Research Triangle Park/RTP | | 100% | | — |
| | 10,461 |
| |
9625 Towne Centre Drive/San Diego/University Town Center | | 100% | | — |
| | 31,880 |
| | | $ | 61,120 |
| | | $ | 93,000 |
| | | | 7.9 | % | | | | 7.0 | % | | | | 7.0 | % | |
9900 Medical Center Drive/Maryland/Rockville | | 100% | | — |
| | 7,237 |
| | | TBD | | | TBD | | | | TBD |
| | | | TBD |
| | | | TBD |
| |
| | 100% | | $ | 60,596 |
| | $ | 59,224 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Near-term projects undergoing marketing and pre-construction (6) | | Various | | $ | — |
| | $ | 114,954 |
| | | | | | | | | | | | | | | | | | | |
| |
(1) | Anticipated project start dates and initial occupancy dates are subject to leasing and/or market conditions. Stabilized occupancy may vary depending on single tenancy versus multi-tenancy. |
| |
(2) | Represents executed letters of intent for three leases under negotiation aggregating 119,389 RSF. |
| |
(3) | Executed an agreement to purchase a 10% interest in a joint venture with Uber and the Golden State Warriors. Our initial cash contribution is expected to be in the range from $35 million to $40 million, to be funded at closing of the joint venture in 2018. The joint venture will acquire land with completed below-grade improvements to the building foundation and parking garage and will construct two buildings aggregating 580,000 RSF, which will be 100% leased to Uber upon completion. |
| |
(4) | The building is 100% occupied through September 2018, after which we expect to redevelop the building from office to office/laboratory space and expand by an additional 15,000 to 30,000 RSF. We expect the project to be delivered in 2019. |
| |
(5) | Refer to “External Growth – Value-Creation Development and Redevelopment of New Class A Properties Placed into Service in the Last 12 Months” within this Item 2 for additional information. |
| |
(6) | The design and budget of these projects are in process, and the estimated project costs with related yields will be disclosed at a later date as they become available. |
Development of new Class A properties: intermediate-term development projects
|
| | | | | | | | |
325 Binney9880 Campus Point Drive and 4150 Campus Point Court | | 9877 Waples Street | | 201 Haskins Way | | 960 Industrial Road | | 825 and 835 Industrial Road | | Alexandria Center® for Life Science 1165 Eastlake Avenue East |
Greater Boston/CambridgeSan Diego/University Town Center | | San Francisco/South San FranciscoDiego/Sorrento Mesa | | San Francisco/Greater StanfordSeattle/Lake Union |
199,621 RSF | | San Francisco/Greater Stanford63,774 RSF | | New York City/Manhattan100,086 RSF |
| | | | | | | | |
|
| | | | | | | | | | | | | |
5200 Illumina Way | | Campus Point Drive | | 1150 Eastlake Avenue East | | 98009804 Medical Center Drive | | 9950 Medical Center Drive | | Alexandria Center® for AgTech |
San Diego/University Town CenterMaryland/Rockville | | San Diego/University Town CenterMaryland/Rockville | | Seattle/Lake UnionResearch Triangle/Research Triangle |
176,832 RSF | | Maryland/Rockville84,264 RSF | | 160,000 RSF |
| | | | | | |
New Class A development and redevelopment properties: current projects (continued)
The following table summarizes the key information fortables set forth a summary of our near-termnew Class A development projects in North Americaand redevelopment properties under construction as of SeptemberJune 30, 20172020 (dollars in thousands, except per SF amounts)thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property/Market/Submarket | | | | Square Footage | | | | | | Percentage | | | | | | | | | |
| | Dev/Redev | | In Service | | CIP | | Total | | Leased | | | Leased/Negotiating | | | Initial Occupancy(1) | | | |
Developments and redevelopments under construction | | | | | | | | | | | | | | | | | | | |
The Arsenal on the Charles/Greater Boston/Cambridge/Inner Suburbs | | Redev | | 630,598 | | (2) | 205,690 | | | 836,288 | | | 75 | % | | | 89 | % | | | | 2021 | | |
945 Market Street/San Francisco/Mission Bay/SoMa | | Redev | | — | | | 255,765 | | | 255,765 | | | — | | | | — | | | | | 2020 | (3) | |
201 Haskins Way/San Francisco/South San Francisco | | Dev | | — | | | 315,000 | | | 315,000 | | | 33 | | | | 33 | | | | 4Q20-1Q21 | | | |
Alexandria District for Science and Technology/San Francisco/Greater Stanford | | Dev | | — | | | 526,178 | | | 526,178 | | | 59 | | | | 59 | | | | 4Q20-1Q21 | | | |
3160 Porter Drive/San Francisco/Greater Stanford | | Redev | | — | | | 92,147 | | | 92,147 | | | 20 | | | | 20 | | | | | 1H21 | | |
Alexandria Center® – Long Island City/New York City/New York City | | Redev | | 36,661 | | | 140,098 | | | 176,759 | | | 21 | | | | 28 | | | | 4Q20-1Q21 | | | |
9880 Campus Point Drive and 4150 Campus Point Court/San Diego/ University Town Center(4) | | Dev | | 69,481 | | | 199,621 | | | 269,102 | | | 89 | | | | 91 | | | | | 4Q19 | | |
9877 Waples Street/Sorrento Mesa/San Diego | | Redev | | — | | | 63,774 | | | 63,774 | | | 100 | | | | 100 | | | | | 2021 | | |
1165 Eastlake Avenue East/Seattle/Lake Union | | Dev | | — | | | 100,086 | | | 100,086 | | | 100 | | | | 100 | | | | 4Q20-1Q21 | | | |
9804 Medical Center Drive/Maryland/Rockville | | Dev | | — | | | 176,832 | | | 176,832 | | | 100 | | | | 100 | | | | | 2H20 | | |
9950 Medical Center Drive/Maryland/Rockville | | Dev | | — | | | 84,264 | | | 84,264 | | | 100 | | | | 100 | | | | | 2H20 | | |
704 Quince Orchard Road/Maryland/Gaithersburg(5) | | Redev | | 59,034 | | | 20,998 | | | 80,032 | | | 90 | | | | 90 | | | | | 4Q18 | | |
Alexandria Center® for AgTech/Research Triangle/Research Triangle(6) | | Dev | | 180,400 | | | 160,000 | | | 340,400 | | | 50 | | | | 50 | | | | | 2021 | | |
Total | | | | 976,174 | | | 2,340,453 | | | 3,316,627 | | | 61 | % | | | 65 | % | | | | | | |
| | | | | | | | | | | | | | | | | | | |
(1)Initial occupancy dates are subject to leasing and/or market conditions. Construction disruptions resulting from COVID-19 and observance of social distancing measures may further impact construction and occupancy forecasts and will continue to be monitored closely. Multi-tenant projects may have occupancy by tenants over a period of time. Stabilized occupancy may vary depending on single tenancy versus multi-tenancy.
(2)We expect to redevelop an additional 154,855 RSF of an office space (acquired lease with space in operating RSF) into office/laboratory space upon expiration of the existing leases in the third quarter of 2020 and the first quarter of 2021.
(3)Various options are under evaluation for this property, including ongoing discussion with a company interested in this property. We expect to update the initial occupancy date later this year.
(4)Refer to footnote 2 on the next page.
(5)704 Quince Orchard Road is an unconsolidated real estate joint venture. RSF represents 100%.
(6)The new strategic collaborative agtech campus consists of Phase I at 5 Laboratory Drive, including campus amenities, and Phase II at 9 Laboratory Drive.
New Class A development and redevelopment properties: current projects (continued)
|
| | | | | | | | | | | | | | | | |
Market | | Property/Submarket | | Book Value | | Project SF | | Per SF | |
Greater Boston | | 325 Binney Street/Cambridge (1) | | | $ | 85,518 |
| | | 208,965 |
| | $ | 409 |
| |
| 50 Rogers Street/Cambridge | | | 6,426 |
| | | 183,644 |
| (2) | 35 |
| |
San Francisco | | 960 Industrial Road/Greater Stanford | | | 67,902 |
| | | 500,000 |
| (3) | 136 |
| |
| 825 and 835 Industrial Road/Greater Stanford | | | 90,018 |
| | | 530,000 |
| | 170 |
| |
| 201 Haskins Way/South San Francisco | | | 33,950 |
| | | 280,000 |
| (4) | 121 |
| |
New York City | | Alexandria Center® for Life Science/Manhattan | | | — |
| | | 420,000 |
| | — |
| |
San Diego | | 5200 Illumina Way/University Town Center | | | 11,239 |
| | | 386,044 |
| | 29 |
| |
| Campus Point Drive/University Town Center | | | 13,395 |
| | | 315,000 |
| | 43 |
| |
Seattle | | 1150 Eastlake Avenue East/Lake Union | | | 18,922 |
| | | 260,000 |
| | 73 |
| |
Maryland | | 9800 Medical Center Drive/Rockville | | | 6,500 |
| | | 180,000 |
| | 36 |
| |
Total | | | $ | 333,870 |
| | | 3,263,653 |
| | $ | 102 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Our Ownership Interest | | | | | | | | | | | | Unlevered Yields | | | | | | |
Property/Market/Submarket | | | | | In Service | | CIP | | Cost to Complete | | Total at Completion | | | Initial Stabilized | | | | Initial Stabilized (Cash Basis) | | |
| | | | | | | | | | | | | | | | | | | | |
Developments and redevelopments under construction | | | | | | | | | | | | | | | | | | | | |
The Arsenal on the Charles/Greater Boston/Cambridge/Inner Suburbs | | 100 | % | | | $ | 428,539 | | | $ | 109,107 | | | TBD | | | | | | | | | | | |
945 Market Street/San Francisco/Mission Bay/SoMa | | 99.5 | % | | | — | | | 197,330 | | | | | | | | | | | | | | |
201 Haskins Way/San Francisco/South San Francisco | | 100 | % | | | — | | | 211,100 | | | $ | 102,900 | | | $ | 314,000 | | | | | 6.6 | % | | | | 6.5 | % | |
Alexandria District for Science and Technology/San Francisco/Greater Stanford | | 100 | % | | | — | | | 368,998 | | | $ | 220,002 | | | $ | 589,000 | | | | | 6.4 | % | | | | 6.1 | % | |
3160 Porter Drive/San Francisco/Greater Stanford | | 100 | % | | | — | | | 39,264 | | | TBD | | | | | | | | | | | |
Alexandria Center® – Long Island City/New York City/New York City | | 100 | % | | | 16,549 | | | 98,263 | | | $ | 69,488 | | | $ | 184,300 | | | | | 5.5 | % | | | | 5.6 | % | |
9880 Campus Point Drive and 4150 Campus Point Court/San Diego/ University Town Center(1) | | (1) | | | 78,429 | | | 58,269 | | | $ | 118,302 | | | $ | 255,000 | | | | | 6.3 | % | (2) | | | 6.4 | % | (2) |
9877 Waples Street/Sorrento Mesa/San Diego | | 100 | % | | | — | | | 17,064 | | | $ | 12,136 | | | $ | 29,200 | | | | | 8.6 | % | | | | 7.9 | % | |
1165 Eastlake Avenue East/Seattle/Lake Union | | 100 | % | | | — | | | 75,486 | | | $ | 62,514 | | | $ | 138,000 | | | | | 6.5 | % | (3) | | | 6.3 | % | (3) |
9804 Medical Center Drive/Maryland/Rockville | | 100 | % | | | — | | | 55,498 | | | $ | 39,902 | | | $ | 95,400 | | | | | 7.7 | % | | | | 7.2 | % | |
9950 Medical Center Drive/Maryland/Rockville | | 100 | % | | | — | | | 34,340 | | | $ | 19,960 | | | $ | 54,300 | | | | | 7.3 | % | | | | 6.8 | % | |
Alexandria Center® for AgTech/Research Triangle/Research Triangle | | 100 | % | | | 86,015 | | | 26,247 | | | TBD | | | | | | | | | | | |
Consolidated projects | | | | | 609,532 | | | 1,290,966 | | | | | | | | | | | | | | |
704 Quince Orchard Road/Maryland/Gaithersburg(4) | | 56.8 | % | | | 8,599 | | | 2,825 | | | $ | 1,876 | | | $ | 13,300 | | | | | 8.9 | % | | | | 8.8 | % | |
Total | | | | | $ | 618,131 | | | $ | 1,293,791 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| |
(1) | We acquired 325 Binney Street (formerly named 303 Binney Street), a land parcel that is currently entitled for the development of 163,339 RSF for office or office/laboratory space and 45,626 RSF for residential space. |
| |
(2) | Represents a multifamily residential development with approximately 130-140 units (adjacent to 161 First Street). As part of our successful efforts to increase the entitlements on our Alexandria Center® at Kendall Square development, we were required to develop two multifamily residential projects, one of which was previously completed and sold. We may market this project for sale.
(1)Refer to the “Consolidated and unconsolidated real estate joint ventures” section under this Item 2 for additional information. (2)Represents a two-phase development project as follows: •Initial phase represents 9880 Campus Point Drive, a 98,000 RSF project to develop Alexandria GradLabs™, a highly flexible, first-of-its-kind life science platform designed to provide post-seed-stage life science companies with turnkey, fully furnished office/laboratory suites and an accelerated, scalable path for growth. As of June 30, 2020, 199,621 RSF and 69,481 RSF are classified in construction in process and in-service, respectively. The R&D building located at 9880 Campus Point Drive was demolished and as of June 30, 2020, continues to be included in our same property performance results. Refer to the “Same properties” subsection of the “Results of operations” section under this Item 2 for additional information. •Subsequent phase represents 4150 Campus Point Court, a 171,102 RSF, 100% leased project undergoing pre-construction, and we expect to commence vertical construction in 1Q21, with occupancy expected in 2022. •Project costs represent development costs for 9880 Campus Point Drive and 4150 Campus Point Court. Unlevered yields represent expected aggregate returns for Campus Pointe by Alexandria, including 9880, 10290, and 10300 Campus Point Drive and 4150 Campus Point Court. (3)Unlevered yields represent anticipated aggregate returns for 1165 Eastlake Avenue, an amenity-rich research headquarters for Adaptive Biotechnologies Corporation, and 1208 Eastlake Avenue, an adjacent multi-tenant office/laboratory building. (4)704 Quince Orchard Road is an unconsolidated real estate joint venture. Cost and yield amounts represent our share.
|
| |
(3) | The intermediate-term development project undergoing entitlements for 500,000 RSF will replace the existing 195,000 RSF of operating property. |
| |
(4) | The intermediate-term development project undergoing entitlements for 280,000 RSF will replace the existing 23,840 RSF of operating property. |
Summary
New Class A development and redevelopment properties: summary of pipeline
The following table summarizes the key information for all our development and redevelopment projects in North America as of SeptemberJune 30, 20172020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property/Submarket | | Our Ownership Interest | | | Book Value | | Square Footage | | | | | | | | | |
| | | | | | | Development and Redevelopment | | | | | | | | Total | |
| | | | | | | Under Construction | | Near Term | | Intermediate Term | | Future | | | |
| | | | | | | | | | | | | | | | |
Greater Boston | | | | | | | | | | | | | | | | |
The Arsenal on the Charles/Cambridge/Inner Suburbs | | 100 | % | | | $ | 126,156 | | | 205,690 | | | — | | | — | | | 200,000 | | | 405,690 | | |
15 Necco Street/Seaport Innovation District | | 98.2 | % | | | 179,347 | | | — | | | 293,000 | | | — | | | — | | | 293,000 | | |
215 Presidential Way/Route 128 | | 100 | % | | | 6,613 | | | — | | | 112,000 | | | — | | | — | | | 112,000 | | |
325 Binney Street/Cambridge | | 100 | % | | | 116,712 | | | — | | | — | | | 402,000 | | | — | | | 402,000 | | |
99 A Street/Seaport Innovation District | | 95.9 | % | | | 42,959 | | | — | | | — | | | 235,000 | | | — | | | 235,000 | | |
10 Necco Street/Seaport Innovation District | | 100 | % | | | 88,365 | | | — | | | — | | | 175,000 | | | — | | | 175,000 | | |
Alexandria Technology Square®/Cambridge | | 100 | % | | | 7,881 | | | — | | | — | | | — | | | 100,000 | | | 100,000 | | |
100 Tech Drive/Route 128 | | 100 | % | | | — | | | — | | | — | | | — | | | 300,000 | | | 300,000 | | |
231 Second Avenue/Route 128 | | 100 | % | | | 1,093 | | | — | | | — | | | — | | | 32,000 | | | 32,000 | | |
Other value-creation projects | | 100 | % | | | 9,587 | | | — | | | — | | | — | | | 16,955 | | | 16,955 | | |
| | | | | 578,713 | | | 205,690 | | | 405,000 | | | 812,000 | | | 648,955 | | | 2,071,645 | | |
San Francisco | | | | | | | | | | | | | | | | |
201 Haskins Way/South San Francisco | | 100 | % | | | 211,100 | | | 315,000 | | | — | | | — | | | — | | | 315,000 | | |
Alexandria District for Science and Technology/Greater Stanford | | 100 | % | | | 611,255 | | | 526,178 | | | — | | | 587,000 | | (1) | 700,000 | | (1) | 1,813,178 | | |
945 Market Street/Mission Bay/SoMa | | 99.5 | % | | | 197,330 | | | 255,765 | | | — | | | — | | | — | | | 255,765 | | |
3160 Porter Drive/Greater Stanford | | 100 | % | | | 39,264 | | | 92,147 | | | — | | | — | | | — | | | 92,147 | | |
88 Bluxome Street/Mission Bay/SoMa | | 100 | % | | | 256,334 | | | — | | | 1,070,925 | | (2) | — | | | — | | | 1,070,925 | | |
Alexandria Technology Center® – Gateway/South San Francisco | | 45.0 | % | | | 44,025 | | | — | | | 217,000 | | | 300,010 | | (1) | 291,000 | | | 808,010 | | |
505 Brannan Street, Phase II/Mission Bay/SoMa | | 99.7 | % | | | 18,770 | | | — | | | — | | | 165,000 | | | — | | | 165,000 | | |
3825 and 3875 Fabian Way/Greater Stanford | | 100 | % | | | — | | | — | | | — | | | 250,000 | | (1) | 228,000 | | (1) | 478,000 | | |
East Grand Avenue/South San Francisco | | 100 | % | | | 6,112 | | | — | | | — | | | — | | | 90,000 | | | 90,000 | | |
Other value-creation projects | | 100 | % | | | 44,096 | | | — | | | — | | | 191,000 | | | 25,000 | | | 216,000 | | |
| | | | | $ | 1,428,286 | | | 1,189,090 | | | 1,287,925 | | | 1,493,010 | | | 1,334,000 | | | 5,304,025 | | |
| | | | | | | | | | | | | | | | |
(1)Represents total square footage upon completion of development or redevelopment of a new Class A property. Square footage presented includes RSF of buildings currently in operation at properties that also have inherent future development opportunities, with the intent to demolish the existing property upon expiration of the existing in-place leases and commencement of future construction. Refer to the definition of “Investments in real estate – value-creation square footage currently in rental properties” in the “Non-GAAP measures and definitions” section within this Item 2 for additional information. (2)Includes 488,899 RSF pre-leased to Pinterest, Inc., for which we expect demolition of the existing building to commence in January 2021. | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property/Submarket | | Our Ownership Interest | | Book Value | | Square Footage | |
| | | Undergoing Construction | | Near-Term Projects Undergoing Marketing and Pre-Construction | | Intermediate-Term Development | | Future Development | | Total (1) | |
Greater Boston | | | | | | | | | | | | | | | | | | | | | |
Undergoing construction | | | | | | | | | | | | | | | | | | | | | |
100 Binney Street/Cambridge | | | 100% | | | | $ | 70,143 |
| | | 91,155 |
| | — |
| | — |
| | | — |
| | | 91,155 |
| |
266 and 275 Second Avenue/Route 128 | | | 100% | | | | 9,646 |
| | | 59,173 |
| | — |
| | — |
| | | — |
| | | 59,173 |
| |
Near-term projects undergoing marketing and pre-construction | | | | | | | | | | | | | | | | | | | | | |
399 Binney (Alexandria Center® at One Kendall Square) | | | 100% | | | | 76,263 |
| | | — |
| | 164,000 |
| | — |
| | | — |
| | | 164,000 |
| |
Intermediate-term development | | | | | | | | | | | | | | | | | | | | | |
325 Binney Street/Cambridge | | | 100% | | | | 85,518 |
| | | — |
| | — |
| | 208,965 |
| | | — |
| | | 208,965 |
| |
50 Rogers Street/Cambridge | | | 100% | | | | 6,426 |
| | | — |
| | — |
| | 183,644 |
| | | — |
| | | 183,644 |
| |
Future development projects | | | | | | |
|
| | |
|
| |
|
| |
|
| | |
|
| | |
| |
Alexandria Technology Square®/Cambridge | | | 100% | | | | 7,787 |
| | | — |
| | — |
| | — |
| | | 100,000 |
| | | 100,000 |
| |
Other future projects | | | 100% | | | | 7,315 |
| | | — |
| | — |
| | — |
| | | 221,955 |
| | | 221,955 |
| |
| | | | | | | $ | 263,098 |
| | | 150,328 |
| | 164,000 |
| | 392,609 |
| | | 321,955 |
| | | 1,028,892 |
| |
San Francisco | | | | | | | | | | | | | | | | | | | | | |
Undergoing construction | | | | | | | | | | | | | | | | | | | | | |
510 Townsend Street/Mission Bay/SoMa | | | 100% | | | | $ | 187,133 |
| | | 300,000 |
| | — |
| | — |
| | | — |
| | | 300,000 |
| |
505 Brannan Street, Phase I/Mission Bay/SoMa | | | 99.7% | | | | 116,522 |
| | | 150,000 |
| | — |
| | — |
| | | — |
| | | 150,000 |
| |
213 East Grand Avenue/South San Francisco | | | 100% | | | | 72,895 |
| | | 300,930 |
| | — |
| | — |
| | | — |
| | | 300,930 |
| |
Near-term projects undergoing marketing and pre-construction | | | | | | | | | | | | | | | | | | | | | |
1655 and 1715 Third Street/Mission Bay/SoMa | | | 10% | | | | — |
| | | — |
| | 580,000 |
| | — |
| | | — |
| | | 580,000 |
| |
279 East Grand Avenue/South San Francisco | | | 100% | | | | 17,998 |
| | | — |
| | 199,000 |
| | — |
| | | — |
| | | 199,000 |
| |
Intermediate-term development | | | | | | | | | | | | | | | | | | | | | |
960 Industrial Road/Greater Stanford | | | 100% | | | | 67,902 |
| | | — |
| | — |
| | 500,000 |
| (2) | | — |
| | | 500,000 |
| |
825 and 835 Industrial Road/Greater Stanford | | | 100% | | | | 90,018 |
| | | — |
| | — |
| | 530,000 |
| | | — |
| | | 530,000 |
| |
201 Haskins Way/South San Francisco | | | 100% | | | | 33,950 |
| | | — |
| | — |
| | 280,000 |
| (3) | | — |
| | | 280,000 |
| |
Future development projects | | | | | | |
|
| | |
| |
| |
| | |
| | |
| |
88 Bluxome Street/Mission Bay/SoMa | | | 100% | | | | 160,901 |
| | | — |
| | — |
| | — |
| | | 1,070,925 |
| (4) | | 1,070,925 |
| |
505 Brannan Street, Phase II/Mission Bay/SoMa | | | 99.7% | | | | 14,988 |
| | | — |
| | — |
| | — |
| | | 165,000 |
| | | 165,000 |
| |
East Grand Avenue/South San Francisco | | | 100% | | | | 5,988 |
| | | — |
| | — |
| | — |
| | | 90,000 |
| | | 90,000 |
| |
Other future projects | | | 100% | | | | — |
| | | — |
| | — |
| | — |
| | | 95,620 |
| | | 95,620 |
| |
| | | | | | | $ | 768,295 |
| | | 750,930 |
| | 779,000 |
| | 1,310,000 |
| | | 1,421,545 |
| | | 4,261,475 |
| |
New York City | | | | | | | | | | | | | | | | | | | | | |
Alexandria Center® for Life Science/Manhattan | | | 100% | | | | $ | — |
| | | — |
| | — |
| | 420,000 |
| | | — |
| | | 420,000 |
| |
| | | | | | | $ | — |
| | | — |
| | — |
| | 420,000 |
| | | — |
| | | 420,000 |
| |
(1) Total pipeline SF represents operating RSF plus incremental SF targeted for intermediate-term and future development. (2) The intermediate-term development project undergoing entitlements for 500,000 RSF will replace the existing 195,000 RSF of operating property. (3) The intermediate-term development project undergoing entitlements for 280,000 RSF will replace the existing 23,840 RSF of operating property. (4) The future development project undergoing entitlements for 1,070,925 developable square feet will replace the existing 232,470 RSF operating property. |
SummaryNew Class A development and redevelopment properties: summary of pipeline (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property/Submarket | | Our Ownership Interest | | | Book Value | | Square Footage | | | | | | | | | |
| | | | | | | Development and Redevelopment | | | | | | | | Total | |
| | | | | | | Under Construction | | Near Term | | Intermediate Term | | Future | | | |
| | | | | | | | | | | | | | | | |
New York City | | | | | | | | | | | | | | | | |
Alexandria Center® – Long Island City/New York City | | 100 | % | | | $ | 98,263 | | | 140,098 | | | — | | | — | | | — | | | 140,098 | | |
Alexandria Center® for Life Science – New York City/New York City | | 100 | % | | | 42,157 | | | — | | | — | | | 550,000 | | (1) | — | | | 550,000 | | |
47-50 30th Street/New York City | | 100 | % | | | 28,497 | | | — | | | — | | | 135,938 | | | — | | | 135,938 | | |
219 East 42nd Street/New York City | | 100 | % | | | — | | | — | | | — | | | — | | | 579,947 | | (2) | 579,947 | | |
| | | | | 168,917 | | | 140,098 | | | — | | | 685,938 | | | 579,947 | | | 1,405,983 | | |
San Diego | | | | | | | | | | | | | | | | |
Campus Pointe by Alexandria/University Town Center | | (3) | | | 111,126 | | | 199,621 | | | — | | | 390,164 | | (4) | 359,281 | | (4) | 949,066 | | |
9877 Waples Street/Sorrento Mesa | | 100 | % | | | 17,064 | | | 63,774 | | | — | | | — | | | — | | | 63,774 | | |
3115 Merryfield Row/Torrey Pines | | 100 | % | | | 49,409 | | | — | | | 125,000 | | | — | | | — | | | 125,000 | | |
SD Tech by Alexandria/Sorrento Mesa | | (3) | | | 47,444 | | | — | | | 176,428 | | (5) | 190,074 | | | 388,000 | | | 754,502 | | |
10931 and 10933 Torrey Pines Road/Torrey Pines | | 100 | % | | | — | | | — | | | — | | | 242,000 | | (4) | — | | | 242,000 | | |
University District/University Town Center | | 100 | % | | | 51,559 | | | — | | | — | | | 600,000 | | (4)(6) | — | | | 600,000 | | |
Townsgate by Alexandria/Del Mar Heights | | 100 | % | | | 21,735 | | | — | | | — | | | 185,000 | | | — | | | 185,000 | | |
5200 Illumina Way/University Town Center | | 51 | % | | | 12,302 | | | — | | | — | | | — | | | 451,832 | | | 451,832 | | |
Vista Wateridge/Sorrento Mesa | | 100 | % | | | 4,175 | | | — | | | — | | | — | | | 163,000 | | | 163,000 | | |
4045 and 4075 Sorrento Valley Boulevard/Sorrento Valley | | 100 | % | | | 7,668 | | | — | | | — | | | — | | | 149,000 | | (4) | 149,000 | | |
Other value-creation projects | | 100 | % | | | — | | | — | | | — | | | — | | | 50,000 | | | 50,000 | | |
| | | | | 322,482 | | | 263,395 | | | 301,428 | | | 1,607,238 | | | 1,561,113 | | | 3,733,174 | | |
Seattle | | | | | | | | | | | | | | | | |
1165 Eastlake Avenue East/Lake Union | | 100 | % | | | 75,486 | | | 100,086 | | | — | | | — | | | — | | | 100,086 | | |
1150 Eastlake Avenue East/Lake Union | | 100 | % | | | 41,687 | | | — | | | — | | | 260,000 | | | — | | | 260,000 | | |
701 Dexter Avenue North/Lake Union | | 100 | % | | | 47,081 | | | — | | | — | | | 217,000 | | | — | | | 217,000 | | |
601 Dexter Avenue North/Lake Union | | 100 | % | | | 33,787 | | | — | | | — | | | — | | | 188,400 | | (4) | 188,400 | | |
Other value-creation projects | | 100 | % | | | 53,877 | | | — | | | — | | | — | | | 579,825 | | | 579,825 | | |
| | | | | $ | 251,918 | | | 100,086 | | | — | | | 477,000 | | | 768,225 | | | 1,345,311 | | |
| | | | | | | | | | | | | | | | |
(1)We have been negotiating a long-term ground lease for the future site of a new building approximating 550,000 RSF. Beginning March 2020, due to the impacts of COVID-19 on New York City, the City has been using the site as a temporary morgue. The use of this site by the City has resulted in delays to deadlines for both ground lease negotiations and ultimately the timing to commence and complete key milestone construction dates. (2)Includes 349,947 RSF in operation with an opportunity either to convert the existing office space into office/laboratory space through future redevelopment or to expand the building by an additional 230,000 RSF through ground-up development. The building is currently occupied by Pfizer Inc. with a remaining lease term of approximately five years. (3)Refer to the “Consolidated and unconsolidated real estate joint ventures” section within this Item 2 for additional information on our ownership interest. (4)Represents total square footage upon completion of development of a new Class A property. Square footage presented includes RSF of buildings currently in operation at properties that also have inherent future development opportunities. We intend to demolish the existing property upon expiration of the existing in-place leases and commencement of future construction. Refer to the definition of “Investments in real estate – value-creation square footage currently in rental properties” in the “Non-GAAP measures and definitions” section within this Item 2 for additional information. (5)During the three months ended June 30, 2020, we pre-leased 59% of this project and expect to commence construction over the next six to eight months. (6)Includes our recently acquired project at 4555 Executive Drive and 9363 and 9393 Towne Centre Drive in our University Town Center submarket, which are currently under evaluation for development, subject to future market conditions. | | | | | | | | | | | | | | | | |
New Class A development and redevelopment properties: summary of pipeline (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property/Submarket | | Our Ownership Interest | | Book Value | | Square Footage | |
| | | Undergoing Construction | | Near-Term Projects Undergoing Marketing and Pre-Construction | | Intermediate-Term Development | | Future Development | | Total (1) | |
San Diego | | | | | | | | | | | | | | | | | | | | | |
Undergoing construction | | | | | | | | | | | | | | | | | | | | | |
ARE Spectrum/Torrey Pines | | | 100% | | | | $ | 143,149 |
| | | 170,523 |
| | — |
| | — |
| | | — |
| | | 170,523 |
| |
9625 Towne Centre Drive/University Town Center | | | 100% | | | | 31,880 |
| | | 163,648 |
| | — |
| | — |
| | | — |
| | | 163,648 |
| |
Intermediate-term development | | | | | | | | | | | | | | | | | | | | | |
5200 Illumina Way/University Town Center | | | 100% | | | | 11,239 |
| | | — |
| | — |
| | 386,044 |
| | | — |
| | | 386,044 |
| |
Campus Point Drive/University Town Center | | | 100% | | | | 13,395 |
| | | — |
| | — |
| | 315,000 |
| | | — |
| | | 315,000 |
| |
Future development projects | | | | | | |
|
| | |
| |
| |
| | |
| | |
| |
Vista Wateridge/Sorrento Mesa | | | 100% | | | | 3,909 |
| | | — |
| | — |
| | — |
| | | 163,000 |
| | | 163,000 |
| |
Other future projects | | | 100% | | | | 33,147 |
| | | — |
| | — |
| | — |
| | | 259,895 |
| | | 259,895 |
| |
| | | | | | | $ | 236,719 |
| | | 334,171 |
| | — |
| | 701,044 |
| | | 422,895 |
| | | 1,458,110 |
| |
Seattle | | | | | | | | | | | | | | | | | | | | | |
Undergoing construction | | | | | | | | | | | | | | | | | | | | | |
400 Dexter Avenue North/Lake Union | | | 100% | | | | $ | 19,243 |
| | | 31,215 |
| | — |
| | — |
| | | — |
| | | 31,215 |
| |
Near-term projects undergoing marketing and pre-construction | | | | | | | | | | | | | | | | | | | | | |
1818 Fairview Avenue East/Lake Union | | | 100% | | | | 20,693 |
| | | — |
| | 205,000 |
| | — |
| | | — |
| | | 205,000 |
| |
Intermediate-term development | | | | | | | | | | | | | | | | | | | | | |
1150 Eastlake Avenue East/Lake Union | | | 100% | | | | 18,922 |
| | | — |
| | — |
| | 260,000 |
| | | — |
| | | 260,000 |
| |
Future development projects | | | | | | |
|
| | |
| |
| |
| | |
| | |
| |
1165/1166 Eastlake Avenue East/Lake Union | | | 100% | | | | 18,631 |
| | | — |
| | — |
| | — |
| | — |
| 106,000 |
| | | 106,000 |
| |
| | | | | | | $ | 77,489 |
| | | 31,215 |
| | 205,000 |
| | 260,000 |
| | | 106,000 |
| | | 602,215 |
| |
Maryland | | | | | | | | | | | | | | | | | | | | | |
Undergoing construction | | | | | | | | | | | | | | | | | | | | | |
9900 Medical Center Drive/Rockville | | | 100% | | | | $ | 7,237 |
| | | 45,039 |
| | — |
| | — |
| | | — |
| | | 45,039 |
| |
Intermediate-term development | | | | | | | | | | | | | | | | | | | | | |
9800 Medical Center Drive/Rockville | | | 100% | | | | 6,500 |
| | | — |
| | — |
| | 180,000 |
| | | — |
| | | 180,000 |
| |
Future development projects | | | | | | |
|
| | |
| |
| |
| | |
| | |
| |
Other future projects | | | 100% | | | | 4,035 |
| | | — |
| | — |
| | — |
| | | 61,000 |
| | | 61,000 |
| |
| | | | | | | $ | 17,772 |
| | | 45,039 |
| | — |
| | 180,000 |
| | | 61,000 |
| | | 286,039 |
| |
Research Triangle Park | | | | | | | | | | | | | | | | | | | | | |
Undergoing construction | | | | | | | | | | | | | | | | | | | | | |
5 Laboratory Drive/Research Triangle Park | | | 100% | | | | $ | 10,461 |
| | | 175,000 |
| | — |
| | — |
| | | — |
| | | 175,000 |
| |
Future development projects | | | | | | |
|
| | |
| |
| |
| | |
| | |
| |
6 Davis Drive/Research Triangle Park | | | 100% | | | | 16,673 |
| | | — |
| | — |
| | — |
| | | 1,000,000 |
| | | 1,000,000 |
| |
Other future projects | | | 100% | | | | 4,149 |
| | | — |
| | — |
| | — |
| | | 76,262 |
| | | 76,262 |
| |
| | | | | | | $ | 31,283 |
| | | 175,000 |
| | — |
| | — |
| | | 1,076,262 |
| | | 1,251,262 |
| |
Non-cluster markets – other future projects | | | 100% | | | | 11,791 |
| | | — |
| | — |
| | — |
| | | 571,705 |
| | | 571,705 |
| |
| | | | | | | $ | 1,406,447 |
| | | 1,486,683 |
| | 1,148,000 |
| | 3,263,653 |
| | | 3,981,362 |
| | | 9,879,698 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property/Submarket | | Our Ownership Interest | | | Book Value | | Square Footage | | | | | | | | | |
| | | | | | | Development and Redevelopment | | | | | | | | Total | |
| | | | | | | Under Construction | | Near Term | | Intermediate Term | | Future | | | |
| | | | | | | | | | | | | | | | |
Maryland | | | | | | | | | | | | | | | | |
704 Quince Orchard Road/Gaithersburg | | 56.8 | % | | | $ | — | | (1) | 20,998 | | | — | | | — | | | — | | | 20,998 | | |
9804 and 9800 Medical Center Drive/Rockville | | 100.0 | % | | | 56,905 | | | 176,832 | | | — | | | — | | | 64,000 | | | 240,832 | | |
9950 Medical Center Drive/Rockville | | 100.0 | % | | | 34,340 | | | 84,264 | | | — | | | — | | | — | | | 84,264 | | |
14200 Shady Grove Road/Rockville | | 100.0 | % | | | 27,285 | | | — | | | — | | | 290,000 | | | 145,000 | | | 435,000 | | |
| | | | | 118,530 | | | 282,094 | | | — | | | 290,000 | | | 209,000 | | | 781,094 | �� | |
Research Triangle | | | | | | | | | | | | | | | | |
Alexandria Center® for AgTech, Phase II/Research Triangle | | 100.0 | % | | | 26,247 | | | 160,000 | | | — | | | — | | | — | | | 160,000 | | |
8 Davis Drive/Research Triangle | | 100.0 | % | | | 15,985 | | | — | | | 150,000 | | | 70,000 | | | — | | | 220,000 | | |
6 Davis Drive/Research Triangle | | 100.0 | % | | | 15,761 | | | — | | | — | | | — | | | 800,000 | | | 800,000 | | |
Other value-creation projects | | 100.0 | % | | | 4,185 | | | — | | | — | | | — | | | 76,262 | | | 76,262 | | |
| | | | | 62,178 | | | 160,000 | | | 150,000 | | | 70,000 | | | 876,262 | | | 1,256,262 | | |
Other value-creation projects | | 100.0 | % | | | 3,842 | | | — | | | — | | | — | | | 146,800 | | | 146,800 | | |
Total | | | | | 2,934,866 | | | 2,340,453 | | | 2,144,353 | | | 5,435,186 | | | 6,124,302 | | | 16,044,294 | | (2) |
| | | | | | | | | | | | | | | | |
Key pending acquisition | | | | | | | | | | | | | | | | |
Mercer Mega Block/Lake Union | | (3) | | | (3) | | — | | | — | | | — | | | 800,000 | | | 800,000 | | |
| | | | | — | | | — | | | — | | | — | | | 800,000 | | | 800,000 | | |
| | | | | $ | 2,934,866 | | | 2,340,453 | | | 2,144,353 | | | 5,435,186 | | | 6,924,302 | | | 16,844,294 | | |
| | | | | | | | | | | | | | | | |
| |
(1) | Total pipeline SF represents operating RSF plus incremental SF targeted for intermediate-term and future development. |
(1)This property is held by an unconsolidated real estate joint venture. Refer to the “Consolidated and unconsolidated real estate joint ventures” section within this Item 2 for additional information on our ownership interest.
(2)Total square footage includes 1,821,610 RSF of buildings currently in operation that will be redeveloped or replaced with new development RSF upon commencement of future construction. Refer to the definition of “Investments in real estate – value-creation square footage currently in rental properties” in the “Non-GAAP measures and definitions” section within this Item 2 for additional information.
(3)Refer to the “Acquisitions” subsection of this “Investments in real estate” section within this Item 2 for additional information.
Summary of capital expenditures
Our construction spending for the ninesix months ended SeptemberJune 30, 2017,2020, consisted of the following (in thousands):
| | | | | | | | | | | |
Construction Spending | | Six Months Ended June 30, 2020 | |
Additions to real estate – consolidated projects | | $ | 725,742 | | |
Investments in unconsolidated real estate joint ventures | | 2,861 | | |
Contributions from noncontrolling interests | | (5,704) | | |
Construction spending (cash basis) | | 722,899 | | |
Change in accrued construction | | (56,497) | | |
Construction spending for the six months ended June 30, 2020 | | 666,402 | | |
Projected construction spending for the six months ending December 31, 2020 | | 683,598 | | |
Guidance midpoint | | $ | 1,350,000 | | |
|
| | | | | |
| | Nine Months Ended | |
Construction Spending | | September 30, 2017 | |
Additions to real estate – consolidated projects | | $ | 660,877 |
| |
Investments in unconsolidated real estate joint ventures | | 248 |
| |
Construction spending (cash basis) (1) | | 661,125 |
| |
Decrease in accrued construction | | (38,767 | ) | |
Construction spending | | $ | 622,358 |
| |
The following table summarizes the total projected construction spending for the year ending December 31, 2017,2020, which includes interest, property taxes, insurance, payroll, and other indirect project costs (in thousands):
|
| | | | | | | | | | |
Projected Construction Spending | | Year Ending December 31, 2017 | |
Development and redevelopment projects | | $ | 203,000 | | |
Contributions from noncontrolling interests (consolidated joint ventures) | | | (7,000 | ) | |
Generic laboratory infrastructure/building improvement projects | | | 41,000 | | |
Non-revenue-enhancing capital expenditures and tenant improvements | | | 6,000 | | |
Projected construction spending for three months ending December 31, 2017 | | | 243,000 | | |
Actual construction spending for the nine months ended September 30, 2017 | | | 622,358 | | |
Guidance range | | $ | 815,000 |
| – | 915,000 |
| |
|
|
2017 Disciplined Allocation of Capital (2)
|
88% to Urban Innovation Submarkets |
|
| | | | | | | | | | | | | | | |
(1)Projected Construction Spending | Includes revenue-enhancing projects and non-revenue-enhancing capital expenditures. |
Year Ending December 31, 2020 | | | | |
(2)Development, redevelopment, and pre-construction projects | Represents the percentage of projected spending by submarket, including completed and projected acquisitions in our sources and uses of capital guidance ranging from $620 million to $720 million, for the year ending December 31, 2017. |
Non-revenue-enhancing capital expenditures, tenant improvements, and leasing costs
The table below presents 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 tenants, revenue enhancing, or related to properties that have undergone redevelopment (dollars in thousands, except per RSF amounts):
|
| | | | | | | | | | | | | | | |
Non-Revenue-Enhancing Capital Expenditures (1) | | Nine Months Ended September 30, 2017 | | Recent Average per RSF (2) |
| Amount | | RSF | | Per RSF | |
Non-revenue-enhancing capital expenditures | | $ | 5,431 |
| | 18,576,742 |
| | $ | 0.29 |
| | $ | 0.41 |
|
| | | | | | | | |
Tenant improvements and leasing costs: | | | | | | | | |
Re-tenanted space | | $ | 15,542 |
| | 596,653 |
| | $ | 26.05 |
| | $ | 18.11 |
|
Renewal space | | 22,200 |
| | 1,334,824 |
| | 16.63 |
| | 10.14 |
|
Total tenant improvements and leasing costs/weighted average | | $ | 37,742 |
| | 1,931,477 |
| | $ | 19.54 |
| (3) | $ | 12.52 |
|
$ | 1,170,000 | | | | |
(1)Contributions from noncontrolling interests (consolidated real estate joint ventures) | Excludes amounts that are recoverable from tenants, revenue-enhancing, or related to properties that have undergone redevelopment. |
| (20,000) | | | | |
(2)Revenue-enhancing and repositioning capital expenditures | Represents the average of the five years ended December 31, 2016, and the nine months ended September 30, 2017. |
| 144,000 | | | | |
(3)Non-revenue-enhancing capital expenditures | Includes approximately $9.7 million, or $17.40 per RSF, of leasing commissions related to lease renewals and re-leasing space for five leases in our Greater Boston and San Francisco markets with a weighted average lease term of 10 years and rental rate increases of 28.1% and 20.5% (cash basis). | | 56,000 | | | | |
Guidance midpoint | | $ | 1,350,000 | | | | |
| | | | | | |
Results of operations
We present a tabular comparison of items, whether gain or loss, that may facilitate a high-level understanding of our results and provide context for the disclosures included in our most recent annual report on Form 10-K for the year ended December 31, 2019, and our subsequent quarterly reports on Form 10-Q. We believe thissuch tabular presentation promotes a better understanding for investors of the corporate-level decisions made and activities performed that significantly impactaffect comparison of our operating results from period to period. We also believe this tabular presentation will supplement for investors an understanding of our disclosures and real estate operating results. Gains or losses on sales of real estate and impairments forof held for sale assets are related to corporate-level decisions to dispose of real estate. Gains or losses on early extinguishment of debt, gains or losses on early termination of interest rate hedge agreements, and preferred stock redemption charges are related to corporate-level financing decisions focused on our capital structure strategy. Significant realized and unrealized gains or losses foron non-real estate investments and impairments of real estate and non-real estate investments are not related to the operating performance of our real estate assets as they result from strategic, corporate-level non-real estate investment decisions and external market conditions. Impairments of non-real estate investments are not related to the operating performance of our real estate as they represent the write-down of a non-real estate investmentinvestments when itstheir fair value declinesvalues decline below itstheir respective carrying valuevalues due to changes in general market or other conditions.conditions outside of our control. Significant items, whether a gain or loss, included in the tabular disclosure for current periods are described in further detail within this Item 2. Items2. Key items included in net income (loss) attributable to Alexandria’s common stockholders (amounts are shown after deducting any amounts attributable to noncontrolling interests) arefor the three and six months ended June 30, 2020 and 2019, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
(In millions, except per share amounts) | Amount | | Per Share – Diluted | | Amount | | Per Share – Diluted |
Gain on sales of real estate (1) | $ | 14.1 |
| | $ | 0.1 |
| | $ | 0.15 |
| | $ | — |
| | $ | 14.5 |
| | $ | 0.1 |
| | $ | 0.15 |
| | $ | — |
|
Gain on sales of non-real estate investments | — |
| | — |
| | — |
| | — |
| | — |
| | 4.4 |
| | — |
| | 0.06 |
|
| | | | | | | | | | | | | | | |
Impairment of: | | | | | | | | �� | | | | | | | |
Rental properties (2) | — |
| | (6.3 | ) | | — |
| | (0.08 | ) | | (0.2 | ) | | (94.7 | ) | | — |
| | (1.27 | ) |
Land parcels (2) | — |
| | (1.8 | ) | | — |
| | (0.02 | ) | | — |
| | (98.0 | ) | | — |
| | (1.32 | ) |
Non-real estate investments (3) | — |
| | (3.1 | ) | | — |
| | (0.04 | ) | | (4.5 | ) | | (3.1 | ) | | (0.05 | ) | | (0.04 | ) |
Loss on early extinguishment of debt | — |
| | (3.2 | ) | | — |
| | (0.04 | ) | | (0.7 | ) | | (3.2 | ) | | (0.01 | ) | | (0.04 | ) |
Preferred stock redemption charge (4) | — |
| | (13.1 | ) | | — |
| | (0.17 | ) | | (11.3 | ) | | (25.6 | ) | | (0.12 | ) | | (0.34 | ) |
| $ | 14.1 |
| | $ | (27.4 | ) | | $ | 0.15 |
| | $ | (0.35 | ) | | $ | (2.2 | ) | | $ | (220.1 | ) | | $ | (0.03 | ) | | $ | (2.95 | ) |
Weighted-average shares of common stock outstanding – diluted | | | | | 93.3 |
| | 77.4 |
| | | | | | 90.8 |
| | 74.5 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | | | Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
(In millions, except per share amounts) | Amount | | | | Per Share – Diluted | | | | Amount | | | | Per Share – Diluted | | |
Unrealized gains on non-real estate investments(1) | $ | 171.7 | | | $ | 11.1 | | | $ | 1.38 | | | $ | 0.10 | | | $ | 154.5 | | | $ | 83.3 | | | $ | 1.25 | | | $ | 0.75 | |
Impairment of real estate(2) | (13.2) | | | — | | | (0.11) | | | — | | | (22.9) | | (3) | — | | | (0.18) | | | — | |
Impairment of non-real estate investments(1) | (4.7) | | | — | | | (0.04) | | | — | | | (24.5) | | | — | | | (0.20) | | | — | |
Loss on early extinguishment of debt | — | | | — | | | — | | | — | | | — | | | (7.4) | | | — | | | (0.07) | |
Preferred stock redemption charge | — | | | — | | | — | | | — | | | — | | | (2.6) | | | — | | | (0.02) | |
Total | $ | 153.8 | | | $ | 11.1 | | | $ | 1.23 | | | $ | 0.10 | | | $ | 107.1 | | | $ | 73.3 | | | $ | 0.87 | | | $ | 0.66 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| |
(1) | Refer to Note 4 – “Investments in Unconsolidated Real Estate Joint Ventures” to our unaudited consolidated financial statements under Item 1 of this report for more information. |
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(2) | Refer to Note 3 – “Investments in Real Estate” to our unaudited consolidated financial statements under Item 1 of this report for more information. |
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(3) | Refer to Note 5 – “Investments” to our unaudited consolidated financial statements under Item 1 of this report for more information. |
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(4) | Refer to Note 12 – “Stockholders’ Equity” to our unaudited consolidated financial statements under Item 1 of this report for more information. |
(1)Refer to Note 7 – “Investments” to our unaudited consolidated financial statements under Item 1 of this report for more information.
(2)Refer to the section titled “Sales of real estate assets and impairment charges” in Note 3 – “Investments in real estate” to our unaudited consolidated financial statements under Item 1 of this report for detail.
(3)Amount includes $7.6 million impairment of our investment in a recently developed retail property held by our unconsolidated real estate joint venture. This impairment was recognized during the three months ended March 31, 2020, and was classified in equity in earnings of unconsolidated real estate joint ventures within our consolidated statements of operations. Refer to Note 4 – “Consolidated and unconsolidated real estate joint ventures” to our unaudited consolidated financial statements under Item 1 of this report for additional detail.
Same Propertiesproperties
We supplement an evaluation of our results of operations with an evaluation of operating performance of certain of our properties, referred to as Same Properties. For more information on the determination of our Same Properties portfolio, refer to the definition of “Same Property Comparisons”property comparisons” in the “Non-GAAP Measuresmeasures and Definitions”definitions” section within this Item 2. The following table presents information regarding our Same Properties for the three and ninesix months ended SeptemberJune 30, 2017:2020:
| | | | September 30, 2017 | | | June 30, 2020 | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | | Six Months Ended | |
Percentage change in net operating income over comparable period from prior year | | 2.2% |
| | 2.3% | | Percentage change in net operating income over comparable period from prior year | | 0.6% | (1) | | 1.6% | |
Percentage change in net operating income (cash basis) over comparable period from prior year | | 7.8% |
| | 6.2% |
| | Percentage change in net operating income (cash basis) over comparable period from prior year | | 2.5% | (1) | | 4.5% | |
Operating margin | | 69% |
| | 70% | | Operating margin | | 73% | | 73% | |
Number of Same Properties | | 169 |
| | 166 |
| | Number of Same Properties | | 228 | | | 213 | | |
RSF | | 15,182,829 |
| | 14,419,701 |
| | RSF | | 21,779,066 | | | 21,191,416 | | |
Occupancy – current-period average | | 95.9% | | 96.0% | | Occupancy – current-period average | | 96.3% | | 96.6% | |
Occupancy – same-period prior-year average | | 96.9% | | 97.2% | | Occupancy – same-period prior-year average | | 97.1% | | 97.1% | |
(1)Includes the effect of temporary reduction in same property occupancy of 80 basis points related to downtime in connection with leases aggregating 152,045 RSF, with 63% already leased for delivery in the third quarter of 2020 at significantly higher rental rates. Excluding the impact of the temporary vacancies, the same property net operating income growth for the three months ended June 30, 2020, would have been 1.6% and 4.2% (cash basis), respectively. We expect occupancy and other contractual rental increases in the second half of 2020 will increase same property NOI and same property NOI (cash basis) to within our guidance range for the year ending December 31, 2020.
The following table reconciles the number of Same Propertiessame properties to total properties for the ninesix months ended SeptemberJune 30, 2017:2020:
|
| | | | | | | |
Development – under construction | | Properties |
9804 Medical Center Drive | | 1 | |
505 Brannan Street9950 Medical Center Drive | | 1 |
| |
510 Townsend StreetAlexandria District for Science and Technology | | 12 |
| |
ARE Spectrum201 Haskins Way | | 31 |
| |
2131165 Eastlake Avenue East Grand Avenue | | 1 |
| |
100 Binney Street4150 Campus Point Court | | 1 |
| |
400 Dexter Avenue NorthAlexandria Center® for AgTech, Phase II | | 1 |
| |
| | 8 |
| |
Development – placed into service after January 1, 20162019 | | Properties | |
50 and 60399 Binney Street | | 21 |
| |
430279 East 29th StreetGrand Avenue | | 1 |
| |
5200 Illumina Way, Building 6188 East Blaine Street | | 1 |
| |
4796 Executive Drive | | 13 |
| |
360 Longwood Avenue (unconsolidated real estate joint venture) | | 1 |
| |
1455 and 1515 Third Street | | 2 |
| |
| | 8 |
| |
Redevelopment – under construction | | Properties | |
9625 Towne CentreAlexandria Center® – Long Island City | | 1 | |
945 Market Street | | 1 | |
3160 Porter Drive | | 1 |
| |
The Arsenal on the Charles | | 5 Laboratory Drive | | 1 |
| |
9900 Medical Center Drive9877 Waples Street | | 1 |
| |
266 and 275 Second Avenue | | 2 |
| |
| | 5 |
| |
|
| | 9 | |
Redevelopment – placed into service after January 1, 20162019 | | Properties |
10151 Barnes Canyon RoadAlexandria PARC | | 14 |
|
11 Hurley Street681 and 685 Gateway Boulevard | | 12 |
|
10290 Campus Point Drive266 and 275 Second Avenue | | 12 |
|
Alexandria Center® for AgTech, Phase I | | 31 |
|
| | 9 | |
| | |
| | | | | | | | | | | |
Acquisitions after January 1, 20162019 | | Properties | |
Torrey Ridge25, 35, and 45 West Watkins Mill Road | | 3 | | |
3170 Porter Drive | | 1 | | |
Shoreway Science Center | | 32 |
| |
Alexandria Center® at One Kendall Square 3911, 3931, and 4075 Sorrento Valley Boulevard | | 93 |
| |
88 Bluxome260 Townsend Street | | 1 |
| |
960 Industrial Road5 Necco Street | | 1 |
| |
1450 Page Mill Road601 Dexter Avenue North | | 1 |
| |
201 Haskins4224/4242 Campus Point Court and 10210 Campus Point Drive | | 3 | | |
3825 and 3875 Fabian Way | | 12 |
| |
SD Tech by Alexandria | | 1611 |
| |
The Arsenal on the Charles | | 6 | | |
275 Grove Street | | 1 | | |
601, 611, and 651 Gateway Boulevard | | 3 | | |
3330 and 3412 Hillview Avenue | | 2 | | |
9605 Medical Center Drive | | 1 | | |
220 2nd Avenue South | | 1 | | |
987 and 1075 Commercial Street | | 2 | | |
4555 Executive Drive | | 1 | | |
Other | | 8 | | |
| | 53 | | |
| | | |
Unconsolidated real estate JVs | | 6 | | |
Properties held for sale | | 3 | | |
Total properties excluded from Same Properties | | 4091 |
| |
Same Properties | | 166213 |
| (1) |
Total properties in North America as of SeptemberJune 30, 20172020
| | 206304 |
| |
| | | |
(1)Includes 9880 Campus Point Drive and 3545 Cray Court. The 9880 Campus Point Drive building was occupied through January 2018 and is currently in active development, and 3545 Cray Court is currently undergoing renovations.
Comparison of results for the three months ended SeptemberJune 30, 2017,2020, to the three months ended SeptemberJune 30, 20162019
The following table presents a comparison of the components of net operating income for our Same Properties and Non-Same Properties for the three months ended SeptemberJune 30, 2017,2020, compared to the three months ended SeptemberJune 30, 2016. For a reconciliation2019. Refer to the “Non-GAAP measures and definitions” section within this Item 2 for definitions of net“Tenant recoveries” and “Net operating incomeincome” and their reconciliations from net income, the most directly comparable financial measuremeasures presented in accordance with GAAP, referincome from rentals and net income (loss), respectively.
See additional discussion related to the “Non-GAAP MeasuresCOVID-19 pandemic and Definitions” sectionits impact to us under “The COVID-19 pandemic” within this Item 2. In addition, refer to “Item 1A. Risk factors” within “Part II – Other information” of this quarterly report on Form 10-Q for a discussion about risks that COVID-19 directly or indirectly may pose to our business.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 | | $ Change | | % Change | |
Income from rentals: | | | | | | | | | |
Same Properties | | $ | 272,951 | | | $ | 273,543 | | | $ | (592) | | | (0.2 | %) | |
Non-Same Properties | | 68,604 | | | 16,082 | | | 52,522 | | | 326.6 | | |
Rental revenues | | 341,555 | | | 289,625 | | | 51,930 | | | 17.9 | | |
| | | | | | | | | |
Same Properties | | 81,618 | | | 79,637 | | | 1,981 | | | 2.5 | | |
Non-Same Properties | | 12,683 | | | 2,356 | | | 10,327 | | | 438.3 | | |
Tenant recoveries | | 94,301 | | | 81,993 | | | 12,308 | | | 15.0 | | |
| | | | | | | | | |
Income from rentals | | 435,856 | | | 371,618 | | | 64,238 | | | 17.3 | | |
| | | | | | | | | |
Same Properties | | 32 | | | 93 | | | (61) | | | (65.6) | | |
Non-Same Properties | | 1,068 | | | 2,145 | | | (1,077) | | | (50.2) | | |
Other income | | 1,100 | | | 2,238 | | | (1,138) | | | (50.8) | | |
| | | | | | | | | |
Same Properties | | 354,601 | | | 353,273 | | | 1,328 | | | 0.4 | | |
Non-Same Properties | | 82,355 | | | 20,583 | | | 61,772 | | | 300.1 | | |
Total revenues | | 436,956 | | | 373,856 | | | 63,100 | | | 16.9 | | |
| | | | | | | | | |
Same Properties | | 94,006 | | | 94,140 | | | (134) | | | (0.1) | | |
Non-Same Properties | | 29,905 | | | 11,549 | | | 18,356 | | | 158.9 | | |
Rental operations | | 123,911 | | | 105,689 | | | 18,222 | | | 17.2 | | |
| | | | | | | | | |
Same Properties | | 260,595 | | | 259,133 | | | 1,462 | | | 0.6 | | |
Non-Same Properties | | 52,450 | | | 9,034 | | | 43,416 | | | 480.6 | | |
Net operating income | | $ | 313,045 | | | $ | 268,167 | | | $ | 44,878 | | | 16.7 | % | |
| | | | | | | | | |
Net operating income – Same Properties | | $ | 260,595 | | | $ | 259,133 | | | $ | 1,462 | | | 0.6 | % | |
Straight-line rent revenue | | (18,873) | | | (22,441) | | | 3,568 | | | (15.9) | | |
Amortization of acquired below-market leases | | (4,637) | | | (5,292) | | | 655 | | | (12.4) | | |
Net operating income – Same Properties (cash basis) | | $ | 237,085 | | | $ | 231,400 | | | $ | 5,685 | | | 2.5 | % | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | |
(Dollars in thousands)
| | 2017 | | 2016 | | $ Change | | % Change | |
Same Properties | | $ | 163,817 |
| | $ | 159,424 |
| | $ | 4,393 |
| | 2.8 | % | |
Non-Same Properties | | 52,204 |
| | 7,167 |
| | 45,037 |
| | 628.4 |
| |
Total rental | | 216,021 |
| | 166,591 |
| | 49,430 |
| | 29.7 |
| |
| | | | | | | | | |
Same Properties | | 58,117 |
| | 56,858 |
| | 1,259 |
| | 2.2 |
| |
Non-Same Properties | | 8,941 |
| | 1,823 |
| | 7,118 |
| | 390.5 |
| |
Total tenant recoveries | | 67,058 |
| | 58,681 |
| | 8,377 |
| | 14.3 |
| |
| | | | | | | | | |
Same Properties | | 120 |
| | 16 |
| | 104 |
| | 650.0 |
| |
Non-Same Properties | | 2,171 |
| | 5,091 |
| | (2,920 | ) | | (57.4 | ) | |
Total other income | | 2,291 |
| | 5,107 |
| | (2,816 | ) | | (55.1 | ) | |
| | | | | | | | | |
Same Properties | | 222,054 |
| | 216,298 |
| | 5,756 |
| | 2.7 |
| |
Non-Same Properties | | 63,316 |
| | 14,081 |
| | 49,235 |
| | 349.7 |
| |
Total revenues | | 285,370 |
| | 230,379 |
| | 54,991 |
| | 23.9 |
| |
| | | | | | | | | |
Same Properties | | 68,107 |
| | 65,674 |
| | 2,433 |
| | 3.7 |
| |
Non-Same Properties | | 15,362 |
| | 6,328 |
| | 9,034 |
| | 142.8 |
| |
Total rental operations | | 83,469 |
| | 72,002 |
| | 11,467 |
| | 15.9 |
| |
| | | | | | | | | |
Same Properties | | 153,947 |
| | 150,624 |
| | 3,323 |
| | 2.2 |
| |
Non-Same Properties | | 47,954 |
| | 7,753 |
| | 40,201 |
| | 518.5 |
| |
Net operating income | | $ | 201,901 |
| | $ | 158,377 |
| | $ | 43,524 |
| | 27.5 | % | |
| | | | | | | | | |
Net operating income – Same Properties | | $ | 153,947 |
| | $ | 150,624 |
| | $ | 3,323 |
| | 2.2 | % | |
Straight-line rent revenue and amortization of acquired below-market leases | | (5,744 | ) | | (13,105 | ) | | 7,361 |
| | (56.2 | ) | |
Net operating income – Same Properties (cash basis) | | $ | 148,203 |
| | $ | 137,519 |
| | $ | 10,684 |
| | 7.8 | % | |
Income from rentals
Total income from rentals for the three months ended June 30, 2020, increased by $64.2 million, or 17.3%, to $435.9 million, compared to $371.6 million for the three months ended June 30, 2019, as a result of increases in rental revenues and tenant recoveries, as discussed below.
Rental revenues
Total rental revenues for the three months ended SeptemberJune 30, 2017,2020, increased by $49.4$51.9 million, or 29.7%17.9%, to $216.0$341.6 million, compared to $166.6$289.6 million for the three months ended SeptemberJune 30, 2016.2019. The increase was primarily due to an increase in rental revenues from our Non-Same Properties totaling $45.0aggregating $52.5 million primarily related to 1,592,628455,903 RSF of development and redevelopment projects placed into service subsequent to JulyApril 1, 2016,2019, and 1642 operating properties totaling 1,468,708aggregating 3.8 million RSF acquired.acquired subsequent to April 1, 2019.
Rental revenues from our Same Properties for the three months ended SeptemberJune 30, 2017, increased2020, decreased by $4.4$0.6 million, or 2.8%0.2%, to $163.8$273.0 million, compared to $159.4$273.5 million for the three months ended SeptemberJune 30, 2016.2019. The decrease was primarily due to a temporary reduction in same property occupancy of 80 basis points related to downtime in connection with leases that will begin occupancy during the second half of 2020 at significantly higher rental rates. The decrease in rental revenues from Same Properties was also due to the effect of reduced revenues from our transient parking, retail tenants, and amenities, some of which were temporarily closed as a result of shelter-in-place orders during the three months ended June 30, 2020. The decrease was partially offset by rental rate increases on lease renewals and re-leasing of space since April 1, 2019.
Tenant recoveries
Tenant recoveries for the three months ended June 30, 2020, increased by $12.3 million, or 15.0%, to $94.3 million, compared to $82.0 million for the three months ended June 30, 2019. This increase was primarily due to an increase from our Non-Same Properties as described above.
Same Properties’ tenant recoveries for the three months ended June 30, 2020, increased by $2.0 million, or 2.5%, primarily due to an increase in recoverable property tax expense resulting from higher assessed values of our properties during the three months ended June 30, 2020. As of June 30, 2020, 93% of our leases (on an RSF basis) were triple net leases, which require tenants to pay substantially all real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses (including increases thereto) in addition to base rent.
Other income
Other income for the three months ended June 30, 2020 and 2019, was $1.1 million and $2.2 million, respectively, primarily consisting of construction management fees and interest income earned during each respective period.
Rental operations
Total rental operating expenses for the three months ended June 30, 2020, increased by $18.2 million, or 17.2%, to $123.9 million, compared to $105.7 million for the three months ended June 30, 2019. Approximately $18.4 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 and acquired properties as discussed above under “Income from rentals.”
Same Properties’ rental operating expenses decreased by $0.1 million, or 0.1%, to $94.0 million during the three months ended June 30, 2020, compared to $94.1 million for the three months ended June 30, 2019. The decrease was primarily due to reduced operating expenses from retail tenants and amenities, some of which were temporarily closed as a result of COVID-19 shelter-in-place orders during the three months ended June 30, 2020. The decrease in expenses related to COVID-19 was partially offset by an increase in recoverable property tax expense resulting from higher assessed values of our properties during the three months ended June 30, 2020.
General and administrative expenses
General and administrative expenses for the three months ended June 30, 2020, increased by $5.3 million, or 20.2%, to $31.8 million, compared to $26.4 million for the three months ended June 30, 2019. The increase was primarily due to continued growth in the depth and breadth of our operations in multiple markets, including development and redevelopment projects placed into service and properties acquired subsequent to April 1, 2019, as discussed under Income from rentals” above. As a percentage of net operating income, our general and administrative expenses for the trailing twelve months ended June 30, 2020 and 2019, were 10.3% and 9.5%, respectively.
Interest expense
Interest expense for the three months ended June 30, 2020 and 2019, consisted of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | |
Component | | 2020 | | 2019 | | Change |
Interest incurred | | $ | 75,807 | | | $ | 64,553 | | | $ | 11,254 | |
Capitalized interest | | (30,793) | | | (21,674) | | | (9,119) | |
Interest expense | | $ | 45,014 | | | $ | 42,879 | | | $ | 2,135 | |
| | | | | | |
Average debt balance outstanding(1) | | $ | 7,461,439 | | | $ | 6,129,748 | | | $ | 1,331,691 | |
Weighted-average annual interest rate(2) | | 4.1 | % | | 4.2 | % | | (0.1) | % |
(1)Represents the average debt balance outstanding during the respective periods.
(2)Represents annualized total interest incurred divided by the average debt balance outstanding in the respective periods.
The net change in interest expense during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, resulted from the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Component | | Interest Rate(1) | | | | Effective Date | | Change | |
Increases in interest incurred due to: | | | | | | | | | |
Issuances of debt: | | | | | | | | | |
$700 million unsecured senior notes payable | | | 3.91 | % | | | July/September 2019 | | $ | 6,921 | | |
$750 million unsecured senior notes payable | | | 3.48 | % | | | July 2019 | | 6,348 | | |
$400 million unsecured senior notes payable | | | 2.87 | % | | | September 2019 | | 2,765 | | |
$700 million unsecured senior notes payable | | | 5.05 | % | | | March 2020 | | 8,585 | | |
Fluctuations in interest rate and average balance: | | | | | | | | | |
$1.0 billion commercial paper program | | | | | | | | 709 | | |
Other increase in interest | | | | | | | | 436 | | |
Total increases | | | | | | | | 25,764 | | |
Decreases in interest incurred due to: | | | | | | | | | |
Repayments of debt: | | | | | | | | | |
$550 million unsecured senior notes payable | | | 4.75 | % | | | July/August 2019 | | (6,339) | | |
$400 million unsecured senior notes payable | | | 2.96 | % | | | July/August 2019 | | (2,792) | | |
Unsecured senior bank term loan | | | Various | | | Various | | (3,088) | | |
$2.2 billion unsecured senior line of credit | | | | | | | | (2,177) | | |
Interest rate hedge agreement in effect during the three months ended June 30, 2019 | | | | | | | | (114) | | |
Total decreases | | | | | | | | (14,510) | | |
Change in interest incurred | | | | | | | | 11,254 | | |
Increase in capitalized interest | | | | | | | | (9,119) | | |
Total change in interest expense | | | | | | | | $ | 2,135 | | |
(1)Represents the weighted-average interest rate as of the end of the applicable period, including amortization of loan fees, amortization of debt premiums (discounts), and other bank fees.
Depreciation and amortization
Depreciation and amortization expense for the three months ended June 30, 2020, increased by $33.6 million, or 25.0%, to $168.0 million, compared to $134.4 million for the three months ended June 30, 2019. The increase was primarily due to additional depreciation from 455,903 RSF of development and redevelopment projects placed into service subsequent to April 1, 2019, and 42 operating properties aggregating 3.8 million RSF acquired subsequent to April 1, 2019.
Impairment charges
During the three months ended June 30, 2020, we recognized impairment charges aggregating $13.2 million, which primarily consisted of a $10 million write-off of the pre-acquisition deposit for a previously pending acquisition of an operating tech office property for which our revised economic projections declined from our initial underwriting. We recognized this impairment charge in April 2020, concurrently with the submission of our notice to terminate the transaction.
Investment income
During the three months ended June 30, 2020, we recognized investment income aggregating $184.7 million, which included $13.0 million of realized gains and $171.7 million of unrealized gains. Realized gains consisted of $17.7 million of realized gains, partially offset by an impairment charge of $4.7 million primarily related to two investments in privately held entities that do not report NAV. Unrealized gains of $171.7 million primarily consisted of increases in fair values of our investments in publicly traded companies during the three months ended June 30, 2020. For more information about our investments, refer to Note 7 – “Investments” to our unaudited consolidated financial statements under Item 1 of this report. For our impairments accounting policy, refer to the “Investments” section of Note 2 – “Summary of significant accounting policies” to our unaudited consolidated financial statements under Item 1 of this report.
During the three months ended June 30, 2019, we recognized investment income aggregating $21.5 million, which included $10.4 million of realized gains and $11.1 million of unrealized gains.
Comparison of results for the six months ended June 30, 2020, to the six months ended June 30, 2019
The following table presents a comparison of the components of net operating income for our Same Properties and Non-Same Properties for the six months ended June 30, 2020, compared to the six months ended June 30, 2019. Refer to the “Non-GAAP measures and definitions” section within this Item 2 for definitions of “Tenant recoveries” and “Net operating income” and their reconciliations from the most directly comparable financial measures presented in accordance with GAAP, income from rentals and net income, respectively.
See additional discussion related to the COVID-19 pandemic and its impact to us under “The COVID-19 pandemic” within this Item 2. In addition, refer to “Item 1A. Risk factors” within “Part II – Other information” of this quarterly report on Form 10-Q for a discussion about risks that COVID-19 directly or indirectly may pose to our business.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 | | $ Change | | % Change | |
Income from rentals: | | | | | | | | | |
Same Properties | | $ | 529,138 | | | $ | 522,721 | | | $ | 6,417 | | | 1.2 | % | |
Non-Same Properties | | 150,359 | | | 41,467 | | | 108,892 | | | 262.6 | | |
Rental revenues | | 679,497 | | | 564,188 | | | 115,309 | | | 20.4 | | |
| | | | | | | | | |
Same Properties | | 162,493 | | | 153,902 | | | 8,591 | | | 5.6 | | |
Non-Same Properties | | 31,471 | | | 8,277 | | | 23,194 | | | 280.2 | | |
Tenant recoveries | | 193,964 | | | 162,179 | | | 31,785 | | | 19.6 | | |
| | | | | | | | | |
Income from rentals | | 873,461 | | | 726,367 | | | 147,094 | | | 20.3 | | |
| | | | | | | | | |
Same Properties | | 114 | | | 265 | | | (151) | | | (57.0) | | |
Non-Same Properties | | 3,300 | | | 6,066 | | | (2,766) | | | (45.6) | | |
Other income | | 3,414 | | | 6,331 | | | (2,917) | | | (46.1) | | |
| | | | | | | | | |
Same Properties | | 691,745 | | | 676,888 | | | 14,857 | | | 2.2 | | |
Non-Same Properties | | 185,130 | | | 55,810 | | | 129,320 | | | 231.7 | | |
Total revenues | | 876,875 | | | 732,698 | | | 144,177 | | | 19.7 | | |
| | | | | | | | | |
Same Properties | | 188,816 | | | 181,678 | | | 7,138 | | | 3.9 | | |
Non-Same Properties | | 64,198 | | | 25,512 | | | 38,686 | | | 151.6 | | |
Rental operations | | 253,014 | | | 207,190 | | | 45,824 | | | 22.1 | | |
| | | | | | | | | |
Same Properties | | 502,929 | | | 495,210 | | | 7,719 | | | 1.6 | | |
Non-Same Properties | | 120,932 | | | 30,298 | | | 90,634 | | | 299.1 | | |
Net operating income | | $ | 623,861 | | | $ | 525,508 | | | $ | 98,353 | | | 18.7 | % | |
| | | | | | | | | |
Net operating income – Same Properties | | $ | 502,929 | | | $ | 495,210 | | | $ | 7,719 | | | 1.6 | % | |
Straight-line rent revenue | | (33,492) | | | (45,225) | | | 11,733 | | | (25.9) | | |
Amortization of acquired below-market leases | | (7,372) | | | (7,757) | | | 385 | | | (5.0) | | |
Net operating income – Same Properties (cash basis) | | $ | 462,065 | | | $ | 442,228 | | | $ | 19,837 | | | 4.5 | % | |
Income from rentals
Total income from rentals for the six months ended June 30, 2020, increased by $147.1 million, or 20.3%, to $873.5 million, compared to $726.4 million for the six months ended June 30, 2019, as a result of increases in rental revenues and tenant recoveries, as discussed below.
Rental revenues
Total rental revenues for the six months ended June 30, 2020, increased by $115.3 million, or 20.4%, to $679.5 million, compared to $564.2 million for the six months ended June 30, 2019. The increase was primarily due to an increase in rental revenues from our Non-Same Properties aggregating $108.9 million primarily related to 926,892 RSF of development and redevelopment projects placed into service subsequent to January 1, 2019, and 53 operating properties aggregating 4.2 million RSF acquired subsequent to January 1, 2019. The increase was partially offset by the effect of the reduction in rental revenues from our transient parking, retail tenants, and amenities, some of which were temporarily closed as a result of shelter-in-place orders.
Rental revenues from our Same Properties for the six months ended June 30, 2020, increased by $6.4 million, or 1.2%, to $529.1 million, compared to $522.7 million for the six months ended June 30, 2019. The increase was primarily due to significant rental rate increases on lease renewals and re-leasing of space since JulyJanuary 1, 2016. Refer to “Leasing” within the “Operating Summary” section of this Item 2 for additional information on our leasing activity.2019. The increase was partially offset by a decrease in rental revenue as a result of a decreasetemporary reduction in Same Properties’Property occupancy of 50 basis points related to 95.9% fordowntime in connection with leases that will begin occupancy during the threesecond half of 2020 at significantly higher rental rates. The increase was also partially offset by the effect of reduced revenues generated from our transient parking, retail tenants, and amenities, some of which were temporarily closed due to shelter-in-place orders.
The increase in total rental revenues was partially offset by the $5.1 million reduction to rental revenues recognized during the six months ended SeptemberJune 30, 2017, from 96.9% for2020, related to the three months ended September 30, 2016. Referspecific write-off aggregating $1.6 million and a general allowance aggregating $3.5 million related to “Same Properties” in the section above within this Item 2 for additional information on the change in our Same Properties’ occupancy rates.deferred rent balances of tenants that are or may potentially be impacted by uncertainties surrounding COVID-19.
Tenant recoveries
Tenant recoveries for the threesix months ended SeptemberJune 30, 2017,2020, increased by $8.4$31.8 million, or 14.3%19.6%, to $67.1$194.0 million, compared to $58.7$162.2 million for the threesix months ended SeptemberJune 30, 2016. Non-Same2019. This increase is consistent with the increase in our rental operating expenses of $45.8 million, or 22.1%, as discussed under “Rental operations” below. Same Properties’ tenant recoveries for the six months ended June 30, 2020, increased by $7.1$8.6 million, or 5.6%, primarily due to the increase in recoverable operating expenses for the threesix months ended SeptemberJune 30, 2017,2020, as discussed under “Rental Operating Expenses”operations” below. As of SeptemberJune 30, 2017, 97%2020, 93% of our leases (on an RSF basis) were triple net leases, which require 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.
Same Properties’ tenant recoveries remained relatively consistent during the three months ended September 30, 2017, and 2016.
Other income
Other income for the threesix months ended SeptemberJune 30, 20172020 and 2016, consisted2019 was, $3.4 million and $6.3 million, respectively, primarily consisting of construction management fees and interest income earned during each respective period. The decrease is due primarily to lower construction management fees recognized due to the following (in thousands):completion of certain projects.
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2017 | | 2016 | | Change |
Management fee income | | $ | 658 |
| | $ | 46 |
| | $ | 612 |
|
Interest and other income | | 588 |
| | 795 |
| | (207 | ) |
Investment income | | 1,045 |
| | 4,266 |
| | (3,221 | ) |
Total other income | | $ | 2,291 |
| | $ | 5,107 |
| | $ | (2,816 | ) |
Refer to Note 5 – “Investments” to our unaudited consolidated financial statements under Item 1 of this report for more information on investment income.
Rental operating expensesoperations
Total rental operating expenses for the threesix months ended SeptemberJune 30, 2017,2020, increased by $11.5$45.8 million, or 15.9%22.1%, to $83.5$253.0 million, compared to $72.0$207.2 million for the threesix months ended SeptemberJune 30, 2016.2019. Approximately $9.0$38.7 million of the increase was due to an increase in rental operating expenses from our Non-Same Properties primarily related to 1,592,628926,892 RSF of development and redevelopment projects placed into service subsequent to JulyJanuary 1, 2016,2019, and 1653 operating properties totaling 1,468,708aggregating 4.2 million RSF acquired.acquired subsequent to January 1, 2019.
Same Properties’ rental operating expenses increased by $2.4 $7.1 million, or 3.7%3.9%, to $188.8 million during the six months ended June 30, 2020, compared to the $181.7 million for the six months ended June 30, 2019. Approximately $5.8 million of the increase was due to an increase in property tax expense resulting from higher assessed values of our properties. The remaining $1.3 million was mainly a result of the higher repairs and maintenance expenses, contract services, payroll, and property insurance costs, which were partially offset by reduced operating expenses related to retail tenants, some of which were temporarily closed due to COVID-19 shelter-in-place orders during the three months ended SeptemberJune 30, 2017, compared to the three months ended September 30, 2016, primarily due to higher repairs and maintenance expenses. The increase in Same Properties’ rental operating expenses was partially offset by property tax refunds during the three months ended September 30, 2017.2020.
General and administrative expenses
General and administrative expenses for the threesix months ended SeptemberJune 30, 2017,2020, increased by $1.8$12.6 million, or 11.2%24.7%, to $17.6$63.7 million, compared to $15.9$51.1 million for the threesix months ended SeptemberJune 30, 2016. General and administrative expenses increased2019. The increase was primarily due to the continued growth in the depth and breadth of our operations in multiple markets, including a 29.7% increase in total rental revenue to $216.0 million for the three months ended September 30, 2017, compared to $166.6 million for the same period in 2016,development and including a 4.1 million RSF, or 16.7%, increase in our North America asset baseredevelopment projects placed into service and properties acquired subsequent to OctoberJanuary 1, 2016.2019, as discussed under “Income from rentals” above. As a percentage of total assets,net operating income, our general and administrative expenses for the threetrailing twelve months ended SeptemberJune 30, 20172020 and 2016, quarter annualized, declined to 0.6% from 0.7%2019, were 10.3% and 9.5%, respectively.
Interest expense
Interest expense for the threesix months ended SeptemberJune 30, 20172020 and 2016,2019, consisted of the following (dollars in thousands):
| | | | Three Months Ended September 30, | | | | Six Months Ended June 30, | | |
Component | | 2017 | | 2016 | | Change | Component | | 2020 | | 2019 | | Change |
Interest incurred | | $ | 48,123 |
| | $ | 40,753 |
| | $ | 7,370 |
| Interest incurred | | $ | 146,226 | | | $ | 122,162 | | | $ | 24,064 | |
Capitalized interest | | (17,092 | ) | | (14,903 | ) | | (2,189 | ) | Capitalized interest | | (55,473) | | | (40,183) | | | (15,290) | |
Interest expense | | $ | 31,031 |
| | $ | 25,850 |
| | $ | 5,181 |
| Interest expense | | $ | 90,753 | | | $ | 81,979 | | | $ | 8,774 | |
| | | | | | | | | | | | |
Average debt balance outstanding (1) | | $ | 4,887,491 |
| | $ | 4,244,247 |
| | $ | 643,244 |
| Average debt balance outstanding(1) | | $ | 7,358,158 | | | $ | 5,958,590 | | | $ | 1,399,568 | |
Weighted-average annual interest rate (2) | | 3.9 | % | | 3.8 | % | | 0.1 | % | Weighted-average annual interest rate(2) | | 4.0 | % | | 4.1 | % | | (0.1) | % |
(1)Represents the average debt balance outstanding during the respective periods.
| |
(1) | Represents the average debt balance outstanding during the three months ended September 30, 2017 and 2016. |
| |
(2) | Represents annualized total interest incurred divided by the average debt balance outstanding in the respective periods. |
(2)Represents annualized total interest incurred divided by the average debt balance outstanding in the respective periods.
The net change in interest expense during the threesix months ended SeptemberJune 30, 2017,2020, compared to the threesix months ended SeptemberJune 30, 2016,2019, resulted from the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Component | | Interest Rate(1) | | | | Effective Date | | Change | |
Increases in interest incurred due to: | | | | | | | | | |
Issuances of debt: | | | | | | | | | |
$650 million unsecured senior notes payable – green bond | | | 4.03 | % | | | June 2018/ March 2019 | | $ | 1,792 | | |
$350 million unsecured senior notes payable – green bond | | | 3.96 | % | | | March 2019 | | 2,968 | | |
$300 million unsecured senior notes payable | | | 4.93 | % | | | March 2019 | | 3,236 | | |
$750 million unsecured senior notes payable | | | 3.48 | % | | | July 2019 | | 12,696 | | |
$700 million unsecured senior notes payable | | | 3.91 | % | | | July/September 2019 | | 13,842 | | |
$400 million unsecured senior notes payable | | | 2.87 | % | | | September 2019 | | 5,530 | | |
$700 million unsecured senior notes payable | | | 5.05 | % | | | March 2020 | | 9,062 | | |
Fluctuations in interest rate and average balance: | | | | | | | | | |
$1.0 billion commercial paper program | | | | | | | | 3,599 | | |
Interest rate hedge agreement in effect during the six months ended June 30, 2019 | | | | | | | | 1,815 | | |
Other increase in interest | | | | | | | | 722 | | |
Total increases | | | | | | | | 55,262 | | |
Decreases in interest incurred due to: | | | | | | | | | |
Repayments of debt: | | | | | | | | | |
$550 million unsecured senior notes payable | | | 4.75 | % | | | July/August 2019 | | (12,678) | | |
$400 million unsecured senior notes payable | | | 2.96 | % | | | July/August 2019 | | (5,583) | | |
Secured construction loan | | | 3.29 | % | | | March 2019 | | (1,778) | | |
Unsecured senior bank term loan | | | Various | | | Various | | (5,975) | | |
$2.2 billion unsecured senior line of credit | | | | | | | | (5,184) | | |
Total decreases | | | | | | | | (31,198) | | |
Change in interest incurred | | | | | | | | 24,064 | | |
Increase in capitalized interest | | | | | | | | (15,290) | | |
Total change in interest expense | | | | | | | | $ | 8,774 | | |
(1)Represents the weighted-average interest rate as of the end of the applicable period, including amortization of loan fees, amortization of debt premiums (discounts), and other bank fees.
|
| | | | | | | | | | |
Component | | Interest Rate(1) | | Effective Date | | Change |
Increases in interest incurred due to: | | | | | | | | |
Issuance of $425 million unsecured senior note payable | | | 4.09% | | | March 2017 | | $ | 4,210 |
|
Assumption of $203 million secured note payable | | | 3.40% | | | November 2016 | | 1,840 |
|
Higher average balance and interest rate on secured construction loans | | | Various | | | Various | | 2,640 |
|
Higher average interest rate on unsecured senior line of credit and term loans | | | | | | | | 1,880 |
|
Total increases | | | | | | | | 10,570 |
|
Decreases in interest incurred due to: | | | | | | | | |
Repayments of debt: | | | | | | | | |
Variable-rate unsecured senior bank term loan | | | Various | | | February 2017 | | (750 | ) |
$76 million secured note payable | | | 2.81% | | | December 2016 | | (460 | ) |
Lower average notional amounts of interest rate hedge agreements in effect | | | | | | | | (1,500 | ) |
Amortization of loan fees | | | | | | | | (240 | ) |
Other decrease in interest | | | | | | | | (250 | ) |
Total decreases | | | | | | | | (3,200 | ) |
Change in interest incurred | | | | | | | | 7,370 |
|
Increase in capitalized interest (2) | | | | | | | | (2,189 | ) |
Total change in interest expense | | | | | | | | $ | 5,181 |
|
| |
(1) | Represents the interest rate as of the end of the applicable period, plus the impact of debt premiums/discounts, interest rate hedge agreements, and deferred financing costs. |
| |
(2) | Increase in capitalized interest is primarily due to an increase in our highly leased development and redevelopment projects undergoing construction in our value-creation pipeline during the three months ended September 30, 2017, compared to the three months ended September 30, 2016. |
Depreciation and amortization
Depreciation and amortization expense for the threesix months ended SeptemberJune 30, 20172020, increased by $30.7$75.0 million, or 39.7%27.9%, to $107.8$343.5 million, compared to $77.1$268.5 million for the threesix months ended SeptemberJune 30, 2016.2019. The increase iswas primarily due to additional depreciation from 1,592,628926,892 RSF of development and redevelopment projects placed into service subsequent to JulyJanuary 1, 2016,2019, and 1653 operating properties totaling 1,468,708aggregating 4.2 million RSF acquired subsequent to JulyJanuary 1, 2016.2019.
Impairment charges
Sale of real estate assets,During the six months ended June 30, 2020, we recognized impairment charges and gain on salesaggregating $15.2 million, which primarily consisted of real estatea $10 million write-off of the pre-acquisition deposit for a previously pending acquisition of an operating tech office property for which our revised economic projections declined from our initial underwriting. We recognized this impairment charge in April 2020, concurrently with the submission of our notice to terminate the transaction.
Investment income
During the threesix months ended SeptemberJune 30, 2017,2020, we recognized investment income aggregating $162.8 million, which included $8.3 million of realized gains and $154.5 million of unrealized gains. Realized gains consisted of $32.8 million of realized gains, partially offset by an impairment charge of $24.5 million primarily related to four investments in privately held entities that do not report NAV. Unrealized gains of $154.5 million during the six months ended June 30, 2020, primarily consisted of increases in fair values of our investments in publicly traded companies. For more information about our investments, refer to Note 7 – “Investments” to our unaudited consolidated financial statements under Item 1 of this report. For our impairments accounting policy, refer to the “Investments” section of Note 2 – “Summary of significant accounting policies” to our unaudited consolidated financial statements under Item 1 of this report.
During the six months ended June 30, 2019, we recognized investment income aggregating $105.1 million, which included $21.8 million of realized gains and $83.3 million of unrealized gains.
Loss on early extinguishment of debt
During the six months ended June 30, 2019, we repaid early one secured note payable aggregating $106.7 million, which was originally due in 2020 and bore interest at 7.75%, and recognized a gainloss on early extinguishment of $14.1debt of $7.1 million, uponincluding the completionwrite-off of unamortized loan fees. Additionally, during the salesix months ended June 30, 2019, we repaid early the remaining $193.1 million balance of our secured construction loan related to 50/60 Binney Street and recognized a condominium interestloss on early extinguishment of debt of $269 thousand.
Equity in ourearnings of unconsolidated real estate joint venture property at 360 Longwood Avenue in our Longwood Medical Area submarket. This gain is reflected in ourventures
During the six months ended June 30, 2020, we recognized equity in earnings of unconsolidated real estate joint ventures of $777 thousand. This balance consisted of earnings from our unconsolidated real estate joint ventures of approximately $8.4 million, partially offset by the impairment charge discussed below.
In March 2020, the impact of COVID-19 pandemic and the resulting State of Maryland’s shelter-in-place order led to the closure of a retail center owned by one of our unconsolidated joint ventures. We evaluated the recoverability of our investment in this joint venture and recognized a $7.6 million impairment charge to lower the carrying amount of our investment balance, which primarily consisted of real estate, to its estimated fair value less costs to sell. This impairment charge was classified in equity in earnings of unconsolidated real estate joint ventures within our consolidated statements of income.operations for the six months ended June 30, 2020. Refer to Note 4 – “Investments in Unconsolidated Real Estate Joint Ventures”“Consolidated and unconsolidated real estate joint ventures” to our unaudited consolidated financial statements under Item 1 of this report for moreadditional information.
Impairment of real estate recognized during the three months ended September 30, 2016, of $8.1 million primarily relates to our decision to sell our real estate investments in Asia. Refer to “Sale of Real Estate Assets and Impairment Charges” in Note 3 – “Investments in Real Estate” to our unaudited consolidated financial statements under Item 1 of this report for more information.
Loss on early extinguishment of debt
During the three months ended September 30, 2016, we recognized a loss on early extinguishment of debt related to the write-off of a portion of unamortized loan fees aggregating $2.4 million upon the amendment of our unsecured senior line of credit in July 2016. Additionally, we completed a partial principal repayment of $200 million of our 2019 Unsecured Senior Bank Term Loan and recognized a loss on early extinguishment of debt of $869 thousand related to the write-off of unamortized loan fees. No such losses were recognized during the three months ended September 30, 2017.
Preferred stock redemption charge
During the three months ended September 30, 2016, we repurchased 1.1 million outstanding shares of our Series D Convertible Preferred Stock and recognized a preferred stock redemption charge of $13.1 million. We did not repurchase any shares of our Series D Convertible Preferred Stock during the three months ended September 30, 2017.
Comparison of results for the nine months ended September 30, 2017, to the nine months ended September 30, 2016
The following table presents a comparison of the components of net operating income for our Same Properties and Non-Same Properties for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. For a reconciliation of net operating income from net income, the most directly comparable financial measure presented in accordance with GAAP, refer to the “Non-GAAP Measures and Definitions” section within this Item 2.
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | |
(Dollars in thousands)
| | 2017 | | 2016 | | $ Change | | % Change | |
Same Properties | | $ | 457,237 |
| | $ | 445,740 |
| | $ | 11,497 |
| | 2.6 | % | |
Non-Same Properties | | 177,919 |
| | 40,765 |
| | 137,154 |
| | 336.5 |
| |
Total rental | | 635,156 |
| | 486,505 |
| | 148,651 |
| | 30.6 |
| |
| | | | | | | | | |
Same Properties | | 155,017 |
| | 151,588 |
| | 3,429 |
| | 2.3 |
| |
Non-Same Properties | | 33,857 |
| | 13,797 |
| | 20,060 |
| | 145.4 |
| |
Total tenant recoveries | | 188,874 |
| | 165,385 |
| | 23,489 |
| | 14.2 |
| |
| | | | | | | | | |
Same Properties | | 341 |
| | 77 |
| | 264 |
| | 342.9 |
| |
Non-Same Properties | | 4,935 |
| | 20,577 |
| | (15,642 | ) | | (76.0 | ) | |
Total other income | | 5,276 |
| | 20,654 |
| | (15,378 | ) | | (74.5 | ) | |
| | | | | | | | | |
Same Properties | | 612,595 |
| | 597,405 |
| | 15,190 |
| | 2.5 |
| |
Non-Same Properties | | 216,711 |
| | 75,139 |
| | 141,572 |
| | 188.4 |
| |
Total revenues | | 829,306 |
| | 672,544 |
| | 156,762 |
| | 23.3 |
| |
| | | | | | | | | |
Same Properties | | 182,281 |
| | 176,967 |
| | 5,314 |
| | 3.0 |
| |
Non-Same Properties | | 55,255 |
| | 28,197 |
| | 27,058 |
| | 96.0 |
| |
Total rental operations | | 237,536 |
| | 205,164 |
| | 32,372 |
| | 15.8 |
| |
| | | | | | | | | |
Same Properties | | 430,314 |
| | 420,438 |
| | 9,876 |
| | 2.3 |
| |
Non-Same Properties | | 161,456 |
| | 46,942 |
| | 114,514 |
| | 243.9 |
| |
Net operating income | | $ | 591,770 |
| | $ | 467,380 |
| | $ | 124,390 |
| | 26.6 | % | |
| | | | | | | | | |
Net operating income – Same Properties | | $ | 430,314 |
| | $ | 420,438 |
| | $ | 9,876 |
| | 2.3 | % | |
Straight-line rent revenue and amortization of acquired below-market leases | | (13,439 | ) | | (28,024 | ) | | 14,585 |
| | (52.0 | ) | |
Net operating income – Same Properties (cash basis) | | $ | 416,875 |
| | $ | 392,414 |
| | $ | 24,461 |
| | 6.2 | % | |
Rental revenues
Total rental revenues for the nine months ended September 30, 2017, increased by $148.7 million, or 30.6%, to $635.2 million, compared to $486.5 million for the nine months ended September 30, 2016. The increase was primarily due to an increase in rental revenues from our Non-Same Properties totaling $137.2 million related to 2,355,756 RSF of development and redevelopment projects placed into service subsequent to January 1, 2016, and 16 operating properties totaling 1,468,708 RSF acquired subsequent to January 1, 2016.
Rental revenues from our Same Properties for the nine months ended September 30, 2017, increased by $11.5 million, or 2.6%, to $457.2 million, compared to $445.7 million for the nine months ended September 30, 2016. The increase was primarily due to significant rental rate increases on lease renewals and re-leasing of space since January 1, 2016. Refer to “Leasing” within the “Operating Summary” section of this Item 2 for additional information on our leasing activity. The increase was slightly offset by a decrease in rental revenue as a result of a decrease in Same Properties’ occupancy to 96.0% for the nine months ended September 30, 2017, from 97.2% for the nine months ended September 30, 2016. Refer to “Same Properties” in the section above within this Item 2 for additional information on the change in our Same Properties’ occupancy rates.
Tenant recoveries
Tenant recoveries for the nine months ended September 30, 2017, increased by $23.5 million, or 14.2%, to $188.9 million, compared to $165.4 million for the nine months ended September 30, 2016. This increase is relatively consistent with the increase in our rental operating expenses of $32.4 million, or 15.8%, as discussed under “Rental Operating Expenses” below. Same Properties’ tenant recoveries increased by $3.4 million, or 2.3%, primarily due to the increase in recoverable operating expenses for the nine months ended September 30, 2017, as discussed below. As of September 30, 2017, 97% of our leases (on an RSF basis) were triple net leases, which require tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses, and other operating expenses (including increases thereto) in addition to base rent.
Other income
Other income for the nine months ended September 30, 2017 and 2016, consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | Change |
Management fee income | | $ | 1,643 |
| | $ | 380 |
| | $ | 1,263 |
|
Interest and other income | | 1,626 |
| | 2,223 |
| | (597 | ) |
Investment income | | 2,007 |
| | 18,051 |
| | (16,044 | ) |
Total other income | | $ | 5,276 |
| | $ | 20,654 |
| | $ | (15,378 | ) |
Refer to Note 5 – “Investments” to our unaudited consolidated financial statements under Item 1 of this report for more information on investment income.
Rental operating expenses
Total rental operating expenses for the nine months ended September 30, 2017, increased by $32.4 million, or 15.8%, to $237.5 million, compared to $205.2 million for the nine months ended September 30, 2016. Approximately $27.1 million of the increase was due to an increase in rental operating expenses from our Non-Same Properties primarily related to 2,355,756 RSF of development and redevelopment projects placed into service subsequent to January 1, 2016, and 16 operating properties totaling 1,468,708 RSF acquired subsequent to January 1, 2016.
Same Properties’ rental operating expenses increased by $5.3 million, or 3.0%, to $182.3 million during the nine months ended September 30, 2017, compared to $177.0 million for the nine months ended September 30, 2016, primarily due to higher utility expenses, higher snow removal services, and higher repair and maintenance expenses resulting from a comparably colder winter. The increase in Same Properties’ rental operating expenses was partially offset by property tax refunds during the nine months ended September 30, 2017.
General and administrative expenses
General and administrative expenses for the nine months ended September 30, 2017, increased by $9.7 million, or 20.8%, to $56.1 million, compared to $46.4 million for the nine months ended September 30, 2016. General and administrative expenses increased primarily due to the continued growth in the depth and breadth of our operations in multiple markets, including a 30.6% increase in total rental revenue to $635.2 million for the nine months ended September 30, 2017, compared to $486.5 million for the same period in 2016, and including a 4.1 million RSF, or 16.7%, increase in our North America asset base subsequent to October 1, 2016. As a percentage of total assets, our general and administrative expenses for the nine months ended September 30, 2017 and 2016, year-to-date annualized, declined to 0.6% from 0.7%, respectively.
Interest expense
Interest expense for the nine months ended September 30, 2017 and 2016, consisted of the following (dollars in thousands):
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
Component | | 2017 | | 2016 | | Change |
Interest incurred | | $ | 137,888 |
| | $ | 116,520 |
| | $ | 21,368 |
|
Capitalized interest | | (45,325 | ) | | (40,790 | ) | | (4,535 | ) |
Interest expense | | $ | 92,563 |
| | $ | 75,730 |
| | $ | 16,833 |
|
| | | | | | |
Average debt balance outstanding (1) | | $ | 4,675,967 |
| | $ | 4,150,540 |
| | $ | 525,427 |
|
Weighted-average annual interest rate (2) | | 3.9 | % | | 3.7 | % | | 0.2 | % |
| |
(1) | Represents the average total debt balance outstanding during the nine months ended September 30, 2017 and 2016. |
| |
(2) | Represents annualized total interest incurred divided by the average debt balance outstanding in the respective periods. |
The net change in interest expense during the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, resulted from the following (dollars in thousands):
|
| | | | | | | | | | |
Component | | Interest Rate(1) | | Effective Date | | Change |
Increases in interest incurred due to: | | | | | | | | |
Issuance of debt: | | | | | | | | |
$425 million unsecured senior note payable | | | 4.09% | | | March 2017 | | $ | 9,730 |
|
$350 million unsecured senior note payable | | | 4.14% | | | June 2016 | | 6,160 |
|
Secured construction loan | | | 3.89% | | | April 2016 | | 2,770 |
|
Assumption of $203 million secured note payable | | | 3.40% | | | November 2016 | | 5,520 |
|
Higher average balance and interest rate on secured construction loans | | | Various | | | Various | | 4,460 |
|
Higher average interest rate on unsecured senior line of credit and term loans | | | | | | | | 2,790 |
|
Total increases | | | | | | | | 31,430 |
|
Decreases in interest incurred due to: | | | | | | | | |
Repayments of debt: | | | | | | | | |
Secured notes payable (2) | | | Various | | | Various | | (4,550 | ) |
Unsecured senior bank term loan | | | Various | | | February 2017 | | (2,960 | ) |
Lower average notional amounts of interest rate hedge agreements in effect | | | | | | | | (1,910 | ) |
Amortization of loan fees | | | | | | | | (220 | ) |
Other decrease in interest | | | | | | | | (422 | ) |
Total decreases | | | | | | | | (10,062 | ) |
Change in interest incurred | | | | | | | | 21,368 |
|
Increase in capitalized interest (3) | | | | | | | | (4,535 | ) |
Total change in interest expense | | | | | | | | $ | 16,833 |
|
| |
(1) | Represents the interest rate as of the end of the applicable period, plus the impact of debt premiums/discounts, interest rate hedge agreements, and deferred financing costs. |
| |
(2) | Decrease is primarily due to the repayment of four secured notes payable aggregating $270.6 million, subsequent to January 1, 2016. |
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(3) | Increase in capitalized interest is primarily due to an increase in our highly leased development and redevelopment projects undergoing construction in our value-creation pipeline during the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The increase was also partially due to the increase in the weighted-average interest rate required for capitalization of interest to 3.96% effective during the nine months ended September 30, 2017, from 3.70% effective during the nine months ended September 30, 2016, as a result of the increase in rates applicable to borrowings outstanding during each respective period. |
Depreciation and amortization
Depreciation and amortization expense for the nine months ended September 30, 2017, increased by $90.9 million, or 41.7%, to $309.1 million, compared to $218.2 million for the nine months ended September 30, 2016. The increase is primarily due to additional depreciation from 2,355,756 RSF of development and redevelopment projects placed into service subsequent to January 1, 2016, and 16 operating properties totaling 1,468,708 RSF acquired subsequent to January 1, 2016.
Sale of real estate assets, impairment charges, and gain on sales of real estate
Impairment of real estate recognized during the nine months ended September 30, 2017, of $203 thousand related to our 20,580 RSF property located in a non-cluster market that was classified as held for sale as of June 30, 2017, and was sold in July 2017 with no gain or loss.
Impairment of real estate recognized during the nine months ended September 30, 2016, of $193.2 million primarily related to our decision to monetize our real estate investments in Asia. Refer to “Sale of Real Estate Assets and Impairment Charges” in Note 3 – “Investments in Real Estate” to our unaudited consolidated financial statements under Item 1 of this report for more information.
In January 2017, we completed the sale of a vacant property at 6146 Nancy Ridge Drive located in our Sorrento Mesa submarket of San Diego for a purchase price of $3.0 million and recognized a gain of $270 thousand. In May 2017, we recognized a gain of $111 thousand upon the sale of a partial interest in our land parcels at 1401/1413 Research Boulevard, located in the Rockville submarket of Maryland.
In July 2017, we recognized a gain of $14.1 million upon the completion of the sale of a condominium interest in our unconsolidated real estate joint venture property at 360 Longwood Avenue in our Longwood Medical Area submarket. This gain is reflected in our equity in earnings of unconsolidated real estate joint ventures in our consolidated statement of income. Refer to Note 4 – “Investment in Unconsolidated Real Estate Joint Ventures” to our unaudited consolidated financial statement under Item 1 of this report for more information.
Loss on early extinguishment of debt
During the nine months ended September 30, 2017, we repaid $200 million of our 2019 Unsecured Senior Bank Term Loan to reduce the total outstanding balance from $400 million to $200 million and recognized a loss of $670 thousand related to the write-off of unamortized loan fees. During the nine months ended September 30, 2016, we recognized a loss on early extinguishment of debt related to the write-off of a portion of unamortized loan fees aggregating $2.4 million, upon the amendment of our unsecured senior line of credit in July 2016. Additionally, during the nine months ended September 30, 2016, we completed a partial principal repayment of $200 million of our 2019 Unsecured Senior Bank Term Loan to reduce the total outstanding balance from $600 million to $400 million, and recognized a loss on early extinguishment of debt of $869 thousand related to the write-off of unamortized loan fees.
Preferred stock redemption charge
During the nine months ended September 30, 2017 and 2016, we repurchased, in privately negotiated transactions, 501,115 and 3.0 million outstanding shares, respectively, of our Series D Convertible Preferred Stock and recognized a preferred stock redemption charge of $5.8 million and $25.6 million, respectively.
In March 2017, we announced the redemption of our Series E Redeemable Preferred Stock and recognized a preferred stock redemption charge of $5.5 million. Refer to Note 12 – “Stockholders’ Equity” to our unaudited consolidated financial statements under Item 1 of this report for more information.
Projected results
We present updated guidance for EPS attributable to Alexandria’s common stockholders – diluted, and funds from operations per share attributable to Alexandria’s common stockholders – diluted, as adjusted, based on our current view of existing market conditions and other assumptions for the year ending December 31, 2017,2020, as set forth, and as adjusted, in the tabletables below. The tables below also provide a reconciliation of EPS per share attributable to Alexandria’s common stockholders – diluted, the most directly comparable GAAP measure, to funds from operations aper share and funds from operations per share, as adjusted, non-GAAP measure,measures, and other key assumptions included in our updated guidance for the year ending December 31, 2017.2020. There can be no assurance that actual amounts will not be materially higher or lower than these expectations. Refer to our discussion of “Forward-Looking Statements”“Forward-looking statements” in this Item 2.
Guidance for 2020 has been updated to reflect our current view of existing market conditions and assumptions for the year ending December 31, 2020, and reflects the estimated impact stemming from the COVID-19 pandemic on our financial and operating results. Refer to the following tables for complete details on our updated 2020 guidance assumptions. There can be no assurance that actual amounts will not be materially higher or lower than these expectations.
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Projected 2020 Earnings per Share and Funds From Operations per Share Attributable to Alexandria’s Common Stockholders – Diluted | | As of 7/27/20 | | | | As of 4/27/20 | | |
Earnings per share(1) | | $3.00 to $3.08 | | | | $1.69 to $1.79 | | |
Depreciation and amortization of real estate assets | | | 5.15 | | | | 5.15 | |
Impairment of real estate – rental properties(2) | | | 0.06 | | | | 0.06 | |
Allocation of unvested restricted stock awards | | | (0.05) | | | | (0.04) | |
Funds from operations per share(3) | | $8.16 to $8.24 | | | | $6.86 to $6.96 | | |
Unrealized (gains) losses on non-real estate investments | | | (1.25) | | | | 0.14 | |
Impairment of non-real estate investments | | | 0.20 | | | | 0.16 | |
Impairment of real estate(4) | | | 0.12 | | | | 0.10 | |
Allocation to unvested restricted stock awards | | | 0.01 | | | | (0.01) | |
Other | | | 0.02 | | | | — | |
Funds from operations per share, as adjusted(1) | | $7.26 to $7.34 | | | | $7.25 to $7.35 | | |
Midpoint | | | $7.30 | | | | $7.30 | |
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(1)Excludes unrealized gains or losses after June 30, 2020, that are required to be recognized in earnings and are excluded from funds from operations per share, as adjusted.
(2)Includes a $7.6 million impairment on our investment in a recently developed retail property held by our unconsolidated real estate joint venture.
(3)Calculated in accordance with standards established by the Advisory Board of Governors of Nareit (the “Nareit Board of Governors”). Refer to the definition of “Funds from operations and funds from operations, as adjusted, attributable to Alexandria Real Estate Equities, Inc.’s common stockholders” in the “Non-GAAP measures and definitions” section within this Item 2.2 for additional information.
(4)Includes eight cents related to an impairment charge of $10 million recognized in April 2020 to write off the carrying amount of the pre-acquisition deposit related to an operating tech office property for which our revised economic projections declined from our initial underwriting. The impairment was recognized concurrently with the submission of our notice to terminate the transaction.
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Key Assumptions(1) (Dollars in millions) | | As of 7/27/20 | | | | As of 4/27/20 | | |
| | Low | | High | | Low | | High |
Occupancy percentage for operating properties in North America as of December 31, 2020 | | 94.8% | | 95.4% | | 94.8% | | 95.4% |
Lease renewals and re-leasing of space: | | | | | | | | |
Rental rate increases | | 28.0% | | 31.0% | | 28.0% | | 31.0% |
Rental rate increases (cash basis) | | 14.0% | | 17.0% | | 14.0% | | 17.0% |
Same property performance: | | | | | | | | |
Net operating income increase | | 1.0% | | 3.0% | | 1.0% | | 3.0% |
Net operating income increase (cash basis) | | 4.5% | | 6.5% | | 4.5% | | 6.5% |
Straight-line rent revenue | | $ | 98 | | | $ | 108 | | | $ | 98 | | | $ | 108 | |
General and administrative expenses | | $ | 121 | | | $ | 126 | | | $ | 121 | | | $ | 126 | |
Capitalization of interest | | $ | 117 | | | $ | 127 | | | $ | 102 | | | $ | 112 | |
Interest expense | | $ | 170 | | | $ | 180 | | | $ | 185 | | | $ | 195 | |
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(1)Our assumptions presented in the table above are subject to a number of variables and uncertainties, including those discussed as “Forward-Looking Statements” under Part I; “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2019, as well as in “Item 1A. Risk Factors” within “Part II – Other Information” of this quarterly report on Form 10-Q.
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Summary of Key Changes in Guidance | | As of 10/30/17 | | As of 7/31/17 | |
EPS, FFO per share, and FFO per share, as adjusted | | See below | | See below | |
Rental rate increase up 1% | | 20.5% to 23.5% | | 19.5% to 22.5% | |
Rental rate increase (cash basis) up 3% | | 10.5% to 13.5% | | 7.5% to 10.5% | |
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Earnings per Share and Funds From Operations per Share Attributable to Alexandria’s Common Stockholders – Diluted |
| | As of 10/30/17 | | As of 7/31/17 | |
Earnings per share | | $1.57 to $1.59 | | $1.40 to $1.46 | |
Depreciation and amortization | | 4.45 | | | 4.45 | | |
Less: our share of gain on sale of real estate from unconsolidated JVs | | (0.15) | | | — | | |
Allocation of unvested restricted stock awards | | (0.04) | | | (0.04) | | |
Funds from operations per share | | $5.83 to $5.85 | | $5.81 to $5.87 | |
Add: impairment of non-real estate investments (1) | | 0.05 | | | 0.05 | | |
Add: loss on early extinguishment of debt | | 0.01 | | | 0.01 | | |
Add: preferred stock redemption charge (2) | | 0.12 | | | 0.12 | | |
Funds from operations per share, as adjusted | | $6.01 to $6.03 | | $5.99 to $6.05 | |
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Key Assumptions (3) (Dollars in millions) | | 2017 Guidance |
| Low | | High |
Occupancy percentage for operating properties in North America as of December 31, 2017 | | 96.6% |
| | 97.2% |
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Lease renewals and re-leasing of space: | | | | |
Rental rate increases | | 20.5% |
| | 23.5% |
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Rental rate increases (cash basis) | | 10.5% |
| | 13.5% |
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Same property performance: | | | | |
Net operating income increase | | 2.0% |
| | 4.0% |
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Net operating income increase (cash basis) | | 5.5% |
| | 7.5% |
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Straight-line rent revenue | | $ | 107 |
| | $ | 112 |
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General and administrative expenses (4) | | $ | 68 |
| | $ | 73 |
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Capitalization of interest (4) | | $ | 48 |
| | $ | 58 |
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Interest expense (4) | | $ | 131 |
| | $ | 141 |
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Key Credit Metrics | | As of 10/30/172020 Guidance | | |
Net debt to Adjusted EBITDA – fourth quarter of 2017, annualized | | 5.3x to 5.8x | |
Net debt and preferred stock to Adjusted EBITDA – fourth quarter of 2017,2020, annualized | | 5.3xLess than or equal to 5.8x5.3x | | |
Fixed-charge coverage ratio – fourth quarter of 2017,2020, annualized | | Greater than 4.0xor equal to 4.4x | |
Value-creation pipeline as a percentage of gross investments in real estate as of December 31, 2017 | | Less than 10% | |
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(1) | Primarily related to two non-real estate investments during the three months ended June 30, 2017. |
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(2) | Includes charges aggregating $5.8 million related to the repurchases of 501,115 outstanding shares of our Series D Convertible Preferred Stock during the three months ended March 31, 2017. Additionally, in March 2017, we announced the redemption of our Series E Redeemable Preferred Stock and recognized a $5.5 million preferred stock redemption charge. We completed the redemption in April 2017. Excludes any charges related to future repurchases of our Series D Convertible Preferred Stock. |
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(3) | 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 assumptions for Same Properties net operating income growth, rental rate growth, straight-line rent revenue, general and administrative expenses, capitalization of interest, and interest expense are included in the tables above and are subject to a number of variables and uncertainties, including those discussed as “Forward-Looking Statements” under Part I; “Item 1A. Risk Factors”; and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10‑K for the year ended December 31, 2016. 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. |
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(4) | We expect to be at the top end of our guidance ranges for general and administrative expenses and capitalization of interest, and the low end of our guidance range for interest expense. |
Consolidated and unconsolidated real estate joint ventures
We present components of balance sheet and operating results information for the noncontrolling interests’interest share of our consolidated real estate joint ventures and for our share of investments in unconsolidated real estate joint ventures to help investors estimate balance sheet and operating results information related to our partially owned entities. These amounts are estimated by computing, for each joint venture that we consolidate in our financial statements, the noncontrolling interest percentage of each financial item to arrive at the cumulative noncontrolling interest share of each component presented. In addition, for our real estate joint ventures that we do not control and do not consolidate, we apply our economic ownership percentage to the unconsolidated real estate joint ventures to arrive at our proportionate share of each component presented. Refer to Note 4 – “Consolidated and unconsolidated real estate joint ventures” to our unaudited consolidated financial statements under Item 1 of this report for further discussion. | | | | | | | | | | | | | | | | | |
Consolidated Real Estate Joint Ventures | | | | | |
Property/Market/Submarket | | Noncontrolling(1) Interest Share | | | |
225 Binney Street/Greater Boston/Cambridge | | | 70.0 | % | | |
75/125 Binney Street/Greater Boston/Cambridge | | | 60.0 | % | | |
409 and 499 Illinois Street/San Francisco/Mission Bay/SoMa | | | 40.0 | % | | |
1500 Owens Street/San Francisco/Mission Bay/SoMa | | | 49.9 | % | | |
Alexandria Technology Center® – Gateway/San Francisco/South San Francisco(2) | | | 55.0 | % | | |
500 Forbes Boulevard/San Francisco/South San Francisco | | | 90.0 | % | | |
Campus Pointe by Alexandria/San Diego/University Town Center(3) | | | 45.0 | % | | |
5200 Illumina Way/San Diego/University Town Center | | | 49.0 | % | | |
9625 Towne Centre Drive/San Diego/University Town Center | | | 49.9 | % | | |
SD Tech by Alexandria/San Diego/Sorrento Mesa(4) | | | 50.0 | % | | |
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Consolidated Real Estate Joint Ventures | | |
Property/Market/Submarket | | Noncontrolling (1)
Interest Share
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225 Binney Street/Greater Boston/Cambridge | | | 70.0% | | |
1500 Owens Street/San Francisco/Mission Bay/SoMa | | | 49.9% | | |
409 and 499 Illinois Street/San Francisco/Mission Bay/SoMa | | | 40.0% | | |
10290 and 10300 Campus Point Drive/San Diego/University Town Center | | | 45.0% | | |
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Unconsolidated Real Estate Joint Ventures | | |
Property/Market/Submarket | | Our Share | |
360 Longwood Avenue/Greater Boston/Longwood Medical Area | | | 27.5% | | |
1401/1413 Research Boulevard/Maryland/Rockville | | | 65.0% | (2)
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(1)Property/Market/Submarket | In addition to the consolidated real estate joint ventures listed, various partners hold insignificant noncontrolling interests in three other properties in North America. |
Our Ownership Share(5) | | | |
(2)1655 and 1725 Third Street/San Francisco/Mission Bay/SoMa | The joint venture is expected to fund the remaining construction costs of the project with funds from its construction loan shown below, and we expect our ownership interest percentage to remain at 65% at completion of the project. Refer to “Real Estate Asset Sales” within this Item 2 for additional information on the contribution of land parcels to the real estate joint venture. | | 10.0 | % | | |
Menlo Gateway/San Francisco/Greater Stanford | | | 49.0 | % | | |
704 Quince Orchard Road/Maryland/Gaithersburg | | | 56.8 | % | (6) | |
As of September 30, 2017,
(1)In addition to the consolidated real estate joint ventures listed, various partners hold insignificant noncontrolling interests in six other joint ventures in North America.
(2)Excludes 600, 630, 650, 901, and 951 Gateway Boulevard in our South San Francisco submarket. Noncontrolling interest share is anticipated to be 49% as we make further contributions over time.
(3)Excludes 9880 Campus Point Drive in our University Town Center submarket.
(4)Excludes 5505 Morehouse Drive in our Sorrento Mesa submarket.
(5)In addition to the unconsolidated real estate joint ventures listed, we hold an interest in two other insignificant unconsolidated real estate joint ventures in North America.
(6)Represents our ownership interest; our voting interest is limited to 50%.
Our unconsolidated real estate joint ventures have the following non-recourse secured loans that include the following key terms (amounts represent 100%as of the loan amounts at the joint venture level, dollarsJune 30, 2020 (dollars in thousands):
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| | | | Maturity Date | | | | Stated Rate | | Interest Rate(1) | | 100% at Joint Venture Level | |
Unconsolidated Joint Venture | | Our Share | | | | | | | | | | Debt Balance(2) | |
704 Quince Orchard Road | | 56.8% | | | 3/16/23 | | | L+1.95% | | 2.40% | | $ | 11,602 | | |
1655 and 1725 Third Street | | 10.0% | | | 3/10/25 | | | 4.50% | | 4.57% | | 598,020 | | |
Menlo Gateway, Phase II | | 49.0% | | | 5/1/35 | | | 4.53% | | 4.59% | | 106,580 | | |
Menlo Gateway, Phase I | | 49.0% | | | 8/10/35 | | | 4.15% | | 4.18% | | 140,843 | | |
| | | | | | | | | | | | $ | 857,045 | | |
360 Longwood Avenue(1)Includes interest expense and amortization of loan fees.
(2)Represents outstanding principal, net of unamortized deferred financing costs, as of June 30, 2020.
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Maturity Date | | Stated Rate | | Interest Rate (1) | | Debt Balance (2) | | Outstanding Principal | | Remaining Commitments | | Total |
| 9/1/22 | (3) | | 3.32 | % | | | 3.62 | % | | $ | 94,086 |
| | $ | 95,000 |
| | $ | — |
| | $ | 95,000 |
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| 9/1/22 | (3) | | L+1.85 | % | | | N/A |
| | $ | — |
| | $ | — |
| | $ | 17,000 |
| | $ | 17,000 |
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1401/1413 Research Boulevard
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Maturity Date | | Stated Rate | | Interest Rate (1) | | Debt Balance (2) | | Outstanding Principal | | Remaining Commitments | | Total |
| 5/17/20 | (4) | | L+2.50 | % | (5) | | 5.07 | % | | $ | 3,699 |
| | $ | 3,829 |
| | $ | 21,171 |
| | $ | 25,000 |
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(1) | Represents interest rate including interest expense and amortization of loan fees. |
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(2) | Represents outstanding principal, net of unamortized deferred financing costs. |
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(3) | The unconsolidated real estate joint venture has two one-year options to extend the stated maturity date to September 1, 2024, subject to certain conditions. Additionally, the loan commitment balance excludes an earn-out advance provision that allows for incremental borrowings up to $48.0 million, subject to certain conditions. |
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(4) | The unconsolidated real estate joint venture has an option to extend the stated maturity date to July 1, 2020. In addition, there are two one-year options to convert the construction loan to a permanent loan and extend the stated maturity date to May 17, 2022. |
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(5) | The outstanding borrowing bears interest at a floating rate with an interest rate floor equal to 3.15%. |
The following tables present information related to the operating results and financial positions of our consolidated and unconsolidated real estate joint ventures (in thousands):
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| Noncontrolling Interest Share of Consolidated Real Estate Joint Ventures | | | | Our Share of Unconsolidated Real Estate Joint Ventures | | |
| June 30, 2020 | | | | June 30, 2020 | | |
| Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
Total revenues | $ | 39,869 | | | $ | 77,646 | | | $ | 10,011 | | | $ | 20,655 | |
Rental operations | (10,302) | | | (20,397) | | | (1,199) | | | (2,617) | |
| 29,567 | | | 57,249 | | | 8,812 | | | 18,038 | |
General and administrative | (102) | | | (219) | | | (50) | | | (134) | |
Interest | — | | | — | | | (2,011) | | | (3,982) | |
Depreciation and amortization | (15,775) | | | (31,645) | | | (2,858) | | | (5,501) | |
Impairment of real estate | — | | | — | | | — | | | (7,644) | |
Fixed returns allocated to redeemable noncontrolling interests(1) | 217 | | | 435 | | | — | | | — | |
| $ | 13,907 | | | $ | 25,820 | | | $ | 3,893 | | | $ | 777 | |
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Straight-line rent and below-market lease revenue | $ | 1,274 | | | $ | 3,236 | | | $ | 5,698 | | | $ | 11,551 | |
Funds from operations(2) | $ | 29,682 | | | $ | 57,465 | | | $ | 6,751 | | | $ | 13,922 | |
(1)Represents an allocation of joint venture earnings to redeemable noncontrolling interests primarily in one property in our South San Francisco submarket. These redeemable noncontrolling interests earn a fixed return on their investment rather than participate in the operating results of the property.
(2)Refer to the definition of “Funds from operations and funds from operations, as adjusted, attributable to Alexandria Real Estate Equities, Inc.’s common stockholders” in the “Non-GAAP measures and definitions” section within this Item 2 for the definition and the reconciliation from the most directly comparable GAAP measure.
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| As of June 30, 2020 | | |
| Noncontrolling Interest Share of Consolidated Real Estate Joint Ventures | | Our Share of Unconsolidated Real Estate Joint Ventures |
Investments in real estate | $ | 1,491,601 | | | $ | 459,843 | |
Cash, cash equivalents, and restricted cash | 48,327 | | | 9,338 | |
Other assets | 168,342 | | | 49,503 | |
Secured notes payable | — | | | (186,254) | |
Other liabilities | (70,734) | | | (5,572) | |
Redeemable noncontrolling interests | (12,122) | | | — | |
| $ | 1,625,414 | | | $ | 326,858 | |
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| Noncontrolling Interest Share of Consolidated Real Estate JVs | | Our Share of Unconsolidated Real Estate JVs |
| September 30, 2017 | | September 30, 2017 |
| Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
Total revenues | $ | 13,400 |
| | $ | 41,022 |
| | $ | 1,044 |
| | $ | 5,849 |
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Rental operations | (4,189 | ) | | (11,772 | ) | | (489 | ) | | (2,194 | ) |
| 9,211 |
| | 29,250 |
| | 555 |
| | 3,655 |
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General and administrative | (52 | ) | | (126 | ) | | (10 | ) | | (40 | ) |
Interest | — |
| | — |
| | (168 | ) | | (1,552 | ) |
Depreciation and amortization | (3,608 | ) | | (10,985 | ) | | (383 | ) | | (1,119 | ) |
Gain on sale of real estate | — |
| | — |
| | 14,106 |
| | 14,106 |
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| $ | 5,551 |
| (1) | $ | 18,139 |
| (1) | $ | 14,100 |
| | $ | 15,050 |
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| September 30, 2017 | |
| Noncontrolling Interest Share of Consolidated Real Estate JVs | | Our Share of Unconsolidated Real Estate JVs | |
Investments in real estate | $ | 476,339 |
| | $ | 57,340 |
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Cash and cash equivalents | 13,957 |
| | 4,317 |
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Other assets | 29,534 |
| | 3,707 |
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Secured notes payable | — |
| | (28,278 | ) | |
Other liabilities | (21,989 | ) | | (3,394 | ) | |
Redeemable noncontrolling interests | (11,418 | ) | (1) | — |
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| $ | 486,423 |
| | $ | 33,692 |
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(1) | Redeemable noncontrolling interests in our consolidated real estate project at 213 East Grand Avenue since August 2005, located in our South San Francisco submarket, aggregating 300,930 RSF, which earns a fixed preferred return of 8.4% rather than a variable return based upon their ownership percentage of the joint venture. Operating results information presented above excludes an allocation of results attributable to noncontrolling interests since they earn a fixed preferred return. |
ForDuring the ninesix months ended SeptemberJune 30, 20172020 and 2016, we distributed $17.4 million and $10.9 million, respectively, to2019, our consolidated real estate joint ventures distributed an aggregate of $38.2 million and $24.6 million, respectively, to our joint venture partners. The increase is primarily related to the distributions to real estate joint ventures formed with TIAA in December 2015 and December 2016 at 10300 Campus Point Drive in our University Town Center submarket of San Diego. Refer to our consolidated statements of cash flows and Note 34 – “Investments in Real Estate”“Consolidated and unconsolidated real estate joint ventures” to our unaudited consolidated financial statements under Item 1 of this report for additional information.
Investments
We holdpresent our equity investments at fair value whenever fair value or NAV is readily available. Adjustments for our limited partnership investments represent changes in certain publicly traded companies,reported NAV as a practical expedient to estimate fair value. For investments without readily available fair values, we adjust the carrying amount whenever such investments have an observable price change, and further adjustments are not made until another price change, if any, is observed. Refer to Note 7 – “Investments” to our unaudited consolidated financial statements under Item 1 of this report for additional information.
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| | June 30, 2020 | | | | | | | |
(In thousands) | | Three Months Ended | | | Six Months Ended | | | Year Ended December 31, 2019 | |
Realized gains | | $ | 13,005 | | (1) | | $ | 8,328 | | (1) | | $ | 33,158 | | (2) |
Unrealized gains | | 171,652 | | | | 154,508 | | | | 161,489 | | |
Investment income | | $ | 184,657 | | | | $ | 162,836 | | | | $ | 194,647 | | |
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Investments (In thousands) | | Cost | | | Unrealized Gains | | | Carrying Amount | |
Fair value: | | | | | | | | | |
Publicly traded companies | | $ | 159,129 | | | | $ | 262,841 | | (3) | | $ | 421,970 | | |
Entities that report NAV | | 302,954 | | | | 218,602 | | | | 521,556 | | |
| | | | | | | | | |
Entities that do not report NAV: | | | | | | | | | |
Entities with observable price changes | | 48,565 | | | | 74,708 | | | | 123,273 | | |
Entities without observable price changes | | 251,666 | | | | — | | | | 251,666 | | |
June 30, 2020 | | $ | 762,314 | | (4) | | $ | 556,151 | | | | $ | 1,318,465 | | |
| | | | | | | | | |
March 31, 2020 | | $ | 738,983 | | | | $ | 384,499 | | | | $ | 1,123,482 | | |
(1)Includes realized gains for the three and six months ended June 30, 2020, of $17.7 million and $32.8 million, respectively, and impairments related to investments in privately held entities that do not report NAV of $4.7 million and limited partnerships primarily involved$24.5 million, respectively.
(2)Includes realized gains of $50.3 million and impairments related to investments in privately held entities that do not report NAV of $17.1 million for the life scienceyear ended December 31, 2019.
(3)Includes gross unrealized gains and technology industries.
Aslosses of September 30, 2017, our investments aggregated $485.3$279.7 million or approximately 4.2% of our total assets. The charts and table below present selected investment statistics$16.9 million, respectively, as of SeptemberJune 30, 2017 (dollars in thousands, unless stated otherwise):2020.
(4)Represents 3.3% of gross assets as of June 30, 2020.
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| | | | | | | | | | | | | | |
Public/Private Investment Mix (Cost) | | Tenant/Non-Tenant Mix (Cost) |
| | | | | | | | |
| | |
| | |
| | | | | | | | |
Investment Type | | Cost | | Net Unrealized Gains | | Total | | Number of Investments |
Public | | $ | 55,433 |
| | $ | 45,189 |
| | $ | 100,622 |
| | 259 |
Private | | 384,640 |
| | — |
| | 384,640 |
| | Average Cost |
Total | | $ | 440,073 |
| | $ | 45,189 |
| | $ | 485,262 |
| | $1.7M |
| | | | | | | |
Liquidity
|
| | | | | |
Net Debt to Adjusted EBITDA (1) | | Net Debt and Preferred Stock to Adjusted EBITDA (1) |
| | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
Fixed-Charge Coverage Ratio (1) | Liquidity (2) |
| | $1.7B |
|
|
|
|
| (In millions) | |
| Availability under our $1.65 billion unsecured senior line of credit | $ | 1,336 |
|
| Remaining construction loan commitments | 156 |
|
| Available-for-sale equity securities, at fair value | 101 |
|
| Cash, cash equivalents, and restricted cash | 146 |
|
| | | $ | 1,739 |
|
| | | | | | | | |
(1) | Quarter annualized.Public/Private Mix (Cost) | |
| | |
| | |
(2) | As of September 30, 2017.Tenant/Non-Tenant Mix (Cost) | |
| | |
Liquidity
| | | | | | | | | | | | | | | | | |
Liquidity | | | Significant Availability on Unsecured Senior Lines of Credit | | |
| | | | | |
$4.2B | | | (in millions) | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
(In millions) | | | | | |
Availability under our unsecured senior lines of credit | $ | 2,510 | | | | | |
Outstanding forward equity sales agreements(1) | 520 | | | | | |
Cash, cash equivalents, and restricted cash | 242 | | | | | |
Investments in publicly traded companies | 422 | | | | | |
Liquidity as of June 30, 2020 | 3,694 | | | | | |
Outstanding forward equity sales agreements(2) | 532 | | | | | |
Total | $ | 4,226 | | | | | |
| | | | | |
| | | | | |
Net Debt and Preferred Stock to Adjusted EBITDA(4) | | | Fixed-Charge Coverage Ratio(4) | | |
| | | | | |
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(1)Represents expected net proceeds from the future settlement of the remaining 3.5 million shares outstanding under our January 2020 forward equity sales agreements.
(2)Represents expected net proceeds from the future settlement of 6.9 million shares outstanding under our July 2020 forward equity sales agreements, net of the reduction in availability for borrowing under our $750 million unsecured senior line of credit. Pursuant to the terms of the $750 million unsecured senior line of credit agreement, the outstanding commitments will be reduced in the future by 50% of the net proceeds from any equity offerings entered into subsequent to the execution of this line of credit in April 2020. As of the date of this report, none of our forward equity sales agreements entered into in July 2020 have been settled.
(3)Total outstanding availability on our unsecured senior lines of credit reduced by the expected net proceeds from the future settlement of 6.9 million shares outstanding under our July 2020 forward equity sales agreements.
(4)Quarter annualized.
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, scheduled debt maturities, distributions to noncontrolling interests, repurchase/redemptionand payment of preferred stock, and dividends through net cash provided by operating activities, periodic asset sales, strategic real estate joint venture capital, and long-term secured and unsecured indebtedness, including borrowings under our $1.65 billion unsecured senior linelines of credit, unsecured senior bank term loans,issuance under our commercial paper program, 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 and distributions to noncontrolling interests for investment in development and redevelopment projects and/or acquisitions;
Maintain significant liquidity from net cash provided by operating activities, cash, cash equivalents,•Improve credit profile and restricted cash, available-for-sale equity securities, available borrowing capacity under our $1.65 billion unsecured senior linerelative long-term cost of credit, and available commitments under our secured construction loans;capital;
Reduce the aggregate amount outstanding under our unsecured senior bank term loans;
Maintain a well-laddered debt maturity profile;
Decrease the ratio of net debt to Adjusted EBITDA and net debt and preferred stock to Adjusted EBITDA, allowing for some variation from quarter to quarter and year to year;
•Maintain diverse sources of capital, including sources from net cash provided by operating activities, unsecured debt, secured debt, selective real estate asset sales, joint venture capital,partial interest sales, non-real estate investment sales, preferred stock, and common stock;
•Maintain commitment to long-term capital to fund growth;
•Maintain prudent laddering of debt maturities;
•Maintain solid credit metrics;
•Maintain significant balance sheet liquidity;
•Mitigate unhedged variable-rate debt exposure 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 and distributions to noncontrolling interests 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; and
•Maintain high levels of pre-leasing and percentage leased in value-creation projects.
In addition, refer to “Item 1A. Risk factors” within “Part II – Other information” of this quarterly report on Form 10-Q for a discussion about risks that COVID-19 directly or indirectly may pose to our business.
The following table presents the availability under our $1.65$2.2 billion unsecured senior line of credit available commitments underless amounts outstanding on our secured construction loans, available-for-salecommercial paper program; $750 million unsecured senior line of credit; forward equity securities,sales agreements; cash, cash equivalents, and restricted cashcash; and investments in publicly traded companies as of SeptemberJune 30, 20172020 (dollars in thousands):
|
| | | | | | | | | | | | |
Description | | Aggregate Commitments | | Outstanding Balance | | Remaining Commitments/Liquidity |
$1.65 billion unsecured senior line of credit | | $ | 1,650,000 |
| | $ | 314,000 |
| | $ | 1,336,000 |
|
Secured construction loans: | | | | | | |
50 and 60 Binney Street/Greater Boston | | 350,000 |
| | 317,979 |
| | 32,021 |
|
100 Binney Street/Greater Boston | | 304,281 |
| | 179,764 |
| | 124,517 |
|
| | $ | 2,304,281 |
| | $ | 811,743 |
| | 1,492,538 |
|
Available-for-sale equity securities, at fair value | | | | | | 100,622 |
|
Cash, cash equivalents, and restricted cash | | | | | | 146,275 |
|
Total liquidity | | | | | | $ | 1,739,435 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Stated Rate | | Aggregate Commitments | | Outstanding Balance | | Remaining Commitments/Liquidity |
Availability under our $2.2 billion unsecured senior line of credit | | L+0.825 | % | | $ | 2,200,000 | | | $ | 440,000 | | | $ | 1,760,000 | |
Availability under our $750 million unsecured senior line of credit | | L+1.050 | % | | $ | 750,000 | | | $ | — | | | 750,000 | |
Outstanding forward equity sales agreements | | | | | | | | 519,621 | |
Cash, cash equivalents, and restricted cash | | | | | | | | 241,540 | |
Investments in publicly traded companies | | | | | | | | 421,970 | |
Total liquidity | | | | | | | | $ | 3,693,131 | |
Refer to Note 8 – “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.
Cash, and cash equivalents, and restricted cash
As of SeptemberJune 30, 2017,2020, and December 31, 2016,2019, we had $118.6$241.5 million and $125.0$242.7 million, respectively, of cash, cash equivalents, and cash equivalents.restricted cash. We expect existing cash, and cash equivalents, and restricted cash, cash flows from operating activities, proceeds from real estate asset sales and partial interest sales, non-real estate investment sales, borrowings under our $1.65 billion unsecured senior linelines of credit, secured construction loan borrowings,issuances under our commercial paper program, 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, distributiondistributions to noncontrolling interests, scheduled debt repayments, acquisitions, and certain capital expenditures, including expenditures related to construction activities.
Restricted cash
Restricted cash consisted of the following as of September 30, 2017, and December 31, 2016 (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Funds held in trust under the terms of certain secured notes payable | $ | 17,853 |
| | $ | 7,387 |
|
Funds held in escrow related to construction projects and investing activities | 4,544 |
| | 4,541 |
|
Other | 5,316 |
| | 4,406 |
|
Total | $ | 27,713 |
| | $ | 16,334 |
|
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 for the six months ended June 30, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Change |
Net cash provided by operating activities | $ | 393,657 | | | $ | 308,340 | | | $ | 85,317 | |
Net cash used in investing activities | $ | (1,397,060) | | | $ | (1,452,237) | | | $ | 55,177 | |
Net cash provided by financing activities | $ | 1,002,969 | | | $ | 1,109,218 | | | $ | (106,249) | |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2017 | | 2016 | | Change |
Net cash provided by operating activities | $ | 356,330 |
| | $ | 291,851 |
| | $ | 64,479 |
|
Net cash used in investing activities | $ | (1,313,764 | ) | | $ | (715,301 | ) | | $ | (598,463 | ) |
Net cash provided by financing activities | $ | 949,385 |
| | $ | 457,720 |
| | $ | 491,665 |
|
Operating activities
Cash flows provided by operating activities are primarily dependent upon the occupancy level of our asset base, the rental rates of our leases, the collectabilitycollectibility of rent and recovery of operating expenses from our tenants, the timing of completion of development and redevelopment projects, and the timing of acquisitions and dispositions of operating properties. Net cash provided by operating activities for the ninesix months ended SeptemberJune 30, 2017,2020, increased to $356.3$393.7 million, compared to $291.9$308.3 million for the ninesix months ended SeptemberJune 30, 2016.2019. This increase was primarily attributable to (i) cash flows generated byfrom our highly leased development and redevelopment projects recently placed into service, (ii) income-producing acquisitions since January 1, 2016,2019, and (iii) increases in rental rates on lease renewals and re-leasing of space since January 1, 2016.2019.
Investing activities
Cash flows used in investing activities for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | Increase (Decrease) |
| 2020 | | 2019 | | |
Sources of cash from investing activities: | | | | | |
Sales of non-real estate investments | $ | 68,468 | | | $ | 49,967 | | | $ | 18,501 | |
Return of capital from unconsolidated real estate joint ventures | 20,225 | | | — | | | 20,225 | |
Change in escrow deposits | 18,719 | | | — | | | 18,719 | |
| 107,412 | | | 49,967 | | | 57,445 | |
Uses of cash for investing activities: | | | | | |
Purchases of real estate | 699,901 | | | 715,030 | | | (15,129) | |
Additions to real estate | 725,742 | | | 577,322 | | | 148,420 | |
Investments in unconsolidated real estate joint ventures | 2,861 | | | 95,950 | | | (93,089) | |
Change in escrow deposits | — | | | 9,000 | | | (9,000) | |
Additions to non-real estate investments | 75,968 | | | 104,902 | | | (28,934) | |
| 1,504,472 | | | 1,502,204 | | | 2,268 | |
| | | | | |
Net cash used in investing activities | $ | 1,397,060 | | | $ | 1,452,237 | | | $ | (55,177) | |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2017 | | 2016 | | Change |
Proceeds from sales of real estate | $ | 4,263 |
| | $ | 27,332 |
| | $ | (23,069 | ) |
Additions to real estate | (660,877 | ) | | (638,568 | ) | | (22,309 | ) |
Purchases of real estate | (590,884 | ) | | (18,108 | ) | | (572,776 | ) |
Deposits for investing activities | 4,700 |
| | (54,998 | ) | | 59,698 |
|
Additions to investments | (128,190 | ) | | (68,384 | ) | | (59,806 | ) |
Sales of investments | 18,896 |
| | 35,295 |
| | (16,399 | ) |
Repayment of notes receivable | — |
| | 9,054 |
| | (9,054 | ) |
Other | 38,328 |
| | (6,924 | ) | | 45,252 |
|
Net cash used in investing activities | $ | (1,313,764 | ) | | $ | (715,301 | ) | | $ | (598,463 | ) |
The changedecrease in net cash used in investing activities for the ninesix months ended SeptemberJune 30, 2017, is2020, was primarily due to a decreased use of cash for purchases of real estate, investments in unconsolidated real estate joint ventures, additions to non-real estate investments, and an increased source of cash from higher return of capital from unconsolidated real estate joint ventures. The decrease in cash used in investing activities was partially offset by an increased use of cash for property acquisitions and construction related to our highly leased pipeline.acquisitions. Refer to Note 3 – “Investments in Real Estate” and Note 5 – “Investments”real estate” to our unaudited consolidated financial statements under Item 1 of this report for further information.
Financing activities
Cash flows provided by financing activities for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Change |
Proceeds from issuance of unsecured senior notes payable | $ | 699,532 | | | $ | 854,209 | | | $ | (154,677) | |
Repayments of borrowings from secured notes payable | (3,088) | | | (302,878) | | | 299,790 | |
Borrowings from unsecured senior lines of credit | 1,470,000 | | | 2,114,000 | | | (644,000) | |
Repayments of borrowings from unsecured senior lines of credit | (1,414,000) | | | (1,808,000) | | | 394,000 | |
Proceeds from issuance of commercial paper notes | 8,179,900 | | | — | | | 8,179,900 | |
Repayments of borrowings from commercial paper program | (8,179,900) | | | — | | | (8,179,900) | |
Payments of loan fees | (7,957) | | | (15,796) | | | 7,839 | |
Changes related to debt | 744,487 | | | 841,535 | | | (97,048) | |
| | | | | |
Contributions from and sales of noncontrolling interests | 55,775 | | | 441,251 | | | (385,476) | |
Distributions to and purchases of noncontrolling interests | (38,482) | | | (24,590) | | | (13,892) | |
Proceeds from issuance of common stock | 504,338 | | | 85,394 | | | 418,944 | |
Dividend payments | (256,259) | | | (221,046) | | | (35,213) | |
Taxes paid related to net settlement of equity awards | (6,890) | | | (4,086) | | | (2,804) | |
Repurchase of 7.00% Series D cumulative convertible preferred stock | — | | | (9,240) | | | 9,240 | |
Net cash provided by financing activities | $ | 1,002,969 | | | $ | 1,109,218 | | | $ | (106,249) | |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2017 | | 2016 | | Change |
Borrowings from secured notes payable | $ | 145,272 |
| | $ | 215,330 |
| | $ | (70,058 | ) |
Repayments of borrowings from secured notes payable | (2,882 | ) | | (234,096 | ) | | 231,214 |
|
Proceeds from issuance of unsecured senior notes payable | 424,384 |
| | 348,604 |
| | 75,780 |
|
Borrowings from unsecured senior line of credit | 2,634,000 |
| | 2,349,000 |
| | 285,000 |
|
Repayments of borrowings from unsecured senior line of credit | (2,348,000 | ) | | (2,084,000 | ) | | (264,000 | ) |
Repayments of borrowings from unsecured senior bank term loans | (200,000 | ) | | (200,000 | ) | | — |
|
Changes related to debt | 652,774 |
| | 394,838 |
| | 257,936 |
|
| | | | | |
Repurchase of 7.00% Series D cumulative convertible preferred stock | (17,934 | ) | | (98,633 | ) | | 80,699 |
|
Redemption of 6.45% Series E cumulative redeemable preferred stock | (130,350 | ) | | — |
| | (130,350 | ) |
Proceeds from the issuance of common stock | 705,391 |
| | 367,802 |
| | 337,589 |
|
Dividend payments | (238,131 | ) | | (195,453 | ) | | (42,678 | ) |
Contributions from noncontrolling interests | 9,877 |
| | 68,621 |
| | (58,744 | ) |
Distributions to and purchase of noncontrolling interests | (17,432 | ) | | (62,605 | ) | | 45,173 |
|
Other | (14,810 | ) | | (16,850 | ) | | 2,040 |
|
Net cash provided by financing activities | $ | 949,385 |
| | $ | 457,720 |
| | $ | 491,665 |
|
Capital resources
We expect that our principal liquidity needs for the year ending December 31, 2017,2020, 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.
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Key Sources and Uses of Capital (In millions) | | 2017 Guidance | | Key Items Remaining after 9/30/17 | |
| Range | | Midpoint | | |
Sources of capital: | | | | | | | | | |
Net cash provided by operating activities after dividends | | $ | 115 |
| | $ | 135 |
| | $ | 125 |
| | | |
Incremental debt | | 388 |
| | 298 |
| | 343 |
| | | |
Real estate dispositions and common equity | | 1,080 |
| | 1,350 |
| | 1,215 |
| (1) |
| |
Total sources of capital | | $ | 1,583 |
| | $ | 1,783 |
| | $ | 1,683 |
| | | |
| | | | | | | | | |
Uses of capital: | | | | | | | | | |
Construction | | $ | 815 |
| | $ | 915 |
| | $ | 865 |
| | $ | 243 |
| |
Acquisitions | | 620 |
| | 720 |
| | 670 |
| (2) | $ | 79 |
| (3) |
7.00% Series D convertible preferred stock repurchases | | 18 |
| | 18 |
| | 18 |
| (4) |
|
| |
6.45% Series E redeemable preferred stock redemption | | 130 |
| | 130 |
| | 130 |
| | | |
Total uses of capital | | $ | 1,583 |
| | $ | 1,783 |
| | $ | 1,683 |
| | | |
| | | | | | | | | |
Incremental debt (included above): | | | | | | | | | |
Issuance of unsecured senior notes payable | | $ | 425 |
| | $ | 425 |
| | $ | 425 |
| | | |
Borrowings – secured construction loans | | 200 |
| | 250 |
| | 225 |
| | | |
Repayments of secured notes payable | | (5 | ) | | (10 | ) | | (8 | ) | | | |
Repayment of unsecured senior bank term loan | | (200 | ) | | (200 | ) | | (200 | ) | | | |
$1.65 billion unsecured senior line of credit/other | | (32 | ) | | (167 | ) | | (99 | ) | | | |
Incremental debt | | $ | 388 |
| | $ | 298 |
| | $ | 343 |
| | | |
Our initial 2020 guidance issued on December 3, 2019, included ranges for 2020 construction spending and acquisitions of $1.55 billion to $1.65 billion and $900 million to $1.0 billion, respectively, and reflected a strong outlook for 2020, including continued strong demand for our value-creation development and redevelopment projects. Our guidance issued on April 27, 2020 reduced our 2020 forecasted construction spending, acquisitions, real estate dispositions and partial interest sales, and issuance of common equity. These reductions were deemed necessary while we monitored the impact of COVID-19 on many areas of our business, including the overall macro and capital market environments. The following table provides key updates to our 2020 guidance issued on February 3, 2020 and April 27, 2020, based on our current view of existing market conditions and assumptions for the year ending December 31, 2020, and reflects increases in uses of capital to address the continuing tenant demand for our development and redevelopment pipeline and existing and anticipated attractive acquisition opportunities. Our updated 2020 construction spending guidance range increased since April 27, 2020, and is now closer to our initial forecast for 2020 disclosed in our guidance issued on February 3, 2020. Additionally, our initial guidance for 2020 anticipated meaningful acquisition opportunities and our updated 2020 acquisition guidance range continues to reflect opportunistic offerings in the market. The increase above our initial acquisition guidance range is expected to be funded through forecasted real estate dispositions and partial interest sales. Proceeds from forecasted sales are also expected to fund a portion of the increase in construction spending and to provide significant capital for growth over the next two to three quarters. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Key Sources and Uses of Capital (In millions) | | As of 7/27/20 | | | | | | | | | | | | | |
| | Range | | | | Midpoint | | Certain Completed Items | | | As of 4/27/20 Midpoint | | As of 2/3/20 Midpoint | | |
Sources of capital: | | | | | | | | | | | | | | | |
Net cash provided by operating activities after dividends | | $ | 185 | | | $ | 225 | | | $ | 205 | | | | | | $ | 205 | | | $ | 220 | | | |
Incremental debt | | 415 | | | 575 | | | 495 | | | see below | | | 335 | | | 380 | | | |
Real estate dispositions and partial interest sales | | 1,000 | | | 1,500 | | | 1,250 | | | $ | 51 | | (1) | | 50 | | (1) | 50 | | (1) | |
Common equity | | 2,090 | | | 2,090 | | | 2,090 | | | $ | 2,087 | | (2) | | 1,020 | | (1) | 1,900 | | (1) | |
Total sources of capital | | $ | 3,690 | | | $ | 4,390 | | | $ | 4,040 | | | | | | $ | 1,610 | | | $ | 2,550 | | | |
| | | | | | | | | | | | | | | |
Uses of capital: | | | | | | | | | | | | | | | |
Construction (refer to the “Investments in real estate” section within Item 2 for additional information) | | $ | 1,200 | | | $ | 1,500 | | | $ | 1,350 | | | | | | $ | 960 | | | $ | 1,600 | | | |
Acquisitions (refer to the “Executive summary” section within Item 2 for additional information) | | 1,600 | | | 2,000 | | | 1,800 | | | $ | 842 | | | | 650 | | | 950 | | | |
Total uses of capital | | $ | 2,800 | | | $ | 3,500 | | | $ | 3,150 | | | | | | $ | 1,610 | | | $ | 2,550 | | | |
| | | | | | | | | | | | | | | |
Incremental debt (included above): | | | | | | | | | | | | | | | |
Issuance of unsecured senior notes payable(3) | | $ | 700 | | | $ | 700 | | | $ | 700 | | | $ | 700 | | | | $ | 700 | | | $ | 600 | | | |
$3.0 billion unsecured senior lines of credit and other | | (285) | | | (125) | | | (205) | | | | | | (365) | | | (220) | | | |
Incremental debt | | $ | 415 | | | $ | 575 | | | $ | 495 | | | | | | $ | 335 | | | $ | 380 | | | |
| | | | | | | | | | | | | | | |
Excess sources of capital | | | | | | $ | 890 | | | | | | $ | — | | | $ | — | | | |
| |
(1) | Includes 6.2 million shares of our common stock issued during the nine months ended September 30, 2017, for net proceeds of $705.4 million, and 4.8 million shares of our common stock subject to forward equity sales agreements, with anticipated aggregate net proceeds of $495.5 million to be settled in the three months ended December 31, 2017, subject to adjustments as provided in the forward equity sales agreements. Also includes dispositions completed during the nine months ended September 30, 2017. Refer to the “Real Estate Asset Sales” section within this Item 2 for additional information. |
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(2) | Acquisitions guidance increased by $80.0 million from $590.0 million in our July 31, 2017, forecast primarily for the completed acquisition of 201 Haskins Way in September 2017 and one pending acquisition. Refer to the “Acquisitions” section within this Item 2 for additional information. |
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(3) | Includes the second construction milestone installment payment for the 2016 acquisition of the remaining 49% interest in our unconsolidated real estate joint venture with Uber at 1455 and 1515 Third Street in our Mission Bay/SoMa submarket and one pending acquisition. |
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(4) | Guidance for repurchases of our 7.00% Series D preferred stock decreased by $77.0 million to reflect actual redemptions through the third quarter 2017. |
(1)In April 2020, we completed the sale of a partial interest in properties at 9808 and 9868 Scranton Road in our Sorrento Mesa submarket to the existing SD Tech by Alexandria consolidated real estate joint venture, of which we own 50%. We received proceeds of $51.1 million for the 50% interest in the properties that our joint venture partner acquired through the joint venture. Our previous guidance disclosures included a combined amount for real estate dispositions, partial interest sales, and common equity. Amounts presented have been split into two separate categories for (i) actual real estate dispositions and partial interest sales completed through July 27, 2020, and (ii) common equity.
(2)In January 2020 and July 2020, we entered into forward equity sales agreements aggregating $1.0 billion and $1.1 billion, respectively, to sell an aggregate of 6.9 million shares for each offering (13.8 million in aggregate) of our common stock (including the exercise of an underwriters’ option) at a public offering price of $155.00 per share and $160.50 per share, respectively, before underwriting discounts. In March 2020, we settled 3.4 million shares from our forward equity sales agreements and received proceeds of $500.0 million. As of the date of this report, 10.4 million shares of our common stock remain outstanding under forward equity sales agreements, for which we expect to receive proceeds of $1.6 billion, to be further adjusted as provided in the agreements, that will fund pending and recently completed acquisitions and the construction of our highly leased development projects. We expect to settle the remaining outstanding forward equity sales agreements in 2020.
(3)We may opportunistically seek to refinance additional near term maturities in 2020, subject to market conditions.
The key assumptions behind the sources and uses of capital in the table above include a favorable capital market environment, performance of our core operating properties, lease-up and delivery of current and future development and redevelopment projects, completion of pending and projected acquisitions, and continued substantial leasing activity of our operating properties.activity. Our expected sources and uses of capital are subject to a number of variables and uncertainties, including those discussed as “Forward-Looking Statements”“Forward-looking statements” under Part I; “Item 1A. Risk Factors”factors”; and “Item 7. Management’s Discussiondiscussion and Analysisanalysis of Financial Conditionfinancial condition and Resultsresults of Operations”operations” of our annual report on Form 10‑K10-K for the year ended December 31, 2016.2019. 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$185.0 million to $135$225.0 million of net cash flows from operating activities after payment of common stock and preferred stock dividends, and after deduction for distributions to noncontrolling interests. ChangesFor purposes of this calculation, changes in operating assets and liabilities are excluded from this calculation as they represent timing differences. Net cash provided by operating activities after dividends in 2017 is expected to be driven byFor the completion ofyear ending December 31, 2020, we expect our recently delivered projects, our highly pre-leased value-creation projects expected to be completed, along with recently delivered projects, certain future projects, recently acquired properties, and contributions from Same Properties which willand recently acquired properties, to contribute significant increases in rental revenue,income from rentals, net operating income, and cash flows. We anticipate significant contractual near-term growth in annual cash rents of $29 million related to the commencement of contractual rents on the projects recently placed into service that are near the end of their initial free rent period. Refer to the “Cash flows ” subsection of the “Liquidity” section within this Item 2 for a discussion of cash flows provided by operating activities for the six months ended June 30, 2020.
Debt
The table below reflects theAs of June 30, 2020, we have an outstanding balances, maturity dates, applicable rates, and facility fees for eachbalance of these facilities as$440.0 million on our $2.2 billion unsecured senior line of September 30, 2017 (dollars in thousands):
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| | | | | | | | | | |
| | September 30, 2017 |
Facility | | Balance | | Maturity Date (1) | | Applicable Margin | | Facility Fee |
$1.65 billion unsecured senior line of credit | | $ | 314,000 |
| | October 2021 | | L+1.00% | | 0.20% |
2019 Unsecured Senior Bank Term Loan | | $ | 199,543 |
| | January 2019 | | L+1.20% | | N/A |
2021 Unsecured Senior Bank Term Loan | | $ | 348,317 |
| | January 2021 | | L+1.10% | | N/A |
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(1) | Includes any extension options that we control. |
Borrowings under the $1.65credit. Our $2.2 billion unsecured senior line of credit bearbears an interest atrate of LIBOR or the base rate specified in the amended $1.65 billionplus 0.825% and matures on January 28, 2024, which includes two six-month extension options that we control. As of June 30, 2020, we have no outstanding balance on our $750 million unsecured senior line of credit, agreementwhich bears an interest rate of LIBOR plus in either case, a specified margin (the “Applicable Margin”). The Applicable Margin for LIBOR borrowings under1.050% and matures on April 14, 2022. In addition to the $1.65cost of borrowing, the $2.2 billion and $750 million unsecured senior linelines of credit isare subject to an annual facility fee of 0.15% and 0.20%, respectively, based on our existing credit ratings as set by certain rating agencies.the aggregate commitments outstanding.
We use our $1.65 billion unsecured senior linelines of credit to fund working capital, construction activities, and, from time to time, acquisition of properties. Borrowings under the $1.65 billion unsecured senior linelines of credit will bear interest at a “Eurocurrency Rate”Rate,” a “LIBOR Floating Rate,” or a “Base Rate” specified in the amended $1.65 billioneach respective unsecured senior line of credit agreement plus, in eitherany case, the Applicable Margin. The Eurocurrency Rate specified in the amended $1.65 billion unsecured linesenior lines of credit agreementagreements is, as applicable, the rate per annum equal to either (i) the LIBOR or a successor rate thereto as approvedagreed to by the administrative agent and the Company 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 LIBOR Floating Rate means, for any day, one month LIBOR, or a successor rate thereto as agreed to by the administrative agent and the Company for loans denominated in U.S. 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 Americathe Administrative Agent as its “prime rate,” and (iii) the Eurocurrency Rate plus 1.00%. Our $1.65$2.2 billion 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. In addition
Pursuant to the costterms of borrowing, the facility is subjectnew line of credit agreement, the outstanding commitments and any outstanding borrowings from the $750 million unsecured senior line of credit will be reduced by 100% of net cash proceeds from certain new debt transactions and 50% of net cash proceeds from new equity offerings as defined in the agreement. Therefore, upon full or partial settlement of our forward equity sales agreements entered into in July 2020, described further under the “Common equity transactions” section of Note 13 – “Stockholders’ equity” to an annual facility feeour unaudited consolidated financial statements, the outstanding commitments and any outstanding borrowings from the $750 million unsecured senior line of 0.20% based oncredit will be reduced by 50% of net proceeds received from the aggregate commitments outstanding.settlement of the aforementioned July 2020 agreements (January 2020 forward equity sales agreements are excluded). As of the date of this report, none of our forward equity sales agreements entered into in July 2020 have been settled.
We expect to fund a significant portion of our capital needs in 2017for the remainder of 2020 from the issuancesettlement of our outstanding forward equity sales agreements, from issuances under our commercial paper program discussed below, from borrowings under our $2.95 billion unsecured senior lines of credit, and from real estate dispositions and partial interest sales.
We established a commercial paper program with the ability to issue up to $1.0 billion of commercial paper notes generally with a maturity of 30 days or less and with a maximum maturity of 397 days from the date of issuance. Our commercial paper program is backed by our $2.2 billion unsecured senior line of credit, and at all times we expect to retain a minimum undrawn amount of borrowing capacity under our $2.2 billion unsecured senior line of credit equal to any outstanding balance on our commercial paper program. We use borrowings under the program to fund short-term capital needs. The notes issued under our commercial paper program are sold under customary terms in the commercial paper market. They are typically issued at a discount to par, representing a yield to maturity dictated by market conditions at the time of issuance. In the event we are unable to issue commercial paper notes or refinance outstanding commercial paper notes under terms equal to or more favorable than those under the $2.2 billion unsecured senior line of credit, we expect to borrow under the $2.2 billion unsecured senior line of credit at LIBOR plus 0.825%. The commercial paper notes sold during the three months ended June 30, 2020, were issued at a weighted-average yield to maturity of 0.79%. As of June 30, 2020, we had no outstanding borrowings under our commercial paper program.
In March 2020, we completed an offering of $700.0 million of unsecured senior notes payable borrowings availabledue on December 15, 2030, at an interest rate of 4.90% for net proceeds of $691.6 million. The net proceeds were used to reduce the outstanding indebtedness under existing secured construction loans, and our $1.65$2.2 billion unsecured senior line of credit.
In March 2017,credit and commercial paper program. Since January 1, 2019, we have completed an offeringthe issuances of $425.0 million of$3.4 billion in unsecured senior notes, due in 2028, at anwith a weighted-average interest rate of 3.95%. Net proceeds and a weighted-average maturity as of $420.5 million wereJune 30, 2020, of 15.2 years.
Proactive management of transition away from LIBOR
LIBOR has been used initiallyextensively in the U.S. and globally as a reference rate for various commercial and financial contracts, including variable-rate debt and interest rate swap contracts. However, it is expected that LIBOR will no longer be used after 2021. To address the increased risk of LIBOR discontinuation, in the U.S. the Alternative Reference Rates Committee (“ARRC”) was established to reducehelp ensure the successful transition from LIBOR. In June 2017, the ARRC selected SOFR, a new index calculated by reference to short-term repurchase agreements backed by U.S. Treasury securities, as its preferred replacement for U.S. dollar LIBOR. We have been closely monitoring developments related to the transition away from LIBOR and have implemented numerous proactive measures to minimize the potential impact of the transition to the Company, specifically:
•We have proactively reduced outstanding LIBOR-based borrowings under our unsecured senior bank term loans and secured construction loans through repayments. From January 2017 through June 2020, we retired approximately $1.5 billion of such debt.
•During 2020, we increased the aggregate amount of our commercial paper program to $1.0 billion from $750.0 million. This program provides us with ability to issue commercial paper notes bearing interest at short-term fixed rates, generally with a maturity of 30 days or less and with a maximum maturity of 397 days from the date of issuance. Our commercial paper program is not subjected to LIBOR and is used for funding short-term working capital needs. As of June 30, 2020, we had no borrowings outstanding under our commercial paper program.
•We prudently manage outstanding borrowings under our $2.2 billion and $750 million unsecured senior lines of credit. As of June 30, 2020, we have not drawn any amounts on our $1.65$750 million unsecured senior line of credit. Excluding LIBOR-based debt held by one of our unconsolidated real estate joint ventures, borrowings under our $2.2 billion unsecured senior line of credit. credit represented our only LIBOR-based debt outstanding as of June 30, 2020, which represented less than 6% of our total debt balance outstanding as of June 30, 2020.
•Our unsecured senior lines of credit contain fallback language generally consistent with the ARRC’s Amendment Approach, which provides a streamlined amendment approach for negotiating a benchmark replacement and introduces clarity with respect to the fallback trigger events and an adjustment to be applied to the successor rate.
•We continue to actively monitor developments by the ARRC and other governing bodies involved in LIBOR transition.
Refer to “3.95% Unsecured Senior Notes Payable Due in 2028” in Note 810 – “Secured and Unsecured Senior Debt”unsecured senior debt” to our unaudited consolidated financial statements under Item 1 of this report and “Item 1A. Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2019, for additional information regardingabout our unsecured senior notes payable.
During the nine months ended September 30, 2017, we completed a partial repaymentmanagement of $200 million of our 2019 Unsecured Senior Bank Term Loan, reducing the total outstanding balance from $400 million to $200 million, and recognized a loss on early extinguishment of debt of $670 thousandrisks related to the write-off of unamortized loan fees. transition away from LIBOR.
Real estate dispositions and common equitypartial interest sales
We expect to continue the disciplined execution of select sales of non-strategic land and non-core/“core-like” operating assets. The sale of non-strategic land and non-core/“core-like” operating assets providesFuture sales will provide an important source of capital to fund a portion of pending and recently completed opportunistic acquisitions and our highly leased value-creation development and redevelopment projects.projects, and also provide significant capital for growth over the next two to three quarters. We may also consider additional sales of partial interests in core Class A properties and/or development projects. For 2017,2020, we expect real estate dispositions and issuances of common equitypartial interest sales ranging from $1.1$1.0 billion to $1.4$1.5 billion. Refer to “Forward Equity Sales Agreements” below within this Item 2 for additional information related to our forward equity sales agreements executed in March 2017. 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. As of the date of this report, we have received proceeds of $51.1 million from our partial interest sale at 9808 and 9868 Scranton Road in our Sorrento Mesa submarket.
As a REIT, generally we are subject to a 100% tax on the net income from real estate asset sales that the IRS characterizes as “prohibited transactions.” We do not expect our sales will be categorized as prohibited transactions. However, unless we meet certain “safe harbor” requirements, whether a real estate asset sale is a prohibited transaction will be based on the facts and circumstances of the sale. Our real estate asset sales may not always meet such safe harbor requirements. Refer to “Item 1A. Risk factors” of our annual report on Form 10-K for the year ended December 31, 2019, for additional information about the “prohibited transaction” tax.
Common equity transactions
In January 2020, we entered into forward equity sales agreements aggregating $1.0 billion to sell an aggregate of 6.9 million shares of our common stock (including the exercise of an underwriters’ option) at a public offering price of $155.00 per share, before underwriting discounts. In March 2020, we settled 3.4 million shares from our forward equity sales agreement and received proceeds of $500.0 million. We expect to receive proceeds of approximately $519.6 million upon settlement of the remaining outstanding forward equity sales agreements, to be further adjusted as provided in the sales agreements.
In addition, in July 2020, we entered into forward equity sales agreements to sell an aggregate of 6.9 million shares of our common stock (including the exercise of an underwriters’ option) at a public offering price of $160.50 per share, before underwriting discounts. We expect to receive proceeds of approximately $1.1 billion, to be further adjusted as provided in the sales agreements. As of the date of this report, no shares have been settled under these forward equity sales agreements.
We expect to settle the outstanding forward equity sales agreements in 2020, and use proceeds to fund pending and recently completed acquisitions and the construction of our highly leased development and redevelopment projects.
In February 2020, we entered into a new ATM common stock offering program, which allows us to sell up to an aggregate of $850.0 million of our common stock. As of June 30, 2020, the remaining availability under this ATM program was approximately $843.7 million. The amount of common equity issued will be subject to market conditions.
For additional information, refer to “Sale of Real Estate Assets and Impairment Charges” in Note 3 – “Investments in Real Estate” and Note 4 – “Investments in Unconsolidated Real Estate Joint Ventures” to our unaudited consolidated financial statements under Item 1 of this report and “Real Estate Asset Sales” under the “Investments in Real Estate” section within this Item 2.
ATM common stock offering program
In October 2016, we established an ATM common stock offering program that allowed us to sell up to an aggregate of $600.0 million of our common stock. During the six months ended June 30, 2017, we completed our ATM program with the sale of 2.1 million shares of common stock for gross proceeds of $245.8 million, or $118.97 per share, and net proceeds of approximately $241.8 million.
In August 2017, we established a new ATM common stock offering program that allows us to sell up to an aggregate of $750.0 million of our common stock. During the three months ended September 30, 2017, we sold an aggregate of 2.1 million shares of common stock for gross proceeds of $249.9 million, or $119.94 per share, and received net proceeds of approximately $245.8 million. As of September 30, 2017, the remaining aggregate amount available under our current program for future sales of common stock is $500.1 million.
Forward equity sales agreements
In March 2017, we executed an offering to sell an aggregate 6.9 million shares of our common stock, including a forward equity component, at a public offering price of $108.55 per share. Approximately 60% of the proceeds was initially targeted to fund value-creation acquisitions and construction, with approximately 40% targeted to fund balance sheet improvements, including reduction in our projected net debt to Adjusted EBITDA – fourth quarter of 2017, annualized by 0.2x, and redemption of our Series E Redeemable Preferred Stock. Aggregate net proceeds from the sale, after underwriters’ discount and issuance costs, of $713.3 million consisted of the following:
2.1 million shares issued at closing with net proceeds of $217.8 million; and
4.8 million shares subject to forward equity sales agreements expiring no later than March 2018 with net proceeds of $495.5 million, which will be further adjusted as provided in the sales agreements. As of September 30, 2017, these forward equity sales agreements have not been settled. We expect to settle these contracts with shares by December 31, 2017.
Other sources
Under our current shelf registration statement filed with the SEC, we may offer common stock, preferred stock, debt, and other securities. These securities may be issued, from time to time, at our discretion based on our needs and market conditions, including, as necessary, the balancing ofto balance our use of incremental debt capital.
WeAdditionally, we hold interests, together with certain third parties,joint venture partners, in companiesreal estate joint ventures that we consolidate in our financial statements. These third partiesjoint venture partners may contribute equity into these entities primarily related to their share of funds for construction and financing-related activities. During the ninesix months ended SeptemberJune 30, 2017,2020, we received $55.8 million of contributions from and sales of noncontrolling interests of $9.9 million.interests.
Uses of capital
Summary of capital expenditures
OurOne of our primary useuses of capital relates to the development, redevelopment, pre-construction, and construction of properties. We currently have projects in our visible growth pipeline aggregating 1.52.3 million RSF of new Class A office/laboratory and tech office space undergoing construction, 6.6 million RSF of near-term and future value-creationintermediate-term development and redevelopment projects, supporting an aggregate of 8.0and 5.3 million SF of ground-upfuture development projects in North America. We incur capitalized construction costs related to development, redevelopment, pre-construction, 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, redevelopment, pre-construction, or construction of a project, during periods when activities necessary to prepare an asset for its intended use are in progress. Refer to “Development of Newthe “New Class A Properties: 2017 Deliveries,” “Developmentdevelopment and Redevelopment of New Class A Properties: 2018 and 2019 Deliveries”,redevelopment properties: current projects” and “Summary of Capital Expenditures,”capital expenditures” subsections of the “Investments in real estate” section within this Item 2 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 ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, of $45.3$55.5 million and $40.8$40.2 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, pre-construction, and construction projects, which aggregated $18.3$32.3 million and $10.5$20.7 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.The increase in capitalized payroll and other indirect project costs for the ninesix months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016,2019 was primarily due to 10 newan increase in our value-creation pipeline projects undergoing construction and pre-construction activities aggregating six projects with approximately 3.34.4 million developable SF that increased pre-construction activitiesRSF in 2017.2020 over 2019. Pre-construction activities include entitlements, permitting, design, site work, and other activities preceding commencement of construction of aboveground building improvements. The advancement of pre-construction efforts is focused on reducing the time required to deliver projects to prospective tenants. These critical activities add significant value for future ground-up development and are required for the vertical construction of buildings. Additionally, shouldShould 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. Expenditures for repairs and maintenance are expensed as incurred.
Fluctuations in our development, redevelopment, and construction activities could result in significant changes to total expenses and net income. For example, had we experienced a 10% reduction in development, redevelopment, and construction activities without a corresponding decrease in indirect project costs, including interest and payroll, total expenses would have increased by approximately $6.4$8.8 million for the ninesix months ended SeptemberJune 30, 2017.2020.
We alsouse third-party brokers to assist in our leasing activity, who are paid on a contingent basis upon successful leasing. We are required to 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 that 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 costsbeen successfully executed. During the six months ended June 30, 2020, we 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, 2017of $26.4 million. Costs that we incur to negotiate or arrange a lease regardless of its outcome, such as fixed employee compensation, tax, or legal advice to negotiate lease terms, and 2016, were $44.4 million and $23.9 million, respectively, of which $10.3 million and $9.4 million, respectively, represented capitalized and deferred payrollother costs, directly related and essential to our leasing activities during each respective period. The increase in direct leasing costs capitalized during the nine months ended September 30, 2017, compared to nine months ended September 30, 2016, was due to the increase in leasing activity in 2017. For the nine months ended September 30, 2017, we completed 3.2 million RSF of new, renewed, and re-leased space with a weighted-average lease term of 7.5 years compared to 1.9 million RSF of leasing activity with a weighted-average lease term of 5.7 years during the nine months ended September 30, 2016.are expensed as incurred.
Acquisitions
Refer to the “Acquisitions” insection of Note 3 – “Investments in Real Estate”real estate” to our unaudited consolidated financial statements under Item 1 of this report, and the “Acquisitions” undersubsection of the “Investments in Real Estate”real estate” section within this Item 2 of this report for more information on our acquisitions.
7.00% Series D cumulative convertible preferred stock repurchases
Dividends
During the ninesix months ended SeptemberJune 30, 2017, we repurchased, in privately negotiated transactions, 501,115 shares of our Series D Convertible Preferred Stock at an aggregate price of $17.9 million, or $35.79 per share. We recognized a preferred stock redemption charge of $5.8 million during the nine months ended September 30, 2017, including the write-off of original issuance costs of approximately $391 thousand. During the remainder of 2017, we may seek to repurchase additional shares of our Series D Convertible Preferred Stock, subject to market conditions. To the extent that we repurchase additional shares of our Series D Convertible Preferred Stock, we expect to fund such amounts with the proceeds from issuances of our common stock, subject to market conditions.
6.45% Series E cumulative redeemable preferred stock redemption
In March 2017, we announced the redemption of our Series E Redeemable Preferred Stock. On April 14, 2017, we completed the redemption of all 5.2 million outstanding shares of our Series E Redeemable Preferred Stock at a redemption price of $25.00 per share, or an aggregate $130.0 million, plus accrued dividends.
Dividends
During the nine months ended September 30, 20172020 and 2016,2019, we paid the following dividends (in thousands):
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Change |
Common stock | $ | 256,259 | | | $ | 218,914 | | | $ | 37,345 | |
Series D Convertible Preferred Stock | — | | | 2,132 | | | (2,132) | |
| $ | 256,259 | | | $ | 221,046 | | | $ | 35,213 | |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2017 | | 2016 | | Change |
Common stock dividends | $ | 229,814 |
| | $ | 177,966 |
| | $ | 51,848 |
|
7.00% Series D cumulative convertible preferred stock dividends | 4,125 |
| | 11,198 |
| | (7,073 | ) |
6.45% Series E cumulative redeemable preferred stock dividends | 4,192 |
| | 6,289 |
| | (2,097 | ) |
| $ | 238,131 |
| | $ | 195,453 |
| | $ | 42,678 |
|
The increase in dividends paid on our common stock forduring the ninesix months ended SeptemberJune 30, 2017,2020, compared to the ninesix months ended SeptemberJune 30, 2016,2019, was primarily due to an increase in number of common shares outstanding at each record date of December 31, 2016, and December 31, 2015,subsequent to January 1, 2019, as a result of issuances of common stock issuances under our ATM program and settlement of forward equity sales agreements, and partially due to the increase in the related dividends to $2.52$2.06 per common share paid during the ninesix months ended SeptemberJune 30, 2017,2020, from $2.37$1.94 per common share paid during the ninesix months ended SeptemberJune 30, 2016. 2019.
The decrease in dividends paid on our Series D Convertible Preferred Stock during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was primarily due to thea decrease in number of shares outstanding to 3.0as a result of the repurchase of 275,000 outstanding shares of our Series D Convertible Preferred Stock in 2019 and the conversion of the remaining 2.3 million outstanding shares as of Septemberour Series D Convertible Preferred Stock into shares of our common stock during 2019. As of June 30, 2017, from 6.5 million2020, we had no outstanding shares as of September 30, 2016, due to the repurchases of shares since October 1, 2016.Series D Convertible Preferred Stock.
Contractual obligations and commitments
Contractual obligations as of SeptemberJune 30, 2017,2020, consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments by Period | | | | | | |
| Total | | 2020 | | 2021–2022 | | 2023–2024 | | Thereafter |
Secured and unsecured debt(1)(2) | $ | 7,549,352 | | | $ | 3,331 | | | $ | 14,127 | | | $ | 1,878,107 | | | $ | 5,653,787 | |
Estimated interest payments on fixed-rate debt(3) | 3,044,443 | | | 142,537 | | | 569,201 | | | 511,055 | | | 1,821,650 | |
Ground lease obligations – operating leases | 706,394 | | | 7,270 | | | 30,242 | | | 30,811 | | | 638,071 | |
Ground lease obligations – finance lease | 36,074 | | | 207 | | | 832 | | | 840 | | | 34,195 | |
Other obligations | 27,130 | | | 380 | | | 4,895 | | | 5,469 | | | 16,386 | |
Total | $ | 11,363,393 | | | $ | 153,725 | | | $ | 619,297 | | | $ | 2,426,282 | | | $ | 8,164,089 | |
|
| | | | | | | | | | | | | | | | | | | |
| | | Payments by Period |
| Total | | 2017 | | 2018-2019 | | 2020-2021 | | Thereafter |
Secured and unsecured debt (1) (2) | $ | 4,828,766 |
| | $ | 732 |
| | $ | 925,546 |
| | $ | 1,181,834 |
| | $ | 2,720,654 |
|
Estimated interest payments on fixed-rate and hedged variable-rate debt (3) | 1,006,863 |
| | 35,059 |
| | 306,472 |
| | 247,533 |
| | 417,799 |
|
Estimated interest payments on variable-rate debt (4) | 8,735 |
| | 1,765 |
| | 6,970 |
| | — |
| | — |
|
Ground lease obligations | 584,022 |
| | 4,037 |
| | 24,346 |
| | 23,724 |
| | 531,915 |
|
Other obligations | 3,607 |
| | 399 |
| | 3,107 |
| | 101 |
| | — |
|
Total | $ | 6,431,993 |
| | $ | 41,992 |
| | $ | 1,266,441 |
| | $ | 1,453,192 |
| | $ | 3,670,368 |
|
| |
(1) | Amounts represent principal amounts due and exclude unamortized debt premiums/discounts and deferred financing costs reflected on the consolidated balance sheets. |
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(2) | Payment dates reflect any extension options that we control. |
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(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 hedge agreements, interest payment dates, and scheduled maturity dates. |
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(4) | The interest payments on variable-rate debt are based on the interest rates in effect as of September 30, 2017. |
(1)Amounts represent principal amounts due and exclude unamortized premiums (discounts) and deferred financing costs reflected in the consolidated balance sheets under Item 1 of this report.
(2)Payment dates reflect any extension options that we control.
(3)Amounts are based upon contractual interest rates, including interest payment dates and scheduled maturity dates.
Secured notes payable
Secured notes payable as of SeptemberJune 30, 2017,2020, consisted of ninesix notes secured by 2011 properties. Our secured notes payable typically require monthly payments of principal and interest and had a weighted-average interest rate of approximately 3.80%3.57%. As of SeptemberJune 30, 2017,2020, the total book valuesvalue of our investmentinvestments in real estate securing debt werewas approximately $2.3$1.1 billion. AsAdditionally, as of SeptemberJune 30, 2017,2020, our entire secured notes payable balance of $344.8 million, including unamortized discounts and deferred financing cost, were composed of approximately $902.2 million and $251.7 million of fixed-rate/hedged variable-rate debt and variable-rate debt, respectively.costs, was fixed-rate debt.
Unsecured senior notes payable, unsecured senior bank term loans, and $1.65$2.2 billion unsecured senior line of credit, and $750.0 million unsecured senior line of credit
The requirements of, and our actual performance with respect to, the key financial covenants under our 2.75% unsecured senior notes payable (“2.75% Unsecured Senior Notes”), 4.60% unsecured senior notes payable (“4.60% Unsecured Senior Notes”), 3.90% unsecured senior notes payable (“3.90% Unsecured Senior Notes”), 4.30% unsecured senior notes payable (“4.30% Unsecured Senior Notes”), 3.95% unsecured senior notes payable due in 2027 (“3.95% Unsecured Senior Notes Due in 2027”), 4.50% unsecured senior notes payable (“4.50% Unsecured Senior Notes”), and 3.95% unsecured senior notes payable due in 2028 (“3.95% Unsecured Senior Notes Due in 2028) as of SeptemberJune 30, 2017,2020, were as follows:
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| | | | | | | | | | | | | |
Covenant Ratios(1) | | Requirement | | ActualJune 30, 2020 |
Total Debt to Total Assets | | Less than or equal to 60% | | 37%34% |
Secured Debt to Total Assets | | Less than or equal to 40% | | 9%2% |
Consolidated EBITDA(2) to Interest Expense | | Greater than or equal to 1.5x | | 6.4x6.9x |
Unencumbered Total Asset Value to Unsecured Debt | | Greater than or equal to 150% | | 272%273% |
| |
(1) | For definitions of the ratios, refer to the indenture at Exhibits 4.3, 4.13, and 4.18 hereto and the related supplemental indentures at Exhibits 4.4, 4.7, 4.9, 4.11, 4.14, 4.16, and 4.19 hereto, which are each listed under Item 6 of this report. |
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(2) | (1)All covenant ratio titles utilize terms as defined in the respective debt agreements. (2)The calculation of consolidated EBITDA is based on the definitions contained in our loan agreements and is not directly comparable to the computation of EBITDA as described in Exchange Act Release No. 47226. |
The requirements of, and our actual performance with respect to the key financial covenants under our $1.65 billion unsecured senior linecomputation of credit and unsecured senior bank term loansEBITDA as of September 30, 2017, were as follows:described in Exchange Act Release No. 47226. |
| | | | |
Covenant Ratios (1)
| | Requirement | | Actual |
Leverage Ratio | | Less than or equal to 60.0% | | 30.9% |
Secured Debt Ratio | | Less than or equal to 45.0% | | 7.3% |
Fixed-Charge Coverage Ratio | | Greater than or equal to 1.50x | | 3.83x |
Unsecured Leverage Ratio | | Less than or equal to 60.0% | | 32.6% |
Unsecured Interest Coverage Ratio | | Greater than or equal to 1.50x | | 6.49x |
| |
(1) | For definitions of the ratios, refer to the amended unsecured senior line of credit and unsecured senior bank term loan agreements at Exhibits 10.1, 10.2, and 10.3 hereto, which are each listed under 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.
The requirements of, and our actual performance with respect to, the key financial covenants under our $2.2 billion unsecured senior line of credit and $750.0 million unsecured senior line of credit as of June 30, 2020, were as follows:
| | | | | | | | | | | | | | | | | |
Covenant Ratios(1) | | Requirement | | June 30, 2020 | |
Leverage Ratio | | Less than or equal to 60.0% | | 30.7% | |
Secured Debt Ratio | | Less than or equal to 45.0% | | 1.4% | |
Fixed-Charge Coverage Ratio | | Greater than or equal to 1.50x | | 3.77x | |
Unsecured Interest Coverage Ratio | | Greater than or equal to 1.75x | | 5.98x | |
(1)All covenant ratio titles utilize terms as defined in each respective credit agreement.
Estimated interest payments
Estimated interest payments on our fixed-rate and hedged variable-rate debt were calculated based upon contractual interest rates, including estimated interest expense related to interest rate hedge agreements, interest payment dates and scheduled maturity dates. As of SeptemberJune 30, 2017, approximately 88%2020, 94% of our debt was fixed-rate debt. For additional information regarding our debt, or variable-rate debt subject to interest rate hedge agreements. Referrefer to Note 910 – “Interest Rate Hedge Agreements”“Secured and unsecured senior debt” to our unaudited consolidated financial statements under Item 1 of this reportreport.
Ground lease obligations
Operating lease agreements
Ground lease obligations as of June 30, 2020, included leases for further information. The remaining 12%33 of our debtproperties, which accounted for approximately 11% of our total number of properties. Excluding one ground lease that expires in 2036 related to one operating property with a net book value of $7.5 million as of SeptemberJune 30, 2017, was unhedged variable-rate debt based primarily on LIBOR. Interest2020, our ground lease obligations have remaining lease terms ranging from approximately 33 to 94 years, including available extension options that we are reasonably certain to exercise.
As of June 30, 2020, the remaining contractual payments onunder ground and office lease agreements in which we are the lessee aggregated $706.4 million and $27.1 million, respectively. We are required to recognize a right-of-use asset and a related liability to account for our unhedged variable-rate debt have been calculatedfuture obligations under operating lease arrangements in which we are the lessee. The operating lease liability is measured based on interest ratesthe present value of the remaining lease payments, including payments during the term under our extension options that we are reasonably certain to exercise. The right-of-use asset is equal to the corresponding operating lease liability, adjusted for the initial direct leasing cost and any other consideration exchanged with the landlord prior to the commencement of the lease, as well as adjustments to reflect favorable or unfavorable terms of an acquired lease when compared with market terms at the time of acquisition. As of June 30, 2020, the present value of the remaining contractual payments, aggregating $733.5 million, under our operating lease agreements, including our extension options that we are reasonably certain to exercise, was $291.7 million, which is classified in effect asaccounts payable, accrued expenses, and other liabilities in our consolidated balance sheets. As of SeptemberJune 30, 2017.2020, the weighted-average remaining lease term of operating leases in which we are the lessee was approximately 43 years, and the weighted-average discount rate was 5.17%. Our corresponding operating lease right-of-use assets, adjusted for initial direct leasing costs and other consideration exchanged with the landlord prior to the commencement of the lease, aggregated $283.6 million. We classify the right-of-use asset in other assets in our consolidated balance sheets. Refer to the “Lease accounting” section of Note 82 – “Secured and Unsecured Senior Debt”“Summary of significant accounting policies” to our unaudited consolidated financial statements under Item 1 of this report for additional information regarding our debt.information.
Interest rate hedge agreements
We utilize interest rate derivatives to hedge a portion of our exposure to volatility in variable interest rates primarily associated with our $1.65 billion unsecured senior line of credit, unsecured senior bank term loans, and variable-rate secured construction loans. Our derivative instruments include interest rate swaps and interest rate caps.
Our interest rate swap 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 of our interest rate swap agreements is based on 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.
We have entered into master derivative agreements with our counterparties. 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 respective counterparties to address and minimize certain risks associated with our interest rate hedge agreements. In order to limit our risk of non-performance by an individual counterparty under our interest rate hedge agreements, these agreements are spread among various counterparties. The largest aggregate notional amount in effect at any single point in time with an individual counterparty in our interest rate hedge agreements existing as of September 30, 2017, was $250 million. If one or more of our counterparties fail to perform under our interest rate hedge 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 hedge agreements.
Ground lease obligations
Ground lease obligations as of September 30, 2017, included leases for 27 of our properties, which accounted for approximately 13% of our total number of properties, and one land development parcel. Excluding one ground lease related to one operating property that expires in 2036 with a net book value of $9.4 million as of September 30, 2017, our ground lease obligations have remaining lease terms ranging from approximately 36 to 97 years, including extension options.
Commitments
As of SeptemberJune 30, 2017,2020, remaining aggregate costs under contract for the construction of properties undergoing development, redevelopment, and improvements under the terms of leases approximated $571.6 million.$1.2 billion. 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 $173.6 million for certain non-real estate investments over the next several years.
We executed an agreement to purchase a 10% interest in a joint venture with Uber and the Golden State Warriors. The Golden State Warriors organization owns two land parcels at 1655 and 1715 Third Street in our Mission Bay/SoMa submarket of San Francisco and is expected to contribute the land to this joint venture. Our initial cash contribution is expected to be in a range from $35 million to $40 million and will be funded at closing of the joint venture in 2018. The joint venture will acquire the land parcels after completion of below-grade improvements to the building foundation and parking garage and will complete vertical construction of two buildings aggregating 580,000 RSF, which will be leased to Uber.
We have existing office space aggregating 46,356 RSF at 161 First Street/50 Rogers Street in our Alexandria Center® at Kendall Square (“ACKS”) campus that we are required to partially convert to multifamily residential space, pursuant to our entitlements for our ACKS campus. Pursuant to these requirements, we expect to begin construction of the conversion to multifamily residential in the first half of 2018.
In addition, we have letters of credit and performance obligations aggregating $39.5$11.1 million primarily related to construction projects.
We are committed to funding approximately $224.9 million for non-real estate investments primarily related to our agreement to purchaseinvestments in limited partnerships. Our funding commitments expire at various dates over the next 11 years, with a 10% interest in a joint venture with Uber and the Golden State Warriors.weighted-average expiration of 8.5 years as of June 30, 2020.
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.
Accumulated
Foreign currency translation gains and losses
The following table presents the changes in accumulated other comprehensive income
Accumulated other comprehensive incomeloss attributable to Alexandria Real Estate Equities, Inc. consists of’s stockholders during the following (in thousands):
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| | | | | | | | | | | | | | | | |
| | Net Unrealized Gain (Loss) on: | | |
| | Available-for- Sale Equity Securities | | Interest Rate Hedge Agreements | | Foreign Currency Translation | | Total |
Balance as of December 31, 2016 | | $ | 19,293 |
| | $ | 405 |
| | $ | (14,343 | ) | | $ | 5,355 |
|
| | | | | | | | |
Other comprehensive income before reclassifications | | 23,414 |
| | 812 |
| | 7,592 |
| | 31,818 |
|
Amounts reclassified from other comprehensive income | | 2,482 |
| | 1,810 |
| | 2,421 |
| | 6,713 |
|
| | 25,896 |
| | 2,622 |
| | 10,013 |
| | 38,531 |
|
Amounts attributable to noncontrolling interests | | — |
| | — |
| | (22 | ) | | (22 | ) |
Net other comprehensive income | | 25,896 |
| | 2,622 |
| | 9,991 |
| | 38,509 |
|
| | | | | | | | |
Balance as of September 30, 2017 | | $ | 45,189 |
| | $ | 3,027 |
| | $ | (4,352 | ) | | $ | 43,864 |
|
Available-for-sale equity securities
Changes in our accumulated other comprehensive income balance relatesix months ended June 30, 2020, due to the increase in fair value of our investments in certain publicly held entities. We reclassify amounts from accumulated other comprehensive income upon recognition of gains and losses on sales and impairment write-downs of investments in these publicly held entities.
Interest rate hedge agreements
Changes in our accumulated other comprehensive income balance relate to the change in fair value of our interest rate hedge agreements. We reclassify amounts from accumulated other comprehensive income as we recognize interest expense related to the hedged variable-rate debt instrument.
Foreign currency translation
Changes in our accumulated other comprehensive income balance relate to changes in the foreign exchange rates for our real estate investments in Canada and Asia. Additionally, weAsia (in thousands). We reclassify unrealized foreign currency translation gains and losses into net income as we dispose of these holdings.
| | | | | | | | | | | | |
| | | | Total | | |
Balance as of December 31, 2019 | | | | $ | (9,749) | | | |
| | | | | | |
Other comprehensive loss before reclassifications | | | | (3,331) | | | |
Net other comprehensive loss | | | | (3,331) | | | |
| | | | | | |
Balance as of June 30, 2020 | | | | $ | (13,080) | | | |
Issuer and guarantor subsidiary summarized 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 Issuer’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 summarized financial information presents on a combined basis for the Issuer and the Guarantor Subsidiary balance sheet financial information as of June 30, 2020, and December 31, 2019, and results of operations and comprehensive income for the six months ended June 30, 2020, and year ended December 31, 2019. The information presented below excludes eliminations necessary to arrive at the information on a consolidated basis. In presenting the summarized financial statements, the equity method of accounting has been applied to (i) the Issuer’s interests in the Guarantor Subsidiary, (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 assets and liabilities have been allocated to the Issuer and the Guarantor Subsidiary generally based on legal entity ownership.
The following tables present combined summarized financial information for the Issuer and Guarantor Subsidiary. Amounts provided do not represent our total consolidated amounts, as of June 30, 2020, and December 31, 2019, and for the six months ended June 30, 2020, and year ended December 31, 2019 (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
Assets: | | | | |
Cash, cash equivalents, and restricted cash | | $ | 48,774 | | | $ | 4,432 | |
Other assets | | 92,316 | | | 71,036 | |
Total assets | | $ | 141,090 | | | $ | 75,468 | |
| | | | |
Liabilities: | | | | |
Unsecured senior notes payable | | $ | 6,738,486 | | | $ | 6,044,127 | |
Unsecured senior lines of credit | | 440,000 | | | 384,000 | |
Other liabilities | | 304,502 | | | 278,858 | |
Total liabilities | | $ | 7,482,988 | | | $ | 6,706,985 | |
| | | | |
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2020 | | Year Ended December 31, 2019 |
Total revenues | | $ | 11,179 | | | $ | 22,731 | |
Total expenses | | (151,220) | | | (317,896) | |
Net loss | | (140,041) | | | (295,165) | |
Net income attributable to unvested restricted stock awards and preferred stock | | (3,574) | | | (12,170) | |
Net loss attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | | $ | (143,615) | | | $ | (307,335) | |
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Critical accounting policies
Refer to our annual report on Form 10‑K10-K for the year ended December 31, 2016,2019, for a discussion of our critical accounting policies which includerelated to REIT compliance, investments in real estate, and properties classified as held for sale, impairment of long-lived assets, capitalization of costs, accounting forequity investments, interest rate hedge agreements, recognition of rental revenueliability and tenant recoveries,right-of-use assets related to operating leases in which we are the lessee, and monitoring of tenant credit quality. There were no significant changes to these policies during the nine months ended September 30, 2017.
Non-GAAP measures and definitions
This section contains additional information of certain non-GAAP financial measures and the reasons why we use these supplemental measures of performance and believe they provide useful information to investors, as well as the definitions of other terms used in this report.
Funds from operations and funds from operations, as adjusted, attributable to Alexandria Real Estate Equities, Inc.’s common stockholders
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 NAREITNareit Board of Governors established funds from operations as an improved measurement tool. Since its introduction, funds from operations has become a widely used non-GAAP financial measure among equity REITs. We believe that funds from operations is helpful to investors as an additional measure of the performance of an equity REIT. Moreover, we believe that funds from operations, 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 recognized because of real estate investment and disposition decisions, financing decisions, capital structures, andstructure, capital market transactions. We compute fundstransactions, and variances resulting from operations in accordance withthe volatility of market conditions outside of our control. On January 1, 2019, we adopted standards established by the NAREITNareit Board of Governors in its April 2002November 2018 White Paper and related implementation guidance (the “NAREIT“Nareit White Paper”). on a prospective basis. The NAREITNareit White Paper defines funds from operations as net income (computed in accordance with GAAP), excluding gains (losses) fromor losses on sales of depreciable real estate, and land parcels and impairments of depreciable real estate, (excluding land parcels), plus real estate-related depreciation and amortization of operating real estate assets, and after adjustments for our share of consolidated and unconsolidated partnerships and real estate joint ventures. Impairments represent the write-down of assets when fair value over the recoverability period is less than the carrying value due to changes in general market conditions and do not necessarily reflect the operating performance of the properties during the corresponding period.
We compute funds from operations, as adjusted, as funds from operations calculated in accordance with the NAREITNareit White Paper, less/plusexcluding significant gains/gains, losses, and impairments realized on non-real estate investments, unrealized gains or losses on the sale ofnon-real estate investments, plusgains or losses on early extinguishment of debt, gains or losses on early termination of interest rate hedge agreements, preferred stock redemption charges, impairments of non-depreciable real estate, impairments of non-real estate investments, and deal costs, the income tax effect related to such items, and the amount of such items that is allocable to our unvested restricted stock awards. Neither funds from operations nor funds from operations, as adjusted, should be considered as alternatives to net income (determined in accordance with GAAP) as indications of financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as measures of liquidity, nor are they indicative of the availability of funds for our cash needs, including our ability to make distributions.
The following table reconciles net income to funds from operations for the share of consolidated real estate joint ventures attributable to noncontrolling interests and our share of unconsolidated real estate joint ventures for the three and six months ended June 30, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Noncontrolling Interest Share of Consolidated Real Estate Joint Ventures | | | | Our Share of Unconsolidated Real Estate Joint Ventures | | |
| June 30, 2020 | | | | June 30, 2020 | | |
| Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
Net income | $ | 13,907 | | | $ | 25,820 | | | $ | 3,893 | | | $ | 777 | |
Depreciation and amortization | 15,775 | | | 31,645 | | | 2,858 | | | 5,501 | |
Impairment of real estate | — | | | — | | | — | | | 7,644 | |
Funds from operations | $ | 29,682 | | | $ | 57,465 | | | $ | 6,751 | | | $ | 13,922 | |
| | | | | | | |
The following tables present a reconciliation of net income (loss) attributable to Alexandria Real Estate Equities, Inc.’s common stockholders, the most directly comparable financial measure calculated and presented in accordance with GAAP, including our share of amounts from consolidated and unconsolidated real estate joint ventures, to funds from operations attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – diluted, and funds from operations attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – diluted, as adjusted, and the related per share amounts. Per share amounts allocable to unvested restricted stock awards are not materialfor the three and are not presented separately within the per share table below.six months ended June 30, 2020 and 2019. Per share amounts may not add due to rounding.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Net income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – basic and diluted | | $ | 226,600 | | | $ | 76,330 | | | $ | 244,845 | | | $ | 200,181 | |
Depreciation and amortization of real estate assets(1) | | 165,040 | | | 134,437 | | | 337,668 | | | 268,524 | |
Noncontrolling share of depreciation and amortization from consolidated real estate JVs | | (15,775) | | | (6,744) | | | (31,645) | | | (12,163) | |
Our share of depreciation and amortization from unconsolidated real estate JVs | | 2,858 | | | 973 | | | 5,501 | | | 1,819 | |
Impairment of real estate – rental properties | | — | | | — | | | 7,644 | | | — | |
Assumed conversion of 7.00% Series D cumulative convertible preferred stock | | — | | | 1,005 | | | — | | | 2,031 | |
Allocation to unvested restricted stock awards | | (2,228) | | | (1,445) | | | (4,531) | | | (3,740) | |
Funds from operations attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – diluted(1) | | 376,495 | | | 204,556 | | | 559,482 | | | 456,652 | |
Unrealized gains on non-real estate investments | | (171,652) | | | (11,058) | | | (154,508) | | | (83,264) | |
Impairment of non-real estate investments | | 4,702 | | (2) | — | | | 24,482 | | (3) | — | |
Impairment of real estate | | 13,218 | | (4) | — | | | 15,221 | | (4) | — | |
Loss on early extinguishment of debt | | — | | | — | | | — | | | 7,361 | |
Preferred stock redemption charge | | — | | | — | | | — | | | 2,580 | |
Removal of assumed conversion of 7.00% Series D cumulative convertible preferred stock | | — | | | (1,005) | | | — | | | (2,031) | |
Allocation to unvested restricted stock awards | | 2,251 | | | 179 | | | 1,711 | | | 1,157 | |
Funds from operations attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – diluted, as adjusted | | $ | 225,014 | | | $ | 192,672 | | | $ | 446,388 | | | $ | 382,455 | |
(1)Calculated in accordance with standards established by the Nareit Board of Governors.
(2)Primarily relates to two investments in privately held entities that do not report NAV.
(3)Primarily relates to four investments in privately held entities that do not report NAV.
(4)Primarily relates to a $10 million impairment charge to write off the pre-acquisition deposit for a previously pending acquisition, which was recognized in April 2020 concurrently with the submission of our notice to terminate the transaction.
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| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands)
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | | $ | 51,273 |
| | $ | 5,452 |
| | $ | 108,564 |
| | $ | (126,014 | ) |
Depreciation and amortization | | 107,788 |
| | 77,133 |
| | 309,069 |
| | 218,168 |
|
Noncontrolling share of depreciation and amortization from consolidated real estate JVs | | (3,608 | ) | | (2,224 | ) | | (10,985 | ) | | (6,751 | ) |
Our share of depreciation and amortization from unconsolidated real estate JVs | | 383 |
| | 658 |
| | 1,119 |
| | 2,052 |
|
Gain on sales of real estate – rental properties | | — |
| | — |
| | (270 | ) | | — |
|
Our share of gain on sales of real estate from unconsolidated real estate JVs | | (14,106 | ) | | — |
| | (14,106 | ) | | — |
|
Gain on sales of real estate – land parcels | | — |
| | (90 | ) | | (111 | ) | | (90 | ) |
Impairment of real estate – rental properties | | — |
| | 6,293 |
| | 203 |
| | 94,688 |
|
Allocation to unvested restricted stock awards | | (957 | ) | | (438 | ) | | (2,185 | ) | | (14 | ) |
Funds from operations attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – diluted (1) | | 140,773 |
| | 86,784 |
| | 391,298 |
| | 182,039 |
|
Non-real estate investment income | | — |
| | — |
| | — |
| | (4,361 | ) |
Impairment of land parcels and non-real estate investments | | — |
| | 4,886 |
| | 4,491 |
| | 101,028 |
|
Loss on early extinguishment of debt | | — |
| | 3,230 |
| | 670 |
| | 3,230 |
|
Preferred stock redemption charge | | — |
| | 13,095 |
| | 11,279 |
| | 25,614 |
|
Allocation to unvested restricted stock awards | | — |
| | (359 | ) | | (227 | ) | | (1,736 | ) |
Funds from operations attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – diluted, as adjusted | | $ | 140,773 |
| | $ | 107,636 |
| | $ | 407,511 |
| | $ | 305,814 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(Per share) | | 2020 | | 2019 | | 2020 | | 2019 |
Net income per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – diluted | | $ | 1.82 | | | $ | 0.68 | | | $ | 1.99 | | | $ | 1.80 | |
Depreciation and amortization of real estate assets(1) | | 1.22 | | | 1.15 | | | 2.53 | | | 2.32 | |
Impairment of real estate – rental properties | | — | | | — | | | 0.06 | | | — | |
Allocation to unvested restricted stock awards | | (0.01) | | | — | | | (0.04) | | | (0.04) | |
Funds from operations per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – diluted(1) | | 3.03 | | | 1.83 | | | 4.54 | | | 4.08 | |
Unrealized gains on non-real estate investments | | (1.38) | | | (0.10) | | | (1.25) | | | (0.75) | |
Impairment of non-real estate investments | | 0.04 | | (2) | — | | | 0.20 | | | — | |
Impairment of real estate | | 0.11 | | (2) | — | | | 0.12 | | | — | |
Loss on early extinguishment of debt | | — | | | — | | | — | | | 0.07 | |
Preferred stock redemption charge | | — | | | — | | | — | | | 0.02 | |
Allocation to unvested restricted stock awards | | 0.01 | | | — | | | 0.02 | | | 0.02 | |
Funds from operations per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – diluted, as adjusted | | $ | 1.81 | | | $ | 1.73 | | | $ | 3.63 | | | $ | 3.44 | |
| | | | | | | | |
Weighted-average shares of common stock outstanding(3) for calculations of: | | | | | | | | |
EPS – diluted | | 124,448 | | | 111,501 | | | 123,117 | | | 111,279 | |
Funds from operations – diluted, per share | | 124,448 | | | 112,077 | | | 123,117 | | | 111,857 | |
Funds from operations – diluted, as adjusted, per share | | 124,448 | | | 111,501 | | | 123,117 | | | 111,279 | |
(1)Calculated in accordance with standards established by the Nareit Board of Governors.
(2)Refer to footnotes on the previous page for additional information.
(3)Refer to the definition of “Weighted-average shares of common stock outstanding – diluted” within this section of this Item 2 for additional information. |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Per share) | | 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders | | $ | 0.55 |
| | $ | 0.07 |
| | $ | 1.20 |
| | $ | (1.69 | ) |
Depreciation and amortization | | 1.11 |
| | 0.97 |
| | 3.26 |
| | 2.85 |
|
Our share of gain on sales of real estate from unconsolidated real estate JVs | | (0.15 | ) | | — |
| | (0.15 | ) | | — |
|
Impairment of real estate – rental properties | | — |
| | 0.08 |
| | — |
| | 1.27 |
|
Funds from operations per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – diluted (1) | | 1.51 |
| | 1.12 |
| | 4.31 |
| | 2.43 |
|
Non-real estate investment income | | — |
| | — |
| | — |
| | (0.06 | ) |
Impairment of land parcels and non-real estate investments | | — |
| | 0.06 |
| | 0.05 |
| | 1.34 |
|
Loss on early extinguishment of debt | | — |
| | 0.04 |
| | 0.01 |
| | 0.04 |
|
Preferred stock redemption charge | | — |
| | 0.17 |
| | 0.12 |
| | 0.34 |
|
Funds from operations per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – diluted, as adjusted | | $ | 1.51 |
| | $ | 1.39 |
| | $ | 4.49 |
| | $ | 4.09 |
|
| | | | | | | | |
Weighted-average shares of common stock outstanding for calculating funds from operations per share and funds from operations, as adjusted, per share – diluted | | 93,296 |
| | 77,402 |
| | 90,766 |
| | 74,778 |
|
| |
(1) | Calculated in accordance with standards established by the NAREIT Board of Governors in its April 2002 White Paper and related implementation guidance. |
Adjusted EBITDA and Adjusted EBITDA marginsmargin
We use Adjusted EBITDA as a supplemental performance measure of real estate rentalour operations, for financial and operational decision making,decision-making, and as a supplemental or additional means of evaluating period-to-period comparisons on a consistent basis. Adjusted EBITDA is calculated as earnings before interest, taxes, depreciation, and amortization (“EBITDA”), excluding stock compensation expense, gains or losses on early extinguishment of debt, gains or losses on sales of real estate, and impairments. impairments of real estate. Adjusted EBITDA also excludes unrealized gains or losses and significant realized gains and impairments that result from our non-real estate investments. These non-real estate investment amounts are classified in our consolidated statements of operations outside of revenues.
We believe Adjusted EBITDA provides investors with relevant and useful information becauseas it allows investors to view income fromevaluate the operating performance of our business activities without having to account for differences recognized because of real estate rental operations on an unleveraged basis beforeand non-real estate investment and disposition decisions, financing decisions, capital structure, capital market transactions, and variances resulting from the effectsvolatility of interest, taxes, depreciation and amortization, stock compensation expense,market conditions outside of our control. For example, we exclude gains or losses on the early extinguishment of debt gains or losses on sales of real estate, and impairments.
By excluding interest expense and gains or losses on early extinguishment of debt, Adjusted EBITDA allowsto allow investors to measure our performance independent of our indebtedness and capital structure and indebtedness. We believe that excluding charges related to share-based compensation facilitates a comparison of our operations across periods without the variances caused by the volatility of the expense (which depends on market forces outside our control).structure. We believe that adjusting for the effects of impairments and gains or losses on sales of real estate, and significant impairments and significant gains on the sale of non-real estate investments allows investors to evaluate performance from period to period on a consistent basis without having to account for differences recognized because of real estate and non-real estate investment and disposition decisions. We believe that excluding charges related to stock compensation and unrealized gains or losses facilitates for investors a comparison of our business activities across periods without the volatility resulting from market forces outside of our control. Adjusted EBITDA has limitations as a measure of our performance. Adjusted EBITDA does not reflect our historical cash expenditures or future cash requirements for capital expenditures or contractual commitments. While Adjusted EBITDA is a relevant measure of performance, it does not represent net income (loss) or cash flows from operations calculated and presented in accordance with GAAP, and it should not be considered as an alternative to those indicators in evaluating performance or liquidity.
Our calculation of Adjusted EBITDA margin divides Adjusted EBITDA by our revenues, as adjusted. We believe that revenues, as adjusted, provides a denominator for Adjusted EBITDA margin that is calculated on a basis more consistent with that of the Adjusted EBITDA numerator. Specifically, revenues, as adjusted, includes the same realized gains on, and impairments of, non-real estate investments that are included in the reconciliation of Adjusted EBITDA. We believe that the consistent application of results from our non-real estate investments to both the numerator and denominator of Adjusted EBITDA margin provides a more useful calculation for the comparison across periods.
The following table reconciles net income
(loss) and revenues, the most directly comparable financial
measuremeasures calculated and presented in accordance with GAAP, to Adjusted EBITDA
and revenues, as adjusted, respectively, for the three and six months ended June 30, 2020 and 2019 (dollars in thousands):
| | | | | | | | | | | | | | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | 2020 | | 2019 | | 2020 | | 2019 |
| 2017 | | 2016 | | 2017 | | 2016 | |
Net income (loss) | $ | 59,546 |
| | $ | 28,559 |
| | $ | 148,597 |
| | $ | (69,591 | ) | |
Net income | | Net income | $ | 243,561 | | | $ | 87,179 | | | $ | 274,239 | | | $ | 223,997 | |
Interest expense | 31,031 |
| | 25,850 |
| | 92,563 |
| | 75,730 |
| Interest expense | 45,014 | | | 42,879 | | | 90,753 | | | 81,979 | |
Income taxes | 1,305 |
| | 355 |
| | 3,405 |
| | 2,374 |
| Income taxes | 1,406 | | | 890 | | | 2,747 | | | 2,187 | |
Depreciation and amortization | 107,788 |
| | 77,133 |
| | 309,069 |
| | 218,168 |
| Depreciation and amortization | 168,027 | | | 134,437 | | | 343,523 | | | 268,524 | |
Stock compensation expense | 7,893 |
| | 7,451 |
| | 18,649 |
| | 19,007 |
| Stock compensation expense | 9,185 | | | 11,437 | | | 19,114 | | | 22,466 | |
Loss on early extinguishment of debt | — |
| | 3,230 |
| | 670 |
| | 3,230 |
| Loss on early extinguishment of debt | — | | | — | | | — | | | 7,361 | |
Gain on sales of real estate – rental properties | — |
| | — |
| | (270 | ) | | — |
| |
Our share of gain on sales of real estate from unconsolidated real estate JVs | (14,106 | ) | | — |
| | (14,106 | ) | | — |
| |
Gain on sales of real estate – land parcels | — |
| | (90 | ) | | (111 | ) | | (90 | ) | |
Impairment of real estate and non-real estate investments | — |
| | 11,179 |
| | 4,694 |
| | 196,302 |
| |
Unrealized gains on non-real estate investments | | Unrealized gains on non-real estate investments | (171,652) | | | (11,058) | | | (154,508) | | | (83,264) | |
Impairment of real estate | | Impairment of real estate | 13,218 | | | — | | | 22,865 | | | — | |
Impairment of non-real estate investments | | Impairment of non-real estate investments | 4,702 | | | — | | | 24,482 | | | — | |
Adjusted EBITDA | $ | 193,457 |
| | $ | 153,667 |
| | $ | 563,160 |
| | $ | 445,130 |
| Adjusted EBITDA | $ | 313,461 | | | $ | 265,764 | | | $ | 623,215 | | | $ | 523,250 | |
| | | | | | | | | | | | | | | |
Revenues | $ | 285,370 |
| | $ | 230,379 |
| | $ | 833,797 |
| (1) | $ | 672,544 |
| Revenues | $ | 436,956 | | | $ | 373,856 | | | $ | 876,875 | | | $ | 732,698 | |
Non-real estate investments – total realized gains | | Non-real estate investments – total realized gains | 13,005 | | | 10,442 | | | 8,328 | | | 21,792 | |
Impairment of non-real estate investments | | Impairment of non-real estate investments | 4,702 | | | — | | | 24,482 | | | — | |
Revenues, as adjusted | | Revenues, as adjusted | $ | 454,663 | | | $ | 384,298 | | | $ | 909,685 | | | $ | 754,490 | |
| | | | | | | | | | | | | | | |
Adjusted EBITDA Margins | 68 | % | | 67 | % | | 68 | % | | 66 | % | |
Adjusted EBITDA margin | | Adjusted EBITDA margin | 69% | | 69% | | 69% | | 69% |
| |
(1) | Excludes impairment charges aggregating $4.5 million, primarily related to two non-real estate investments. We believe excluding impairment of non-real estate investments improves the consistency and comparability of the Adjusted EBITDA margins from period to period. |
Annual rental revenue
Annual rental revenue represents the annualized fixed base rental amountobligzations, calculated in accordance with GAAP, for leases in effect as of the end of the period, related to our operating RSF. Annual rental revenue and measures computedis presented using 100% of the annual rental revenue are presented atof our consolidated properties and our share of annual rental revenue for our unconsolidated real estate joint ventures. Annual rental revenue per RSF is computed by dividing annual rental revenue by the sum of 100% for allof the RSF of our consolidated properties underand our management, includingshare of the RSF of properties held by our consolidated andin unconsolidated real estate joint ventures. As of SeptemberJune 30, 2017,2020, approximately 97%93% of our leases (on an RSF basis) were triple net leases, which require tenants to pay substantially all real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses (including increases thereto) in addition to base rent. Annual rental revenue excludes these operating expenses recovered from our tenants. Amounts recovered from our tenants related to these operating expenses, along with base rent, are classified in tenant recoveriesincome from rentals in our consolidated statements of income.operations.
Average cash yield
See definition of initial stabilized yield (unlevered).
Cash interest
Cash interest is equal to interest expense calculated in accordance with GAAP plus capitalized interest, less amortization of loan fees and debt premiums/discounts. Seepremiums (discounts). Refer to the definition of fixed-charge“Fixed-charge coverage ratioratio” within this section of this Item 2 for a reconciliation of interest expense, the most directly comparable financial measure calculated and presented in accordance with GAAP, to cash interest.
Class A properties and AAA locations
Class A properties are properties clustered in AAA locations that provide innovative 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. Class A properties generally command higher annual rental rates than other classes of similar properties.
AAA locations are in close proximity to concentrations of specialized skills, knowledge, institutions, and related businesses. Such locations are generally characterized by high barriers to entry for new landlords, high barriers to exit for tenants, and a limited supply of available space.
Fixed-charge coverage ratio
Fixed-charge coverage ratio is a non-GAAP financial measure representing the ratio of Adjusted EBITDA to fixed charges. We believe this ratio is useful to investors as a supplemental measure of our ability to satisfy fixed financing obligations and preferred stock dividends. Cash interest is equal to interest expense calculated in accordance with GAAP, plus capitalized interest, less amortization of loan fees and amortization of debt premiums (discounts). The fixed-charge coverage ratio calculation below is not directly comparable to the computation of ratio of earnings to fixed charges as defined in Item 503(d) of Regulation S-K and 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.
The following table reconciles interest expense, the most directly comparable financial measure calculated and presented in accordance with GAAP, to cash interest and fixed charges (dollars in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Adjusted EBITDA | | $ | 193,457 |
| | $ | 153,667 |
| | $ | 563,160 |
| | $ | 445,130 |
|
| | | | | | | | |
Interest expense | | $ | 31,031 |
| | $ | 25,850 |
| | 92,563 |
| | 75,730 |
|
Capitalized interest | | 17,092 |
| | 14,903 |
| | 45,325 |
| | 40,790 |
|
Amortization of loan fees | | (2,840 | ) | | (3,080 | ) | | (8,578 | ) | | (8,792 | ) |
Amortization of debt premiums | | 652 |
| | 5 |
| | 1,873 |
| | 117 |
|
Cash interest | | 45,935 |
| | 37,678 |
| | 131,183 |
| | 107,845 |
|
Dividends on preferred stock | | 1,302 |
| | 5,007 |
| | 6,364 |
| | 16,388 |
|
Fixed charges | | $ | 47,237 |
| | $ | 42,685 |
| | $ | 137,547 |
| | $ | 124,233 |
|
| | | | | | | | |
Fixed-charge coverage ratio: | | | | | | | | |
– period annualized | | 4.1x |
| | 3.6x |
| | 4.1x |
| | 3.6x |
|
– trailing 12 months | | 4.0x |
| | 3.6x |
| | 4.0x |
| | 3.6x |
|
Development, redevelopment, and pre-construction
A key component of our business model is our disciplined allocation of capital to the development and redevelopment of new Class A properties, and property enhancements identified during the underwriting of certain acquired properties, located in world-class collaborative life science, technology, and technologyagtech campuses in AAA urban innovation clusters. These projects are generally focused on providing high-quality, generic, and reusable spaces that meet the real estate requirements of, and are reusable by, a wide range of tenants. Upon completion, each value-creation project is expected to generate a significant increase in rental income, net operating income, and cash flows. Our development and redevelopment projects are generally in locations that are highly desirable to high-quality entities, which we believe results in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value.
Development projects generally 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, or agtech space. We generally will not commence new development projects for aboveground construction of new Class A office/laboratory, and tech office, and agtech space without first securing significant pre-leasing for such space, except when there is solid market demand for high-quality Class A properties.
Pre-construction activities include entitlements, permitting, design, site work, and other activities preceding commencement of construction of aboveground building improvements. The advancement of pre-construction efforts is focused on reducing the time required to deliver projects to prospective 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.
Development, redevelopment, and pre-construction spending also includes the following costs: (i) certain tenant improvements and renovations that will be reimbursed, (ii) amounts to bring certain acquired properties up to market standard and/or other costs identified during the acquisition process (generally within two years of acquisition), and (iii) permanent conversion of space for highly flexible, move-in-ready office/laboratory space to foster the growth of promising early- and growth-stage life science companies.
Revenue-enhancing and repositioning capital expenditures represent spending to reposition or significantly change the use of property, including through improvement in the asset quality from Class B to Class A.
Non-revenue-enhancing capital expenditures represent costs required to maintain the current revenues of a stabilized property, including costs for renewed and re-leased space.
Fixed-charge coverage ratio
Fixed-charge coverage ratio is a non-GAAP financial measure representing the ratio of Adjusted EBITDA to fixed charges. We believe this ratio is useful to investors as a supplemental measure of our ability to satisfy fixed financing obligations and preferred stock dividends. Cash interest is equal to interest expense calculated in accordance with GAAP plus capitalized interest, less amortization of loan fees and debt premiums (discounts).
The following table reconciles interest expense, the most directly comparable financial measure calculated and presented in accordance with GAAP, to cash interest and fixed charges for the three and six months ended June 30, 2020 and 2019 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
Adjusted EBITDA | | $ | 313,461 | | | $ | 265,764 | | | $ | 623,215 | | | $ | 523,250 | |
| | | | | | | | |
Interest expense | | $ | 45,014 | | | $ | 42,879 | | | $ | 90,753 | | | $ | 81,979 | |
Capitalized interest | | 30,793 | | | 21,674 | | | 55,473 | | | 40,183 | |
Amortization of loan fees | | (2,737) | | | (2,380) | | | (4,984) | | | (4,613) | |
Amortization of debt premiums | | 888 | | | 782 | | | 1,776 | | | 1,583 | |
Cash interest | | 73,958 | | | 62,955 | | | 143,018 | | | 119,132 | |
Dividends on preferred stock | | — | | | 1,005 | | | — | | | 2,031 | |
Fixed charges | | $ | 73,958 | | | $ | 63,960 | | | $ | 143,018 | | | $ | 121,163 | |
| | | | | | | | |
Fixed-charge coverage ratio: | | | | | | | | |
– period annualized | | 4.2x | | 4.2x | | 4.4x | | 4.3x |
– trailing 12 months | | 4.2x | | 4.2x | | 4.2x | | 4.2x |
Initial stabilized yield (unlevered)
Initial stabilized yield is calculated as the quotient of the estimated amounts of net operating income at stabilization anddivided by our investment in the property. Our initial stabilized yield excludes the benefit of leverage. Our cash rents related to our value-creation projects are generally expected to increase over time due to contractual annual rent escalations, and our average cash yields are generally expected to be greater than our initial stabilized yields (cash basis).escalations. 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 and our total cash investment in the property.
Average cash yield reflects cash rents, including contractual rent escalations after initial rental concessions have elapsed, calculated onInvestment-grade or publicly traded large cap tenants
Investment-grade or publicly traded large cap tenants represent tenants that are investment-grade rated or publicly traded companies with an average daily market capitalization greater than $10 billion for the twelve months ended June 30, 2020, as reported by Bloomberg Professional Services. In addition, we monitor the credit quality and related material changes of our tenants. Material changes that cause a straight-line basis, and our total cash investmenttenant’s market capitalization to decline below $10 billion, which are not immediately reflected in the property.twelve-month average, may result in their exclusion from this measure.
Investments in real estate – value-creation square footage currently in rental properties
The following table represents RSF of buildings in operation as of June 30, 2020, that will be redeveloped or replaced with new development RSF upon commencement of future construction:
| | | | | | | | |
Property/Submarket | | RSF |
Intermediate-term projects: | | |
651 Gateway Boulevard/South San Francisco | | 300,010 | |
3825 Fabian Way/Greater Stanford | | 250,000 | |
960 Industrial Road/Greater Stanford | | 110,000 | |
10931 and 10933 North Torrey Pines Road/Torrey Pines | | 92,450 | |
10260 Campus Point Drive/University Town Center | | 109,164 | |
9363 and 9393 Towne Centre Drive/University Town Center | | 71,961 | |
4555 Executive Drive/University Town Center | | 41,475 | |
| | 975,060 | |
Future projects: | | |
3875 Fabian Way/Greater Stanford | | 228,000 | |
987 and 1075 Commercial Street/Greater Stanford | | 26,738 | |
219 East 42nd Street/New York City | | 349,947 | |
4161 Campus Point Court/University Town Center | | 159,884 | |
4110 Campus Point Court/University Town Center | | 12,375 | |
4075 Sorrento Valley Boulevard/Sorrento Valley | | 40,000 | |
4045 Sorrento Valley Boulevard/Sorrento Valley | | 10,926 | |
601 Dexter Avenue North/Lake Union | | 18,680 | |
| | 846,550 | |
Total value-creation RSF currently included in rental properties | | 1,821,610 | |
Joint venture financial information
We present components of balance sheet and operating results information related to our real estate joint ventures, which are not in accordance withpresented, or intended to be presentationspresented, in accordance with GAAP. We present the proportionate share of certain financial line items as follows: (i) for each real estate joint venture that we consolidate in our financial statements, which are controlled by us through contractual rights or majority voting rights, but of which we own less than 100%, we apply the noncontrolling interest economic ownership percentage to each financial item to arrive at the amount of such cumulative noncontrolling interest share of each component presented; and (ii) for each real estate joint venture that we do not control and do not consolidate, and are instead controlled jointly or by our joint venture partners through contractual rights or majority voting rights, we apply our economic ownership percentage to each financial item to arrive at our proportionate share of each component presented.
The components of balance sheet and operating results information related to our real estate joint ventures do not represent our legal claim to those items. The joint venture agreement forFor each entity that we do not wholly own, the joint venture agreement generally determines what equity holders can receive upon capital events, such as sales or refinancing, or in the event of a liquidation. Equity holders are normally entitled to their respective legal ownership of any residual cash from a joint venture only after all liabilities, priority distributions, and claims have been repaid or satisfied.
We believe this information can help investors estimate the balance sheet and operating results information related to our partially owned entities. Presenting this information provides a perspective not immediately available from consolidated financial statements and one that can supplement an understanding of the joint venture assets, liabilities, revenues, and expenses included in our consolidated results.
The components of balance sheet and operating results information related to our real estate joint ventures are limited as an analytical tool as the overall economic ownership interest does not represent our legal claim to each of our joint ventures’ assets, liabilities, or results of operations. In addition, joint venture financial information may include financial information related to the unconsolidated real estate joint ventures that we do not control. Refer to Note 4 – “Consolidated and unconsolidated real estate joint ventures” to our unaudited consolidated financial statements under Item 1 of this report for more information on our unconsolidated real estate joint ventures. We believe that in order to facilitate for investors a clear understanding of our operating results and our total assets and liabilities, joint venture financial information should be examined in conjunction with our consolidated statements of incomeoperations and balance sheets. Joint venture financial information should not be considered an alternative to our consolidated financial statements, which are prepared in accordance with GAAP.
Net cash provided by operating activities after dividends
Net cash provided by operating activities after dividends includes the deduction for distributions to noncontrolling interests. For purposes of this calculation, changes in operating assets and liabilities are excluded as they represent timing differences.
Net debt to Adjusted EBITDA and net debt and preferred stock 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 debt less cash, cash equivalents, and restricted cash. Net debt and preferred stock is equalRefer to the sumdefinition of net debt, as discussed above, plus preferred stock outstanding as of period end. Refer to “Adjusted EBITDA”EBITDA and Adjusted EBITDA margin” within this section of this Item 2 for further information on the calculation of Adjusted EBITDA.
The following table reconciles debt to net debt and to net debt and preferred stock, and computes the ratio of each to Adjusted EBITDA as of SeptemberJune 30, 2017,2020, and December 31, 20162019 (dollars in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Secured notes payable | $ | 344,784 | | | $ | 349,352 | |
Unsecured senior notes payable | 6,738,486 | | | 6,044,127 | |
Unsecured senior lines of credit | 440,000 | | | 384,000 | |
Unamortized deferred financing costs | 52,175 | | | 47,299 | |
Cash and cash equivalents | (206,860) | | | (189,681) | |
Restricted cash | (34,680) | | | (53,008) | |
Net debt | $ | 7,333,905 | | | $ | 6,582,089 | |
| | | |
Adjusted EBITDA: | | | |
– quarter annualized | $ | 1,253,844 | | | $ | 1,148,620 | |
– trailing 12 months | $ | 1,185,347 | | | $ | 1,085,382 | |
| | | |
Net debt to Adjusted EBITDA: | | | |
– quarter annualized | 5.8x | | | 5.7x | |
– trailing 12 months | 6.2x | | | 6.1x | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Secured notes payable | $ | 1,153,890 |
| | $ | 1,011,292 |
|
Unsecured senior notes payable | 2,801,290 |
| | 2,378,262 |
|
Unsecured senior line of credit | 314,000 |
| | 28,000 |
|
Unsecured senior bank term loans | 547,860 |
| | 746,471 |
|
Unamortized deferred financing costs | 27,803 |
| | 29,917 |
|
Cash and cash equivalents | (118,562 | ) | | (125,032 | ) |
Restricted cash | (27,713 | ) | | (16,334 | ) |
Net debt | $ | 4,698,568 |
| | $ | 4,052,576 |
|
| | | |
Net debt | $ | 4,698,568 |
| | $ | 4,052,576 |
|
7.00% Series D cumulative convertible preferred stock | 74,386 |
| | 86,914 |
|
6.45% Series E cumulative redeemable preferred stock | — |
| | 130,000 |
|
Net debt and preferred stock | $ | 4,772,954 |
| | $ | 4,269,490 |
|
| | | |
Adjusted EBITDA: | | | |
– quarter annualized | $ | 773,828 |
| | $ | 662,836 |
|
– trailing 12 months | $ | 728,869 |
| | $ | 610,839 |
|
| | | |
Net debt to Adjusted EBITDA: | | | |
– quarter annualized | 6.1 | x | | 6.1 | x |
– trailing 12 months | 6.4 | x | | 6.6 | x |
Net debt and preferred stock to Adjusted EBITDA: | | | |
– quarter annualized | 6.2 | x | | 6.4 | x |
– trailing 12 months | 6.5 | x | | 7.0 | x |
Net operating income, net operating income (cash basis), and operating margin
The following table reconciles net income to total net operating income, (inand to net operating income (cash basis) for the three and six months ended June 30, 2020 and 2019 (dollars in thousands):
| | | | | | | | | | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | | 2020 | | 2019 | | 2020 | | 2019 |
Net income | | Net income | | $ | 243,561 | | | $ | 87,179 | | | $ | 274,239 | | | $ | 223,997 | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
Net income (loss) | | $ | 59,546 |
| | $ | 28,559 |
| | $ | 148,597 |
| | $ | (69,591 | ) | |
| | | | | | | | | |
Equity in (earnings) losses of unconsolidated real estate joint ventures | | (14,100 | ) | | (273 | ) | | (15,050 | ) | | 270 |
| |
Equity in earnings of unconsolidated real estate joint ventures | | Equity in earnings of unconsolidated real estate joint ventures | | (3,893) | | | (1,262) | | | (777) | | | (2,408) | |
General and administrative expenses | | 17,636 |
| | 15,854 |
| | 56,099 |
| | 46,426 |
| General and administrative expenses | | 31,775 | | | 26,434 | | | 63,738 | | | 51,111 | |
Interest expense | | 31,031 |
| | 25,850 |
| | 92,563 |
| | 75,730 |
| Interest expense | | 45,014 | | | 42,879 | | | 90,753 | | | 81,979 | |
Depreciation and amortization | | 107,788 |
| | 77,133 |
| | 309,069 |
| | 218,168 |
| Depreciation and amortization | | 168,027 | | | 134,437 | | | 343,523 | | | 268,524 | |
Impairment of real estate | | — |
| | 8,114 |
| | 203 |
| | 193,237 |
| Impairment of real estate | | 13,218 | | | — | | | 15,221 | | | — | |
Loss on early extinguishment of debt | | — |
| | 3,230 |
| | 670 |
| | 3,230 |
| Loss on early extinguishment of debt | | — | | | — | | | — | | | 7,361 | |
Gain on sales of real estate – rental properties | | — |
| | — |
| | (270 | ) | | — |
| |
Gain on sales of real estate – land parcels | | — |
| | (90 | ) | | (111 | ) | | (90 | ) | |
Investment income | | Investment income | | (184,657) | | | (21,500) | | | (162,836) | | | (105,056) | |
Net operating income | | $ | 201,901 |
| | $ | 158,377 |
| | $ | 591,770 |
| | $ | 467,380 |
| Net operating income | | 313,045 | | | 268,167 | | | 623,861 | | | 525,508 | |
Straight-line rent revenue | | Straight-line rent revenue | | (23,367) | | | (25,476) | | | (43,964) | | | (52,441) | |
Amortization of acquired below-market leases | | Amortization of acquired below-market leases | | (13,787) | | | (8,054) | | | (29,751) | | | (15,202) | |
Net operating income (cash basis) | | Net operating income (cash basis) | | $ | 275,891 | | | $ | 234,637 | | | $ | 550,146 | | | $ | 457,865 | |
| | | | | | | | | | | | | | | | |
Revenues | | $ | 285,370 |
| | $ | 230,379 |
| | $ | 829,306 |
| | $ | 672,544 |
| |
Net operating income (cash basis) – annualized | | Net operating income (cash basis) – annualized | | $ | 1,103,564 | | | $ | 938,548 | | | $ | 1,100,292 | | | $ | 915,730 | |
| | | | | | | | | |
Net operating income (from above) | | Net operating income (from above) | | $ | 313,045 | | | $ | 268,167 | | | $ | 623,861 | | | $ | 525,508 | |
Total revenues | | Total revenues | | $ | 436,956 | | | $ | 373,856 | | | $ | 876,875 | | | $ | 732,698 | |
Operating margin | | 71% | | 69% | | 71% | | 69% | Operating margin | | 72% | | 72% | | 71% | | 72% |
Net operating income is a non-GAAP financial measure calculated as net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, excluding equity in the earnings (losses) of our unconsolidated real estate joint ventures, general and administrative expenses, interest expense, depreciation and amortization, impairmentimpairments of real estate, gaingains or losslosses on early extinguishment of debt, and gaingains or losslosses on sales of real estate.estate, and investment income or loss. We believe net operating income 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 net operating income is a useful measure for evaluatinginvestors to evaluate the operating performance of our consolidated real estate assets. Net operating income on a cash basis is net operating income adjusted to exclude the effect of straight-line rent and amortization of acquired above- and below-market lease revenue adjustments required by GAAP. We believe that net operating income on a cash basis is helpful to investors as an additional measure of operating performance because it eliminates the timing differences between the recognition ofstraight-line rent revenue in accordance with GAAP and the receiptamortization of payments reflected in our consolidated results.acquired above- and below-market leases.
Further,Furthermore, we believe net operating income is useful to investors as a performance measure for our consolidated properties because, when compared across periods, net operating income reflects trends in occupancy rates, rental rates, and operating costs, which provide a perspective not immediately apparent from net income.income or loss. Net operating income can be used to measure the initial stabilized yields of our properties by calculating the quotient of net operating income generated by a property on a straight-line basis anddivided by our investment in the property. Net operating income excludes certain components from net income 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 comparability of operating performance at the property level. Impairments of real estate have been excluded in deriving net operating income 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 andor a deterioration in market conditions. We also exclude realized and unrealized investment income or loss, which results from investment decisions that occur at the corporate level related to non-real estate investments in publicly traded companies and certain privately held entities. Therefore, we do not consider these activities to be an indication of operating performance of our real estate assets at the property level. Our calculation of net operating income also excludes charges incurred from changes in certain financing decisions, such as losslosses on early extinguishment of debt, as these charges often relate to corporate strategy. Property operating expenses that are included in
determining net operating income primarily 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. We calculate operating margin as net operating income divided by total revenues.
We believe that in order to facilitate for investors a clear understanding of our operating results, net operating income should be examined in conjunction with net income or loss as presented in our consolidated statements of income.operations. Net operating income should not be considered as an alternative to net income or loss as an indication of our performance, nor as an alternative to cash flows as a measure either of our liquidity or our ability to make distributions.
Operating statistics
We present certain operating statistics related to our properties, including number of properties, RSF, annual rental revenue, annual rental revenue per occupied RSF, occupancy percentage, leasing activity, rental rates, and contractual lease expirations as of the end of the period. We believe these measures are useful to investors because they facilitate an understanding of certain trends for our properties. We compute operating statisticsthe number of properties, RSF, occupancy percentage, leasing activity, and contractual lease expirations at 100% for all properties managed by us,in which we have an investment, including properties owned by our consolidated and unconsolidated real estate joint ventures. For operating metrics based on annual rental revenue, refer to the definition of “Annual rental revenue” within this section of this Item 2.
Same property comparisons
As a result of changes within our total property portfolio during the comparative periods presented, including changes from assets acquired or sold, properties placed into development or redevelopment, and development or redevelopment properties recently placed into service, the consolidated total rental revenues, tenant recoveries, andincome from rentals, as well as rental operating expenses in our operating results, can show significant changes from period to period. In order to supplement an evaluation of our results of operations over a given quarterly or annual period, we analyze the operating performance for all consolidated properties that were fully operating for the entirety of the comparative periods presented, referred to as same properties. We separately present quarterly and year-to-date same property results to align with the interim financial information required by the SEC in our management’s discussion and analysis of our financial condition and results of operations. These same properties are analyzed separately from properties acquired subsequent to the first day in the earliest comparable quarterly or year-to-date period presented, properties that underwent development or redevelopment at any time during the comparative periods, unconsolidated real estate joint ventures, properties classified as held for sale, and corporate entities (legal entities performing general and administrative functions), which are excluded from same property results. Additionally, rental revenues from lease termination fees, if any, are excluded from the results of same properties. Refer to the “Same properties” subsection in the “Results of operations” section within this Item 2 for additional information.
Stabilized occupancy date
The stabilized occupancy date represents the estimated date on which the project is expected to reach occupancy of 95% or greater.
Tenant recoveries
Tenant recoveries represent revenues comprising reimbursement of real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses and earned in the period during which the applicable expenses are incurred and the tenant’s obligation to reimburse us arises.
We classify rental revenues and tenant recoveries generated through the leasing of real estate assets within revenue in income from rentals in our consolidated statements of operations. We provide investors with a separate presentation of rental revenues and tenant recoveries in the “Comparison of results for the three months ended June 30, 2020, to the three months ended June 30, 2019” and “Comparison of results for the six months ended June 30, 2020, to the six months ended June 30, 2019” subsections of the “Results of operations” section within this Item 2 because we believe it promotes investors’ understanding of our operating results. We believe that the presentation of tenant recoveries is useful to investors as a supplemental measure of our ability to recover operating expenses under our triple net leases, including recoveries of utilities, repairs and maintenance, insurance, property taxes, common area expenses, and other operating expenses, and of our ability to mitigate the effect to net income for any significant variability to components of our operating expenses.
The following table reconciles income from rentals to tenant recoveries for the three and six months ended June 30, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
Income from rentals | | $ | 435,856 | | | $ | 371,618 | | | $ | 873,461 | | | $ | 726,367 | |
Rental revenues | | (341,555) | | | (289,625) | | | (679,497) | | | (564,188) | |
Tenant recoveries | | $ | 94,301 | | | $ | 81,993 | | | $ | 193,964 | | | $ | 162,179 | |
| | | | | | | | |
Total market capitalization
Total market capitalization is equal to the sum of total equity market capitalization and total debt. Total equity market capitalization is equal to the sum of outstanding shares of 7.00% Series D cumulative convertible preferred stock, 6.45% Series E cumulative redeemable preferred stock, and common stock multiplied by the related closing price of each class of security at the end of eachthe period presented.multiplied by the closing price on the last trading day of the period (i.e., total equity capitalization), plus total debt outstanding at period-end.
Unencumbered net operating income as a percentage of total net operating income
Unencumbered net operating income as a percentage of total net operating income 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 reflects those income and expense items that are incurred at the unencumbered property level. Unencumbered net operating income is derived from assets classified in continuing operations, which are not subject to any mortgage, deed of trust, lien, or other security interest, as of the period for which income is presented.
The following table summarizes unencumbered net operating income as a percentage of total net operating income for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Unencumbered net operating income | $ | 296,358 | | | $ | 251,397 | | | $ | 591,359 | | | $ | 494,588 | |
Encumbered net operating income | 16,687 | | | 16,770 | | | 32,502 | | | 30,920 | |
Total net operating income | $ | 313,045 | | | $ | 268,167 | | | $ | 623,861 | | | $ | 525,508 | |
Unencumbered net operating income as a percentage of total net operating income | 95% | | 94% | | 95% | | 94% |
Weighted-average shares of common stock outstanding – diluted
From time to time, we enter into capital market transactions, including forward equity sales agreements (“Forward Agreements”), to fund acquisitions, fund construction of our highly leased development and redevelopment projects, and for general working capital purposes. We are required to consider the potential dilutive effect of our forward equity sales agreements under the treasury stock method while the forward equity sales agreements are outstanding. As of June 30, 2020, we had Forward Agreements outstanding to sell an aggregate of 3.5 million shares of common stock.
Prior to the conversion of our remaining outstanding shares in October 2019, we considered the effect of assumed conversion of our outstanding Series D Convertible Preferred Stock when determining potentially dilutive incremental shares to our common stock. When calculating the assumed conversion, we add back to net income or loss the dividends paid on our Series D Convertible Preferred Stock to the numerator and then include additional common shares assumed to have been issued (as displayed in the table below) to the denominator of the per share calculation. The effect of the assumed conversion is considered separately for our per share calculations of net income or loss; funds from operations, computed in accordance with the definition in the Nareit White Paper; and funds from operations, as adjusted. Prior to the conversion of our remaining outstanding shares in October 2019, our Series D Convertible Preferred Stock was dilutive and assumed to be converted when quarterly and annual basic EPS, funds from operations, or funds from operations, as adjusted, exceeded approximately $1.75 and $7.00 per share, respectively, subject to conversion ratio adjustments and the impact of repurchases of our Series D Convertible Preferred Stock. The effect of the assumed conversion was included when it was dilutive on a per share basis. The dilutive effect of less than a half cent per share appears as zero in our reconciliation of EPS – diluted to funds from operations per share – diluted, and funds from operations per share – diluted, as adjusted, even when the dilutive effect to the numerator alone appears in our reconciliation. Refer to Note 12 – “Earnings per share” and Note 13 – “Stockholders’ equity” to our unaudited consolidated financial statements under Item 1 of this report for more information related to our forward equity sales agreements and our Series D Convertible Preferred Stock.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Unencumbered net operating income | $ | 164,291 |
| | $ | 137,943 |
| | $ | 479,754 |
| | $ | 400,027 |
|
Encumbered net operating income | 37,610 |
| | 20,434 |
| | 112,016 |
| | 67,353 |
|
Total net operating income | $ | 201,901 |
| | $ | 158,377 |
| | $ | 591,770 |
| | $ | 467,380 |
|
Unencumbered net operating income as a percentage of total net operating income | 81% |
| | 87% |
| | 81% |
| | 86% |
|
The weighted-average shares of common stock outstanding used in calculating EPS – diluted, funds from operations per share – diluted, and funds from operations per share – diluted, as adjusted, for the three and six months ended June 30, 2020 and 2019, are calculated as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Weighted-average shares of common stock outstanding: | | | | | | | |
Basic shares for EPS | 124,333 | | | 111,433 | | | 122,883 | | | 111,245 | |
Outstanding forward equity sales agreements | 115 | | | 68 | | | 234 | | | 34 | |
Series D Convertible Preferred Stock | — | | | — | | | — | | | — | |
Diluted shares for EPS | 124,448 | | | 111,501 | | | 123,117 | | | 111,279 | |
| | | | | | | |
Basic shares for EPS | 124,333 | | | 111,433 | | | 122,883 | | | 111,245 | |
Outstanding forward equity sales agreements | 115 | | | 68 | | | 234 | | | 34 | |
Series D Convertible Preferred Stock | — | | | 576 | | | — | | | 578 | |
Diluted shares for FFO | 124,448 | | | 112,077 | | | 123,117 | | | 111,857 | |
| | | | | | | |
Basic shares for EPS | 124,333 | | | 111,433 | | | 122,883 | | | 111,245 | |
Outstanding forward equity sales agreements | 115 | | | 68 | | | 234 | | | 34 | |
Series D Convertible Preferred Stock | — | | | — | | | — | | | — | |
Diluted shares for FFO, as adjusted | 124,448 | | | 111,501 | | | 123,117 | | | 111,279 | |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk
The primary market risk to which we believe we aremay be exposed is interest rate risk, which may result from many factors, including government monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control.
In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaphedge 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 carriesmay carry additional risks, such as counterparty credit risk and the legal enforceability of hedging contracts.hedge agreements. As of June 30, 2020, we did not have any outstanding interest rate hedge agreements.
Our future earnings and fair values relating to financial instrumentsour outstanding debt are primarily dependent upon prevalent market rates of interest, such as LIBOR. However, our interest rate hedge agreements are intended to reduce the effects of interest rate fluctuations.interest. The following table illustratestables illustrate the effect of a 1% change in interest rates assuming a LIBOR floor of 0%, on our fixed- and variable-rate debt including our $1.65 billion unsecured senior line of credit, unsecured senior bank term loans, and secured construction loans, after considering the effect of our interest rate hedge agreements, secured debt, and unsecured senior notes payable as of SeptemberJune 30, 20172020 (in thousands):
| | | | | |
Annualized effect on future earnings due to variable-rate debt: | |
Rate increase of 1% | $ | (2,337) | |
Rate decrease of 1% | $ | 379 | |
| |
Effect on fair value of total consolidated debt: | |
Rate increase of 1% | $ | (622,535) | |
Rate decrease of 1% | $ | 703,529 | |
|
| | | |
Annualized effect on future earnings due to variable-rate debt: | |
Rate increase of 1% | $ | (4,509 | ) |
Rate decrease of 1% | $ | 4,509 |
|
| |
Effect on fair value of total consolidated debt and interest rate hedge agreements: | |
Rate increase of 1% | $ | (201,681 | ) |
Rate decrease of 1% | $ | 216,680 |
|
These amounts are determined by considering the impacteffect of the hypothetical interest rates on our borrowing cost and our interest rate hedge agreements in existence on Septemberborrowings as of June 30, 2017.2020. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further,Furthermore, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change. 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 classifyAll of our investments in publiclyactively traded public companies as available-for-sale and consequently recognize themare reflected in the consolidated balance sheets at fair value, with unrealized gains or losses reported as a component of accumulated other comprehensive income. Investmentsvalue. Our investments in privately held entities that report NAV per share are generally accounted for under the cost method because wemeasured at fair value using NAV as a practical expedient to fair value. Our equity investments in privately held entities that do not influence anyreport NAV per share are measured at cost less impairments, adjusted for observable price changes during the period. Changes in fair value of the operating or financial policiespublic investments, changes in NAV per share reported by privately held entities, and observable price changes of theprivately held entities that do not report NAV per share are classified as investment income 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.our consolidated statements of operations. There is no assurance that future declines in value will not have a material adverse impacteffect 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 SeptemberJune 30, 20172020 (in thousands):
| | | | | |
Equity price risk: | |
Fair value increase of 10% | $ | 131,847 | |
Fair value decrease of 10% | $ | (131,847) | |
|
| | | |
Equity price risk: | |
Fair value increase of 10% | $ | 48,526 |
|
Fair value decrease of 10% | $ | (48,526 | ) |
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 local currencies in each respective local currencies.country. Gains or losses resulting from the translation of our foreign subsidiaries’ balance sheets and statements of incomeoperations are classified in accumulated other comprehensive income (loss) as a separate component of total equity.equity and are excluded from net (loss) income. Gains or losses will be reflected in our consolidated statements of incomeoperations 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 illustratestables illustrate the effect that a 10% change in foreign currency rates relative to the U.S. dollar would have on our potential future earnings and on the fair value of our net investment in foreign subsidiaries based on our current operating assets outside the U.S. as of SeptemberJune 30, 20172020 (in thousands):
|
| | | |
Effect of potential future earnings due to foreign currency exchange rate: | |
Rate increase of 10% | $ | 70 |
|
Rate decrease of 10% | $ | (70 | ) |
| |
Effect on the fair value of net investment in foreign subsidiaries due to foreign currency exchange rate: | |
Rate increase of 10% | $ | 12,184 |
|
Rate decrease of 10% | $ | (12,184 | ) |
| | | | | |
Effect on potential future earnings due to foreign currency exchange rate: | |
Rate increase of 10% | $ | 4 | |
Rate decrease of 10% | $ | (4) | |
| |
Effect on the fair value of net investment in foreign subsidiaries due to foreign currency exchange rate: | |
Rate increase of 10% | $ | 9,275 | |
Rate decrease of 10% | $ | (9,275) | |
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 ninesix months ended SeptemberJune 30, 2017,2020, 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 SeptemberJune 30, 2017,2020, we had performed an evaluation, under the supervision of our Chief Executive Officer (“CEO”)principal executive officers and Chief Financial Officer (“CFO”),principal financial officer, 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 CEOprincipal executive officers and the CFOprincipal financial officer concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 2017.2020.
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 SeptemberJune 30, 2017,2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1A. RISK FACTORS
Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may
adversely affect interest expense related to outstanding debt.
We hold certain instruments in our debt profile in which interest rates move in direct relation to LIBOR, depending on our
selection of borrowing options. Beginning in 2008, concerns have been raised that some of the member banks surveyed by the BBA in connection with the calculation of daily LIBOR across a range of maturities and currencies may have underreported, overreported, or otherwise manipulated the interbank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that might have resulted from reporting interbank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with a number of their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations have been instigated by regulators and government authorities in various jurisdictions. Other member banks may also enter into such settlements with, or have proceedings brought by, their regulators or law enforcement agencies in the future. If manipulation of LIBOR occurred, it may have resulted in LIBOR having been artificially lower (or higher) than it would otherwise have been. Any such manipulation could have occurred over a substantial period of time.
On September 28, 2012, British regulators published a report on the review of LIBOR. The report concluded that LIBOR
should be retained as a benchmark but recommended a comprehensive reform of LIBOR, including replacing the BBA with a new
independent administrator of LIBOR. Based on this report, final rules for the regulation and supervision of LIBOR by the Financial Conduct Authority (“FCA”) were published and came into effect on April 2, 2013 (the “FCA Rules”). In particular, the FCA Rules include requirements that (i) an independent LIBOR administrator monitor and survey LIBOR submissions to identify breaches of practice standards and/or potentially manipulative behavior, and (ii) firms submitting data to LIBOR establish and maintain a clear conflict-of-interest policy and appropriate systems and controls. In response, ICE Benchmark Administration Limited (“IBA”) was appointed as the independent LIBOR administrator, effective in early 2014. It is not possible to predict the effect of the FCA Rules, any changes in the methods pursuant to which LIBOR is determined, the administration of LIBOR by IBA, and any other reforms to LIBOR that will be enacted in the United Kingdom and elsewhere. In addition, any changes announced by the FCA, the BBA, IBA, or any other successor governance or oversight body, or future changes adopted by such body, in the method pursuant to which LIBOR is determined, as well as manipulative practices or the cessation thereof, may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the level of the index. Fluctuation or discontinuation of LIBOR would affect our interest expense and earnings and the fair value of certain of our financial instruments. We rely on interest rate hedge agreements to mitigate our exposure to such interest rate risk on a portion of our debt obligations. However, there is no assurance these arrangements will be effective in reducing our exposure to changes in interest rates.
In addition, in November 2014, the U.S. Federal Reserve established a working group composed of large U.S. financial institutions, the Alternative Reference Rates Committee (“ARRC”), to identify a set of alternative interest reference rates to LIBOR. In a May 2016 interim report, the ARRC narrowed its choice to two LIBOR alternatives. The first choice is the Overnight Bank Funding Rate (“OBFR”), which consists of domestic and foreign unsecured borrowing in U.S. dollars. The U.S. Federal Reserve has been calculating the OBFR and publishing it since March 2016. The second alternative rate to LIBOR is the Treasury General Collateral rate, which is composed of repo transactions secured by treasuries or other assets accepted as collateral by the majority of intermediaries in the repo market.
On July 27, 2017, the FCA announced that it would phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the ARRC, is considering replacing U.S. dollar LIBOR with a newly created index called the Broad Treasury Financing Rate, calculated with a broad set of short-term repurchase agreements backed by treasury securities. If LIBOR ceases to exist, we may need to negotiate the credit agreements with our lenders that utilize LIBOR as a factor in determining the interest rate based on a new standard that is established, if any. The transition to the alternative rate will require careful and deliberate consideration and implementation so as to not disrupt the stability of financial markets. There is no guarantee that a transition from LIBOR to an alternative will not result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers.
Security breaches through cyber-attacks, cyber-intrusions, or other methods could disrupt our information technology networks and related systems.
Risks associated with security breaches, whether through cyber-attacks or cyber-intrusions over the Internet, malware, computer viruses, attachments to e-mails, or other methods, against persons inside our organization, persons with access to systems inside our organization, the U.S. government, financial markets or institutions, or major businesses, including tenants, could disrupt or disable networks and related systems, other critical infrastructures, and the normal operation of business. The risk of a security breach or disruption, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments, and cyber-terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. Due to the fast pace and unpredictability of cyber threats, long-term implementation plans designed to address cybersecurity risks become obsolete quickly. The SEC has recently shared its concern over the rise in cases of cyber-attacks where information was stolen by hackers to gain market advantage. As a consequence, it is critical that entities not only meet SEC expectations in the cybersecurity arena, but also invest in a program to become secure, vigilant, and resilient in the face of emerging cybersecurity risks.
Even though we may not be specifically targeted, cyber-attacks on the U.S. government, financial markets, financial institutions, or other major businesses, including tenants, could disrupt our normal business operations and networks, which may in turn have a material adverse impact on our financial condition and results of operations.
Information technology networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations, including managing our building systems. They also may be critical to the operations of certain of our tenants and our service providers. Although we make efforts to maintain the security and integrity of these types of networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well-protected information, networks, systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and in fact may not be detected. While to date we have not experienced a cyber-attack or cyber-intrusion, we may be unable to anticipate or to implement adequate security barriers or other preventive measures. A security breach or other significant disruption involving our information technology networks and related systems could:
Disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our tenants;
Result in misstated financial reports, violations of loan covenants, missed reporting deadlines, and/or missed permitting deadlines;
Result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;
Result in the unauthorized access to, and destruction, loss, theft, misappropriation, or release of, proprietary, confidential, sensitive, or otherwise valuable information of ours or others, which others could use to compete against us or for disruptive, destructive, or otherwise harmful purposes and outcomes;
Result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space;
Require significant management attention and resources to remedy any damages that result;
Subject us to claims for breach of contract, damages, credits, penalties, or termination of leases or other agreements; or
Damage our reputation among our tenants and investors generally.
Any or all of the foregoing could have a material adverse effect on our financial condition, results of operations, and cash flows.
In addition to the information set forth in this quarterly report on Form 10‑Q,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”factors” in our annual report on Form 10‑K10-K for the year ended December 31, 2016.2019. 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.
There have been no material changes in our risk factors from those disclosed under the caption “Item 1A. Risk factors” to our annual report on Form 10-K for the year ended December 31, 2019, except for the following update:
The current outbreak of the novel coronavirus disease, or COVID-19, or the future outbreak of any other highly infectious or contagious diseases, could adversely impact or cause disruption to our financial condition and results of operations. Further, the spread of COVID-19 has caused severe disruptions in the U.S. and global economies, may further disrupt financial markets, and could create widespread business continuity issues.
In recent years, the outbreaks of a number of diseases, including avian influenza, H1N1, and various other “superbugs,” have increased the risk of a pandemic. In December 2019, COVID-19 was reported to have surfaced in Wuhan, China. COVID-19 has since spread around the globe, including the U.S. COVID-19 has been reported in every state in the U.S., including those where we own and operate our properties, have executive offices, and conduct principal operations. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the U.S. declared a national emergency with respect to COVID-19.
The potential impact and duration of the COVID-19 pandemic has had, and continues to have, a significant adverse impact across regional and global economies and financial markets. The global impact of the outbreak has been rapidly evolving and as new cases of the virus have continued, particularly in the U.S., countries around the world and states around the U.S., have reacted by instituting quarantines and restrictions on travel.
Almost every state implemented some form of shelter-in-place or stay-at-home directive between March and May 2020, including, among others, the cities of Boston, San Francisco (including five other San Francisco Bay area counties), and Seattle, and the states of California, Maryland, Massachusetts, and New York, where we own properties. The lockdown restrictions implemented included quarantines, restrictions on travel, shelter-in-place orders, school closures, restrictions on types of business that may continue to operate, and/or restrictions on types of construction projects that could continue. These quarantines generally came with exceptions for essential healthcare/public health operations; health manufacturing; clinical research, development, and testing for COVID-19; research and laboratory activities; essential manufacturing for pharmaceuticals, vaccines, testing materials, laboratory supplies, medical equipment, instruments; and safety products; essential retail, including pharmacies; essential building services, such as cleaning and maintenance; skilled trades, such as plumbers and electricians; and certain essential construction projects.
Beginning in early May 2020, the U.S. began to lift the lockdown restrictions and allow for the reopening of businesses. The gradual reopening of retail, manufacturing, and office facilities came with required or recommended safety protocols. There is no assurance that the reopening of businesses, even if those businesses adhere to recommended safety protocols, will enable us or many of our tenants to avoid adverse effects on our operations and businesses.
As of the date of this report, all our ground-up development projects undergoing construction have resumed construction. Due to the increase in the number of COVID-19 cases after the reopening of many states beginning in early June 2020, there is no assurance that local and state governments will not reinstitute new lockdowns that may cause our construction projects to have to pause, causing delays on our expected future deliveries. Construction workers are also practicing social distancing and following rules that restrict gathering of large groups of people in close proximity, as well as other appropriate practices that may slow the pace of construction.
Although critical research and development efforts are continuing in our office/laboratory properties, in certain cases such research and development efforts have fewer workers, and non-critical workers in these buildings and most office buildings are working remotely. When appropriate, certain spaces have been and may continue to be subject to temporary closure for quarantine and proper disinfecting. Our properties and tenant base include a small amount of restaurant, conference center, fitness centers, and retail space, accounting for less than 1.0% of our total revenues during the six months ended June 30, 2020. Retail tenants in particular continue to be severely impacted by social distancing protocols that remain in place across all of the markets where our properties are located.
The COVID-19 outbreak has already had a significant adverse impact on the economies of the world, including that of the U.S., and this pandemic, and future pandemics, could trigger a period of prolonged global economic slowdown or recession.
The effects of COVID-19 or another pandemic on our (or our tenants’) ability to successfully operate could be adversely impacted due to, among other factors:
•The continued service and availability of personnel, including our executive officers and other leaders that are part of our management team, and our ability to recruit, attract, and retain skilled personnel. To the extent our management or personnel are impacted in significant numbers by the outbreak of pandemic or epidemic disease and are not available or allowed to conduct work, our business and operating results may be negatively impacted;
•Our (or our tenants’) ability to operate, generally or in affected areas, or delays in the supply of products or services from our vendors that are necessary for us to operate effectively;
•Our tenants’ ability to pay rent on their leases in full and timely and, to the extent necessary, our inability to restructure our tenants’ long-term rent obligations on terms favorable to us or timely recapture the space for re-leasing (refer to the risk factor on the next page within this Item 1A of this report);
•Difficulty in our accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions, which may affect our (or our tenants’) ability to access capital necessary to fund business operations or replace or renew maturing liabilities on a timely basis and may adversely affect the valuation of financial assets and liabilities, any of which could affect our (or our tenants’) ability to meet liquidity and capital expenditure requirements or have a material adverse effect on our business, financial condition, results of operations, and cash flows;
•Complete or partial closures of, or other operational issues at, one or more of our offices or properties resulting from government action or directives;
•Our (or our tenants’) ability to continue or complete construction as planned for our tenants’ operations, or delays in the supply of materials or labor necessary for construction, which may affect our (or our tenants’) ability to complete construction or to complete it timely, our ability to prevent a lease termination, and our ability to collect rent, which may have a material adverse effect on our business, financial condition, results of operations, and cash flows;
•The cost of implementing precautionary measures against COVID-19, including, but not limited to, potential additional health insurance and labor-related costs;
•Governmental efforts (such as moratoriums on or suspensions of eviction proceedings) that may affect our ability to collect rent or enforce remedies for the failure of our tenants to pay rent;
•Deterioration of global economic conditions and job losses, which may decrease demand for and occupancy levels of our rental properties and may cause our rental rates and property values to be negatively impacted;
•Our dependence on short-term and long-term debt sources, including our unsecured senior lines of credit, commercial paper program, and senior notes, which may affect our ability to continue our investing activities and pay distributions to our stockholders;
•Declines in the valuation of our properties, which may affect our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of debt funding;
•Refusal or failure by one or more of our lenders under our credit facilities to fund their financing commitment to us, which we may not be able to replace on favorable terms, or at all;
•To the extent we enter into derivative financial instruments, one or more counterparties to our derivative financial instruments could default on their obligations to us or could fail, increasing the risk that we may not realize the benefits of utilizing these instruments;
•Any possession taken of our properties, in whole or in part, by governmental authorities for public purposes in eminent domain proceedings;
•Our level of insurance coverage and recovery we receive under any insurance we maintain, which may be delayed by, or insufficient to fully offset potential/actual losses caused by, COVID-19;
•Any increase in insurance premiums and imposition of large deductibles;
•Our level of dependence on the Internet, stemming from employees working remotely, and increases in malware campaigns and phishing attacks preying on the uncertainties surrounding COVID-19, which may increase our vulnerability to cyber attacks;
•Our ability to ensure business continuity in the event our continuity of operations plan is not effective or is improperly implemented or deployed during a disruption; and
•Our ability to operate, which may cause our business and operating results to decline or may impact our ability to comply with regulatory obligations leading to reputational harm and regulatory issues or fines.
While the rapid development and fluidity of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impact of COVID-19, the spread of COVID-19 has resulted in, and may continue to result in, significant disruption of the global financial market and increase in unemployment in the U.S. The pandemic and public and private responses to the pandemic may lead to deterioration of economic conditions, an economic downturn and/or a recession, at a global scale, which could materially affect our (or our tenants’) performance, financial condition, results of operations, and cash flows.
The current outbreak of the novel coronavirus disease, or COVID-19, or the future outbreak of any other highly infectious or contagious diseases, could adversely impact or cause disruption to our tenants’ financial condition and results of operations, which could adversely impact our ability to generate income sufficient to meet operating expenses or generate income and capital appreciation.
Our tenants, many of which conduct business in the life science, technology, or agtech industries, may incur significant costs or losses responding to the outbreak of a contagious disease (such as COVID-19), lose business due to interruption in their operations, or incur other liabilities related to shelter-in-place orders, quarantines, infection, or other related factors. Tenants that experience deteriorating financial conditions as a result of the outbreak of a contagious disease, or the COVID-19 pandemic, may be unwilling or unable to pay rent in full or timely due to bankruptcy, lack of liquidity, lack of funding, operational failures, or for other reasons. Our tenants’ defaults and delayed or partial rental payments could adversely impact our rental revenues and operating results.
The negative effects of an outbreak of a contagious disease (such as COVID-19) on our tenants in the life science industry may include, but are not limited to:
•Delays or difficulties in enrolling patients or maintaining scheduled study visits in clinical trials;
•Delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;
•Diversion of healthcare resources away from clinical trials, including the diversion of hospitals serving as our tenants’ clinical trial sites and hospital staff supporting the conduct of our tenants’ clinical trials;
•Interruptions of key clinical trial or other research activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers, and others;
•Limitations in employee resources that would otherwise be focused on our tenants’ research, business, or clinical trials, including because of sickness of employees or their families, the desire of employees to avoid contact with large groups of people, or as a result of the governmental imposition of shelter-in-place or similar working restrictions;
•Interruptions in supply chain, manufacturing, and global shipping or other delays that may affect the transport of materials necessary for our tenants’ research, clinical trials, or manufacturing activities;
•Reduction in revenue projections for our tenants’ products due to the prioritization of the treatment of COVID-19 patients over other treatments, such as specialty and elective procedures and non-COVID-19 diagnostics;
•Delays in necessary interactions with ethics committees, regulators, and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees;
•Delays in receiving approval from regulatory authorities to initiate planned clinical trials or research activities;
•Delays in commercialization of our tenants’ products and approval by governmental authorities (such as the U.S. Food and Drug Administration (“FDA”) and the federal and state Emergency Management Agencies) of our tenants’ products caused by disruptions, funding shortages, or health concerns, as well as by the prioritization by the FDA of the review and approvals of diagnostics, therapeutics, and vaccines that are related to COVID-19;
•Difficulty in retaining staff or rehiring staff in connection with layoffs caused by deteriorating global market conditions;
•Changes in local regulations as part of a response to the COVID-19 outbreak that may require our tenants to change the ways in which their clinical trials are conducted, which may result in unexpected costs or the discontinuation of the clinical trials altogether;
•Refusal or reluctance of the FDA to accept data from clinical trials in affected geographies outside the U.S.;
•Diminishing public trust in healthcare facilities or other facilities, such as medical office buildings, that are treating (or have treated) patients affected by contagious diseases, including COVID-19; and
•Inability to access capital on terms favorable to our tenants because of changes in company valuation and investor appetite due to the general downturn of economic and financial conditions and the volatility of the market.
The negative effects of an outbreak of a contagious disease (such as COVID-19) on our tenants in the technology industry may include, but are not limited to:
•Reduction in staff productivity due to business closures, alternative working arrangements, or illness of staff and/or illness in the family;
•Reductions in sales of our tenants’ services and products, longer sales cycles, reductions in subscription duration and value, slower adoption of new technologies, and increased price competition due to economic uncertainties and downturns;
•Disruptions to our tenants’ supply chain, manufacturing vendors, or logistics providers to deliver products or perform services;
•Limitations on business and marketing activities due to travel restrictions and virtualization, or cancellation of customer and employee events;
•Adverse impact on customer relationships and our ability to recognize revenues due to our tenants’ inability to access their clients’ sites for implementation and on-site consulting services;
•Inability to recruit and develop highly skilled employees with appropriate qualifications, to conduct background checks on potential employees, and to provide necessary equipment and training to new and existing employees;
•Network infrastructure and technology systems failures of our tenants, or of third-party services used by our tenants, which may result in system interruptions, reputational harm, loss of intellectual property, delays in product development, lengthy interruptions in services, breaches of data security, and loss of critical data;
•Higher employment compensation costs that may not be offset by improved productivity or increased sales; and
•Inability to access capital on terms favorable to our tenants because of changes in company valuation and/or investor appetite due to general downturns of economic and financial conditions and the volatility of the market.
The negative effects of an outbreak of a contagious disease (such as COVID-19) on our tenants in the agtech industry may include, but are not limited to:
•Reduction in productive capacity and profitability because of decreased labor availability due, for example, to government restrictions, the inability of employees to report to work, or collective bargaining efforts;
•Potential contract cancellations, project reductions, and reduction in demand for our tenants’ products due to the adverse effect on business confidence and consumer sentiments and the general downturn in economic conditions;
•Disruption of the logistics necessary to import, export, and deliver products to target companies and their customers, as ports and other channels of entry may be closed or may operate at only a portion of capacity;
•Disruptions to manufacturing facilities and supply lines; and
•Inability to access capital on terms favorable to our tenants because of changes in company valuation and investor appetite due to the general downturn of economic and financial conditions and the volatility of the market.
The potential impact of a pandemic or outbreak of a contagious disease with respect to our tenants or our properties is difficult to predict and could have a material adverse impact on the operations of our tenants and, in turn, on our revenues, business, and results of operations, as well as the value of our stock. The COVID-19 pandemic, or other pandemics, may directly or indirectly cause the realization of any of the other risk factors included in our annual report on Form 10-K for the year ended December 31, 2019, or this quarterly report on Form 10-Q.
Our life science tenants are subject to a number of risks unique to their industry, including (i) changes in technology, patent expiration, and intellectual property protection, (ii) high levels of regulation, (iii) failures in the safety and efficacy of their products, and (iv) significant funding requirements for product research and development. These risks may adversely affect their ability to make rental payments to us or satisfy their other lease obligations and consequently may materially adversely affect our business, results of operations, financial condition, and stock price.
Changes in technology, patent expiration, and intellectual property rights and protection
•Our tenants sell products and services in an industry that is characterized by rapid and significant technological changes, frequent new product and service introductions and enhancements, evolving industry standards, and uncertainty over the implementation of new healthcare reform legislation, which may cause them to lose competitive positions and adversely affect their operations.
•Many of our tenants and their licensors require patent, copyright, or trade secret protection and/or rights to use third-party intellectual property to develop, make, market, and sell their products and technologies. A tenant may be unable to commercialize its products or technologies if patents covering such products or technologies are not issued or are successfully challenged, narrowed, invalidated, or circumvented by third parties. Additionally, a third party may own intellectual property that limits a tenant’s ability to bring to market its product or technology without securing a license or other rights to use of the third-party intellectual property, which may require the tenant to pay an upfront fee or royalty. Failure to obtain these rights from third parties may make it challenging or impossible for a tenant to develop and commercialize its products or technologies, which could adversely affect its competitive position and operations.
•Many of our tenants depend upon patents to provide exclusive marketing rights for their products. As their product patents expire, competitors of these tenants may be able to legally produce and market products similar to those products of our tenants, which could have a material adverse effect on their sales and results of operations.
High levels of regulation:
•Some of our tenants develop and manufacture drugs that require regulatory approval, including approval from the FDA, prior to being made, marketed, sold, and used. The regulatory approval process to manufacture and market drugs is costly, typically takes several years, requires validation through clinical trials and the use of substantial resources, and is often unpredictable. A tenant may fail to obtain or may experience significant delays in obtaining these approvals. Even if the tenant obtains regulatory approvals, marketed products will be subject to ongoing regulatory review and potential loss of approvals.
•The ability of some of our tenants to commercialize any future products successfully will depend in part on the coverage and reimbursement levels set by government authorities, private health insurers, and other third-party payers. Additionally, reimbursements may decrease in the future.
Failures in the safety and efficacy of their products
•Some of our tenants developing potential products may find that their products are not effective, or even are harmful, when tested in humans.
•Some of our tenants depend upon the commercial success of certain products. Even if a product made by a tenant is successfully developed and proven safe and effective in human clinical trials, and the requisite regulatory approvals are obtained, subsequent discovery of safety issues with these products could cause product liability events, additional regulatory scrutiny and requirements for additional labeling, loss of approval, withdrawal of products from the market, and the imposition of fines or criminal penalties.
•A drug made by a tenant may not be well accepted by doctors and patients, or may be less effective or accepted than a competitor’s drug, even if it is successfully developed.
•The negative results of safety signals arising from the clinical trials of the competitors of our tenants may prompt regulatory agencies to take actions that may adversely affect the clinical trials or products of our tenants.
Significant funding requirements for product research and development
•Some of our tenants require significant funding to develop and commercialize their products and technologies, which funding must be obtained from venture capital firms; private investors; the public markets; companies in the life science industry; or federal, state, and local governments. Such funding may become unavailable or difficult to obtain. The ability of each tenant to raise capital will depend on its financial and operating condition, viability of their products, and the overall condition of the financial, banking, and economic environment, as well as government budget policies.
•Even with sufficient funding, some of our tenants may not be able to discover or identify potential drug targets in humans, or potential drugs for use in humans, or to create tools or technologies that are commercially useful in the discovery or identification of potential drug targets or drugs.
•Some of our tenants may not be able to successfully manufacture their drugs economically, even if such drugs are proven through human clinical trials to be safe and effective in humans.
•Marketed products also face commercialization risk, and tenants may never realize projected levels of product utilization or revenues.
•Negative news regarding the products, the clinical trials, or other business developments of our tenants may cause their stock price or credit profile to deteriorate.
We cannot assure our stockholders that our life science industry tenants will be able to develop, make, market, or sell their products and technologies due to the risks inherent in the life science industry. Any life science industry tenant that is unable to avoid, or sufficiently mitigate, the risks described above may have difficulty making rental payments to us or satisfying their other lease obligations to us. Such risks may also decrease the credit quality of our life science industry tenants or cause us to expend more funds and resources on the space leased by these tenants than we originally anticipated. The increased burden on our resources due to adverse developments relating to our life science industry tenants may cause us to achieve lower-than-expected yields on the space leased by these tenants. Negative news relating to our more significant life science industry tenants may also adversely impact our stock price.
The companies in which we invest through our non-real estate venture investment portfolio expose us to risks similar to those of our tenant base and additional risks inherent in venture capital investing, which could materially affect our reported asset and liability values and earnings and may materially and adversely affect our reported results of operations.
Through our strategic venture investment portfolio, we hold investments in companies which, similar to our tenant base, are concentrated in the life science, technology and agtech industries. The companies in which we invest are accordingly subject to risks similar to those posed by our tenant base, including those disclosed in this Form 10-Q and in our annual report on Form 10-K for the year ended December 31, 2019. In addition, the companies in which we invest through our venture investment portfolio are subject to the risks inherent in venture capital investing and may be adversely affected by external factors beyond our control and other risks, including, but not limited to the following:
•Risks inherent in venture capital investing, which typically focuses on relatively new and small companies with unproven technologies and limited access to capital, and is therefore generally considered more speculative than investment in larger, more established companies.
•Market disruption and volatility, which may adversely affect the value of the companies in which we hold equity investments.
•Disruptions, uncertainty, or volatility in the capital markets and global economy, which may impact the ability of the companies in which we invest to raise additional capital or access capital from venture capital investors or financial institutions on favorable terms.
•The illiquidity of the companies in which we invest, which may (i) impede our ability to realize the value at which these investments are carried if we are required to dispose of them, (ii) make it difficult for us to sell these investments on a timely basis, and (iii) impair the value of such investments.
•Changes in the political climate, potential reforms and changes to government negotiation and regulation, the effect of healthcare reform legislation, including those that may limit pricing of pharmaceutical products and drugs, market prices and conditions, prospects for favorable or unfavorable clinical trial results, new product initiatives, the manufacturing and distribution of new products, product safety and efficacy issues, and new collaborative agreements, all of which may affect the valuation, funding opportunities, business operations, and financial results of the companies in which we invest.
•Changes in U.S. federal government organizations or other agencies, including changes in policy, regulations, budgeting, retention of key leadership and other personnel, administration of drug approvals or restrictions on drug product or service development or commercialization, or a partial or complete future government shutdown resulting in temporary closures of agencies such as the Food and Drug Administration and SEC, could adversely affect the companies in which we invest, including delays in the commercialization of such companies’ products, decreased funding of research and development in the life sciences, technology and agtech industries or delays surrounding approval of budget proposals for any of these industries.
•Impacts or changes in business in connection with the COVID-19 pandemic or for other reasons, including diversion of healthcare resources away from clinical trials, delays or difficulties enrolling patients or maintaining scheduled appointments in clinical trials, interruptions and delays in lab research due to the reduction in employee resources stemming from social distancing requirements and the desire of employees to avoid contact with people, insufficient inventory of supplies and reagents necessary for lab research due to interruptions in supply chain interruptions in supply chain, delays or difficulties obtaining clinical site locations or engaging clinical site staff, interruptions on clinical site monitoring due to travel restrictions, delays in interacting with or receiving approval from regulatory agencies in connection with research activities or clinical trials, disruptions to manufacturing facilities and supply lines.
•Reduction in revenue, and revenue growth in connection with the COVID-19 pandemic, deterioration in the global economy or for other reasons, may impair the value of the companies in which we hold equity investments or impede their ability to raise additional capital.
•Seasonal weather conditions, changes in availability of transportation or labor, especially in connection with the COVID-19 pandemic, and other related factors may affect the products and services or the availability of such products and services of the companies in which we invest in the agtech sector.
Many of the factors listed above are beyond our control and, if the companies in which we invest are adversely affected by any of the foregoing, could materially affect our reported asset and liability values and earnings and may materially and adversely affect our reported results of operations. The occurrence of any of these adverse events could cause the market price of shares of our common stock to decline regardless of the performance of our primary real estate business. You should review the additional risk factors in our annual report on Form 10-K for the year ended December 31, 2019.
Social, political, and economic instability, unrest, and other circumstances beyond our control could adversely affect our business operations.
Our business may be adversely affected by social, political, and economic instability, unrest, or disruption in a geographic region in which we operate, regardless of cause, including protests, demonstrations, strikes, riots, civil disturbance, disobedience, insurrection, or social and political unrest. Such events may result in restrictions, curfews, or other actions and give rise to significant changes in regional and global economic conditions and cycles, which may adversely affect our financial condition and operations.
There have been recent demonstrations and protests in cities throughout the U.S. as well as globally, including in Hong Kong, in connection with civil rights, liberties, and social and governmental reform. While protests have been peaceful in many locations, looting, vandalism, and fires have taken place in cities, including Seattle, Los Angeles, Washington, D.C., New York City, and Minneapolis, which led to the imposition of mandatory curfews and, in some locations, deployment of the U.S. National Guard. Government actions in an effort to protect people and property, including curfews and restrictions on business operations, may disrupt operations, harm perceptions of personal well-being, and increase the need for additional expenditures on security resources. In addition, action resulting from such social or political unrest may pose significant risks to our personnel, facilities, and operations. The effect and duration of the demonstrations, protests, or other factors is uncertain, and we cannot assure there will not be further political or social unrest in the future or that there will not be other events that could lead to the disruption of social, political, and economic conditions. If such events or disruptions persist for a prolonged period of time, our overall business and results of operations may be adversely affected.
Any or all of the foregoing could have a material adverse effect on our financial condition, results of operations, and cash flows, or the market price of our common stock. Additional risks and uncertainties not currently known to us, or that we presently deem to be immaterial, may also have potential to materially adversely affect our business, financial condition, and results of operations.
ITEM 6. EXHIBITS
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Exhibit Number
| | Exhibit Title | | Incorporated by Reference to: | | Date Filed |
3.1* | | | | Form 10-Q | | August 14, 1997 |
3.2* | | | | Form 10-Q | | August 14, 1997 |
3.3* | | | | Form 8-K | | May 12, 2017 |
3.4* | | | | Form 8-K | | May 11, 2015 |
3.5* | | | | Form 10-Q | | August 13, 1999 |
3.6*3.5* | | | | Form 8-K | | February 10, 2000 |
3.7*3.6* | | | | Form 8-K | | February 10, 2000 |
3.8*3.7* | | | | Form 8-A | | January 18, 2002 |
3.9*3.8* | | | | Form 8-A | | June 28, 2004 |
3.10*3.9* | | | | Form 8-K | | March 25, 2008 |
3.11*3.10* | | | | Form 8-K | | March 14, 2012 |
3.12*3.11* | | | | Form 8-K | | May 12, 2017 |
4.1* | | | | Form 10-Q | | May 5, 2011 |
4.2* | | | | Form 8-K | | 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 | | Form 8-K | | 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 | | Form 8-K | | February 29, 2012 |
4.5* | | | | Form 8-K | | February 29, 2012 |
4.6* | | | | Form 8-A | | 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 | | Form 8-K | | June 7, 2013 |
4.8* | | | | Form 8-K | | June 7, 2013 |
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 | | Form 8-K | | July 18, 2014 |
4.10* | | | | Form 8-K | | July 18, 2014 |
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 | | Form 8-K | | July 18, 2014 |
4.12* | | | | Form 8-K | | July 18, 2014 |
4.13* | | Indenture, dated as of November 17, 2015, among the Company, as Issuer, Alexandria Real Estate Equities, L.P., as Guarantor, and Wilmington Trust, National Association, as Trustee | | Form 8-K | | November 17, 2015 |
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3.12* | | | | | | |
Exhibit
Number
| | Exhibit Title | | Incorporated by Reference to: | | Date Filed |
4.14* | | Supplemental Indenture No. 1, dated as of November 17, 2015, among the Company, as Issuer, Alexandria Real Estate Equities, L.P., as Guarantor, and Wilmington Trust, National Association, as Trustee | | Form 8-K | | November 17, 2015 |
4.15* | | | | Form 8-K | | November 17, 2015 |
4.16* | | Supplemental Indenture No. 2, dated as of June 10, 2016, among the Company, as Issuer, Alexandria Real Estate Equities, L.P., as Guarantor, and Wilmington Trust, National Association, as Trustee | | Form 8-K | | June 10, 2016 |
4.17* | | | | Form 8-K | | June 10, 2016 |
4.18* | | | | Form 8-K | | March 3, 2017 |
4.19* | | | | Form 8-K | | March 3, 2017 |
4.20* | | | | Form 8-K | | March 3, 2017 |
10.1* | | Fifth Amended and Restated Credit Agreement, dated asBylaws of July 29, 2016, among the Company as Borrower, Alexandria Real Estate Equities, L.P., as Guarantor, Bank of America, N.A., as Administrative Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Chase Bank, N.A., and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Book Runners, JPMorgan Chase Bank, N.A. and Citigroup Global Markets Inc., as Co-Syndication Agents, Barclays Bank PLC, BBVA Compass, Capital One, National Association, Goldman Sachs Bank USA, Mizuho Bank, Ltd., Regions Bank, Royal Bank of Canada, Sumitomo Mitsui Banking Corporation, TD Bank, N.A., The Bank of Nova Scotia, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Co-Documentation Agents(Amended July 27, 2018) | | Form 10-Q8-K | | NovemberAugust 2, 20162018 |
10.2*10.1 | | FirstLetter Amendment to AmendedAmended and Restated Term Loan Agreement,Restated Executive Employment Agreement, dated as of July 29, 2016, among the Company, as Borrower, Alexandria Real Estate Equities, L.P.June 8, as Guarantor, Bank of America, N.A., as Administrative Agent, JPMorgan Chase Bank, N.A. and Citigroup Global Markets Inc., as Co-Syndication Agents, Barclays Bank PLC, Capital One, N.A., Compass Bank, Credit Agricole Corporate and Investment Bank, Goldman Sachs Bank USA, HSBC Bank USA, National Association, Royal Bank of Canada, The Bank of Nova Scotia, and The Royal Bank of Scotland PLC, as Co-Documentation Agents, and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Lead Book Runners | | Form 10-Q | | November 2, 2016 |
10.3* | | First Amendment to Third Amended and Restated Term Loan Agreement, dated as of July 29, 2016, among the Company, as Borrower, Alexandria Real Estate Equities, L.P., as Guarantor, Citibank, N.A., as Administrative Agent, Royal Bank of Canada and The Bank of Nova Scotia, as Co-Syndication Agents, Compass Bank, Regions Bank, MUFG Union Bank, N.A., SunTrust Bank, TD Bank, N.A., Mizuho Bank (USA), and PNC Bank National Association, as Co-Documentation Agents, and Citigroup Global Markets Inc., RBC Capital Markets, and The Bank of Nova Scotia, as Joint Lead Arrangers and Joint Book Running Managers | | Form 10-Q | | November 2, 2016 |
10.4* | | | | Form 8-KN/A | | July 3, 2017Filed herewith |
12.122.0 | | | | N/A | | Filed herewith |
31.1 | | | | N/A | | Filed herewith |
31.2 | | | | N/A | | Filed herewith |
31.3 | | | | N/A | | Filed herewith |
31.4 | | | | N/A | | Filed herewith |
32.0 | | | | N/A | | Filed herewith |
|
101.1 | | | | | | |
Exhibit
Number
| | Exhibit Title | | Incorporated by Reference to: | | Date Filed |
101 | | The following materials from the Company’s quarterly report on Form 10-Q for the three monthsquarterly period ended SeptemberJune 30, 20172020, formatted in XBRL (eXtensibleiXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of SeptemberJune 30, 20172020, and December 31, 20162019 (unaudited), (ii) Consolidated Statements of IncomeOperations for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (unaudited), (iii) Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (unaudited), (iv) Consolidated StatementStatements of Changes in Stockholders’ Equity and Noncontrolling Interests for the ninethree and six months ended SeptemberJune 30, 20172020 and 2019 (unaudited), (v) Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited) | | N/A | | Filed herewith |
104 | | Cover Page Interactive Data File – the cover page from this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, is formatted in Inline XBRL and contained in Exhibit 101.1 | | N/A | | Filed herewith |
(*) Incorporated by reference.
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 October 31, 2017.
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| ALEXANDRIA REAL ESTATE EQUITIES, INC. |
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| ALEXANDRIA REAL ESTATE EQUITIES, INC. |
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| /s/ Joel S. Marcus |
| Joel S. Marcus Chairman/Chief Executive Officer
Chairman (Principal Executive Officer) |
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| /s/ Stephen A. Richardson |
| Stephen A. Richardson Co-Chief Executive Officer (Principal Executive Officer) |
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| /s/ Peter M. Moglia |
| Peter M. Moglia Co-Chief Executive Officer and Co-Chief Investment Officer (Principal Executive Officer) |
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| /s/ Dean A. Shigenaga |
| Dean A. Shigenaga Co-President and Chief Financial Officer
(Principal Financial Officer)
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