10-Q 1 a1q1710q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

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

For the transition period from ____________ to ____________

Commission file number 1-12993

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

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   No 

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.
Large accelerated filer
Accelerated filer 
Non-accelerated filer    (Do not check if a smaller reporting company)
Smaller reporting company 
 
Emerging growth company 


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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

As of April 14, 2017, 91,073,397 shares of common stock, par value $0.01 per share, were outstanding.



TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i





GLOSSARY

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

ASU
Accounting Standards Update
ATM
At the Market
BBA
British Bankers’ Association
CIP
Construction in Progress
EPS
Earnings per Share
FASB
Financial Accounting Standards Board
FFO
Funds from Operations
GAAP
U.S. Generally Accepted Accounting Principles
HVAC
Heating, Ventilation, and Air Conditioning
JV
Joint Venture
LEED®
Leadership in Energy and Environmental Design
LIBOR
London Interbank Offered Rate
NAREIT
National Association of Real Estate Investment Trusts
NYSE
New York Stock Exchange
REIT
Real Estate Investment Trust
RSF
Rentable Square Feet/Foot
SEC
Securities and Exchange Commission
SF
Square Feet/Foot
SoMa
South of Market (submarket of the San Francisco market)
U.S.
United States
VIE
Variable Interest Entity



ii





PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Alexandria Real Estate Equities, Inc.
Consolidated Balance Sheets
(In thousands)
(Unaudited)
 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
Investments in real estate
$
9,470,667

 
$
9,077,972

Investments in unconsolidated real estate joint venture
50,457

 
50,221

Cash and cash equivalents
151,209

 
125,032

Restricted cash
18,320

 
16,334

Tenant receivables
9,979

 
9,744

Deferred rent
364,348

 
335,974

Deferred leasing costs
202,613

 
195,937

Investments
394,471

 
342,477

Other assets
206,562

 
201,197

Total assets
$
10,868,626

 
$
10,354,888

 
 
 
 
Liabilities, Noncontrolling Interests, and Equity
 
 
 
Secured notes payable
$
1,083,758

 
$
1,011,292

Unsecured senior notes payable
2,799,508

 
2,378,262

Unsecured senior line of credit

 
28,000

Unsecured senior bank term loans
547,420

 
746,471

Accounts payable, accrued expenses, and tenant security deposits
782,637

 
731,671

Dividends payable
78,976

 
76,914

Preferred stock redemption liability
130,000

 

Total liabilities
5,422,299

 
4,972,610

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Redeemable noncontrolling interests
11,320

 
11,307

 
 
 
 
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
899

 
877

Additional paid-in capital
4,855,686

 
4,672,650

Accumulated other comprehensive income
21,460

 
5,355

Alexandria Real Estate Equities, Inc.’s stockholders’ equity
4,952,431

 
4,895,796

Noncontrolling interests
482,576

 
475,175

Total equity
5,435,007

 
5,370,971

Total liabilities, noncontrolling interests, and equity
$
10,868,626

 
$
10,354,888



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

1





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

 
Three Months Ended March 31,
 
2017
 
2016
Revenues:
 
 
 
Rental
$
207,193

 
$
158,276

Tenant recoveries
61,346

 
52,597

Other income
2,338

 
5,216

Total revenues
270,877

 
216,089

 
 
 
 
Expenses:
 
 
 
Rental operations
77,087

 
65,837

General and administrative
19,229

 
15,188

Interest
29,784

 
24,855

Depreciation and amortization
97,183

 
70,866

Impairment of real estate

 
28,980

Loss on early extinguishment of debt
670

 

Total expenses
223,953

 
205,726

 
 
 
 
Equity in earnings (losses) of unconsolidated real estate joint ventures
361

 
(397
)
Gain on sales of real estate – rental properties
270

 

Net income
47,555

 
9,966

Net income attributable to noncontrolling interests
(5,844
)

(4,030
)
Net income attributable to Alexandria Real Estate Equities, Inc.’s stockholders
41,711

 
5,936

Dividends on preferred stock
(3,784
)
 
(5,907
)
Preferred stock redemption charge
(11,279
)
 
(3,046
)
Net income attributable to unvested restricted stock awards
(987
)
 
(801
)
 Net income (loss) attributable to Alexandria Real Estate Equities, Inc.’s common stockholders
$
25,661

 
$
(3,818
)
 
 
 
 
 Net income (loss) per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders – basic and diluted
 
 
 
 Net income (loss) per share
$
0.29

 
$
(0.05
)
 
 
 
 
Dividends declared per share of common stock
$
0.83

 
$
0.80



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

2





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

 
Three Months Ended March 31,
 
2017
 
2016
Net income
$
47,555

 
$
9,966

Other comprehensive income (loss)
 
 
 
Unrealized gains (losses) on available-for-sale equity securities:
 
 
 
Unrealized holding gains (losses) arising during the period
10,421

 
(47,423
)
Reclassification adjustments for losses (gains) included in net income
133

 
(7,026
)
Unrealized gains (losses) on available-for-sale equity securities, net
10,554

 
(54,449
)
 
 
 
 
Unrealized gains (losses) on interest rate hedge agreements:
 
 
 
Unrealized interest rate hedge gains (losses) arising during the period
1,217

 
(6,961
)
Reclassification adjustment for amortization to interest expense included in net income
905

 
158

Unrealized gains (losses) on interest rate hedge agreements, net
2,122

 
(6,803
)
 
 
 
 
Unrealized gains on foreign currency translation:
 
 
 
Unrealized foreign currency translation gains arising during the period
1,012

 
3,528

Reclassification adjustments for losses included in net income
2,421

 

Unrealized gains on foreign currency translation, net
3,433

 
3,528

 
 
 
 
Total other comprehensive income (loss)
16,109

 
(57,724
)
 Comprehensive income (loss)
63,664

 
(47,758
)
Less: comprehensive income attributable to noncontrolling interests
(5,848
)
 
(4,030
)
Comprehensive income (loss) attributable to Alexandria Real Estate Equities, Inc.’s common stockholders
$
57,816

 
$
(51,788
)

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


3





Alexandria Real Estate Equities, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests
(Dollars in thousands)
(Unaudited)

 
 
Alexandria Real Estate Equities, Inc.’s Stockholders’ Equity
 
 
 
 
 
 
 
 
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
 

 

 

 

 

 
41,711

 

 
5,617

 
47,328

 
227

Total other comprehensive income
 

 

 

 

 

 

 
16,105

 
4

 
16,109

 

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(5,108
)
 
(5,108
)
 
(214
)
Contributions from noncontrolling interests
 

 

 

 

 

 

 

 
6,888

 
6,888

 

Issuances of common stock
 

 

 
2,100,000

 
21

 
217,738

 

 

 

 
217,759

 

Issuances pursuant to stock plan
 

 

 
118,373

 
1

 
8,717

 

 

 

 
8,718

 

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
 

 

 

 

 

 
(75,590
)
 

 

 
(75,590
)
 

Dividends declared on preferred stock
 

 

 

 

 

 
(3,784
)
 

 

 
(3,784
)
 

Distributions in excess of earnings
 

 

 

 

 
(48,942
)
 
48,942

 

 

 

 

Balance as of March 31, 2017
 
$
74,386

 
$

 
89,884,253

 
$
899

 
$
4,855,686

 
$

 
$
21,460

 
$
482,576

 
$
5,435,007

 
$
11,320



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

4





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

 
Three Months Ended March 31,
 
2017
 
2016
Operating Activities
 
 
 
Net income
$
47,555

 
$
9,966

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
97,183

 
70,866

Loss on early extinguishment of debt
670

 

Gain on sales of real estate – rental properties
(270
)
 

Impairment of real estate

 
28,980

Equity in (earnings) losses of unconsolidated real estate joint ventures
(361
)
 
397

Distributions of earnings from unconsolidated real estate joint ventures
125

 
98

Amortization of loan fees
2,895

 
2,760

Amortization of debt premiums
(596
)
 
(86
)
Amortization of acquired below-market leases
(5,359
)
 
(974
)
Deferred rent
(35,592
)
 
(12,138
)
Stock compensation expense
5,252

 
5,439

Investment gains
(1,795
)
 
(5,891
)
Investment losses
308

 
1,782

Changes in operating assets and liabilities:
 
 
 
Restricted cash
(180
)
 
671

Tenant receivables
(235
)
 
521

Deferred leasing costs
(16,072
)
 
(7,083
)
Other assets
(3,987
)
 
(2,525
)
Accounts payable, accrued expenses, and tenant security deposits
17,923

 
8,999

Net cash provided by operating activities
107,464

 
101,782

 
 
 
 
Investing Activities
 
 
 
Proceeds from sales of real estate
2,827

 

Additions to real estate
(218,473
)
 
(159,501
)
Purchase of real estate
(217,643
)
 

Deposits for investing activities
3,200

 

Investments in unconsolidated real estate joint ventures

 
(449
)
Additions to investments
(43,974
)
 
(22,085
)
Sales of investments
5,707

 
10,913

Net cash used in investing activities
$
(468,356
)
 
$
(171,122
)

5





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

 
Three Months Ended March 31,
 
2017
 
2016
Financing Activities
 
 
 
Borrowings from secured notes payable
$
73,401

 
$
64,922

Repayments of borrowings from secured notes payable
(829
)
 
(58,657
)
Proceeds from issuance of unsecured senior notes payable
424,384

 

Borrowings from unsecured senior line of credit
1,139,000

 
555,000

Repayments of borrowings from unsecured senior line of credit
(1,167,000
)
 
(407,000
)
Repayments of borrowings from unsecured senior bank term loans
(200,000
)
 

Change in restricted cash related to financing activities
(1,806
)
 
8,316

Payment of loan fees
(4,335
)
 
(377
)
Repurchase of preferred stock
(17,934
)
 
(25,618
)
Proceeds from the issuance of common stock
217,759

 
25,278

Dividends on common stock
(73,705
)
 
(56,490
)
Dividends on preferred stock
(3,617
)
 
(6,247
)
Financing costs paid for sale of noncontrolling interests

 
(6,420
)
Contributions from noncontrolling interests
6,888

 

Distributions to noncontrolling interests
(5,322
)
 
(1,927
)
Net cash provided by financing activities
386,884

 
90,780

 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
185

 
(341
)
 
 
 
 
Net increase in cash and cash equivalents
26,177

 
21,099

Cash and cash equivalents as of the beginning of period
125,032

 
125,098

Cash and cash equivalents as of the end of period
$
151,209

 
$
146,197

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash paid during the period for interest, net of interest capitalized
$
30,080

 
$
14,068

 
 
 
 
Non-Cash Investing Activities:
 
 
 
Change in accrued construction
$
(1,693
)
 
$
29,197

 
 
 
 
Non-Cash Financing Activities:
 
 
 
Payable for redemption of preferred stock
$
130,000

 
$


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


6


Alexandria Real Estate Equities, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

1.
Background

As used in this quarterly report on Form 10-Q, references to the “Company,” “Alexandria,” “ARE,” “we,” “us,” and “our” refer to Alexandria Real Estate Equities, Inc. and its consolidated subsidiaries.

Alexandria Real Estate Equities, Inc. (NYSE:ARE), an S&P 500® company, is an urban office REIT uniquely focused on collaborative life science and technology campuses in AAA innovation cluster locations with a total market capitalization of $14.5 billion and an asset base in North America of 28.2 million square feet, as of March 31, 2017. The asset base in North America includes 20.1 million RSF of operating properties, including 1.6 million RSF of development and redevelopment of new Class A properties currently undergoing construction. Additionally, the asset base in North America includes 8.1 million SF of future development projects, including 1.5 million SF of near-term projects undergoing marketing for lease and preconstruction activities and 2.0 million SF of other near-term development projects. Founded in 1994, Alexandria pioneered this niche and has 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. Alexandria has a longstanding and proven track record of developing Class A properties clustered in urban life science and technology campuses that provide its 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. 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 March 31, 2017:

Investment-grade tenants represented 51% of our total annual rental revenue;
Approximately 97% of our leases (on an RSF basis) were triple net leases, requiring tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses, and other operating expenses (including increases thereto) in addition to base rent;
Approximately 96% 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 95% of our leases (on an RSF basis) provided for the recapture of certain capital expenditures (such as HVAC systems maintenance and/or replacement, roof replacement, and parking lot resurfacing) that we believe would typically be borne by the landlord in traditional office leases.

Any references to our market capitalization, number or quality of buildings, quality of location, square footage, number of leases, occupancy percentage, and tenants, and any amounts derived from these values in the notes to consolidated financial statements, are unaudited.

7


2.
Basis of presentation and summary of significant accounting policies

We have prepared the accompanying interim consolidated financial statements in accordance with GAAP and in conformity with the rules and regulations of the SEC. In our opinion, the interim consolidated financial statements presented herein reflect all adjustments, 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. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2016.

Basis of presentation and consolidation

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

Consolidation

On an ongoing basis, as circumstances indicate the need for reconsideration, we evaluate each legal entity that is not wholly owned by us, under the consolidation guidance, first under the variable interest model and then under the voting model. 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. The variable interest model applies to entities that meet both of the following criteria:

A legal structure 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
The entity established has variable interests – i.e., it has 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 meets both criteria above, we then evaluate such entity under the variable interest model. If an entity does not meet these criteria, we then evaluate such entity under the voting model or apply other GAAP, such as the cost or equity method of accounting.

Variable interest model

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 criteria 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; and
The right to receive the entity’s expected residual returns.

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 entities structured as limited partnerships or limited liability companies, our evaluation of whether the equity holders (equity partners other than us in each of our joint ventures) 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.


8



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

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.

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 potentially could be significant to the VIE (benefits). We consolidate VIEs whenever we determine that we are the primary beneficiary. Refer to Note 3 – “Investments in Real Estate” 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 (insufficiency of equity, non-substantive voting rights, or lack of 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 – “Investment in Unconsolidated Real Estate Joint Venture” to these unaudited consolidated financial statements for further information on our unconsolidated real estate joint venture that qualifies 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 (see “Recent Accounting Pronouncements” below) 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. This update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for transactions that have not been reported in previously issued (or available to be issued) financial statements. We early adopted this accounting standard effective October 1, 2016, and have evaluated all of our acquisitions since then under the new framework.

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 if the integrated set of assets and activities acquired meet the definition of a business and need to be accounted as a business combination. 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.

9



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


Generally, we expect that acquisitions of real estate or in-substance real estate will 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 length contracts, and the availability of comparable vendors in evaluating whether the acquired contract constitutes a substantive process.

Recognition of real estate acquired

For acquisitions of real estate or in-substance real estate that are accounted for as business combinations, we recognize 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. 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.

Acquisitions of real estate and in-substance real estate that do not meet the definition of a business are accounted for as asset acquisitions. 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. As a result, asset acquisitions do not result in the recognition of goodwill or a bargain purchase gain. In addition, because 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 basis.

The relative fair values used to allocate the cost of an asset acquisition are determined by the same methodologies and assumptions we utilize to determine fair value in a business combination.

If there is a bargain fixed-rate renewal option for the period beyond the non-cancelable lease term of an in-place lease, we evaluate factors, such as the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease 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. The value of tangible assets acquired is based upon our estimation of value on an “as if vacant” basis. The value of acquired in-place leases includes the estimated costs during the hypothetical lease-up period and other costs that would have been incurred in the execution of similar leases under the market conditions at the acquisition date of the acquired in-place lease. We assess the fair value of tangible and intangible assets based on numerous factors, including estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors, including the historical operating results, known trends, and market/economic conditions, that may affect the property.

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

10



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


Capitalized project costs

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

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

Impairment of long-lived assets

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

Long-lived assets to be held and used, including our rental properties, CIP, land held for development, and intangibles, are individually evaluated for impairment when conditions exist that may indicate that the carrying amount of a long-lived asset may not be recoverable. The carrying amount of a long-lived asset to be held and used is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Impairment indicators or triggering events for long-lived assets to be held and used, including our rental properties, 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, and our assumptions about the use of the asset, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value. If an impairment loss is not required to be recognized, the recognition of depreciation is adjusted prospectively, as necessary, to reduce the carrying amount of the real estate to its estimated disposition value over the remaining period that the real estate is expected to be held and used. We may adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives.

We use the held for sale impairment model for our properties classified as held for sale. The held for sale impairment model is different from the held and used impairment model. Under the held for sale impairment model, an impairment loss is recognized if the 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.

11



2.
Basis of presentation and 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 and technology industries. All of our equity investments in actively traded public companies are considered available-for-sale and are reflected in the accompanying consolidated balance sheets at fair value. Fair value has been determined based upon the closing price as of each balance sheet date, with unrealized gains and losses shown as a separate component of other comprehensive income. The classification of each investment is determined at the time each investment is made, and such determination is reevaluated at each balance sheet date. The cost of each investment sold is determined by the specific identification method, with realized gains or losses classified in other income in the accompanying consolidated statements of income. Investments in privately held entities are generally accounted for under the cost method when our interest in the entity is so minor that we have virtually no influence over the entity’s operating and financial policies. Certain investments in privately held entities 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 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%.

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

Recognition of rental income and tenant recoveries

Rental revenue from operating leases is recognized on a straight-line basis over the respective lease terms. We classify amounts currently recognized as rental revenue in our consolidated statement of income, and amounts expected to be received in later years as deferred rent in the accompanying consolidated balance sheets. Amounts received currently but recognized as revenue in future years are classified in accounts payable, accrued expenses, and tenant security deposits in the accompanying consolidated balance sheets. We commence recognition of rental 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 from direct financing leases is recognized over the lease term using the effective interest rate method. At lease inception, 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 revenue in our consolidated statements of income and produces a constant periodic rate of return on the net investment in the direct financing lease.

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

Tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes, and other expenses recoverable from 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 terms of the lease and for tenant recoveries due. If a tenant fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the amount of uncollectible tenant receivables and deferred rent arising from the straight-lining of rent. As of March 31, 2017 and December 31, 2016, no allowance for uncollectible tenant receivables and deferred rent was deemed necessary.


12



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

Monitoring tenant credit quality

During the term of each lease, we monitor the credit quality 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, and undergraduate degrees in biology, chemistry, and industrial biotechnology and experience in the life science and technology industries, as well as in finance. Our research team is responsible for assessing and monitoring the credit quality of our tenants and any material changes in their credit quality.

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 shareholders 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 jurisdiction 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 2011–2016 calendar years.

Other income

The following is a summary of the other income in the accompanying consolidated statements of income for the three months ended March 31, 2017 and 2016 (in thousands):

 
 
Three Months Ended March 31,
 
 
2017
 
2016
Management fee income
 
$
313

 
$
253

Interest and other income
 
538

 
854

Investment income
 
1,487

 
4,109

Total other income
 
$
2,338

 
$
5,216


Recent accounting pronouncements

On January 1, 2017, we adopted an ASU issued by the FASB in March 2016 that simplifies several aspects of employee share-based payment accounting, including the accounting for forfeitures. The ASU allows an entity to make an accounting policy election either to continue to estimate the total number of awards that are expected to vest (current method) or to account for forfeitures when they occur. This entity-wide accounting policy election only applies to service conditions; for performance conditions, the entity continues to assess the probability that such conditions will be achieved. If an entity elects to account for forfeitures when they occur, all nonforfeitable dividends paid on share-based payment awards are initially charged to retained earnings and reclassified to compensation cost only when forfeitures of the underlying awards occur. We elected to account for forfeitures when they occur and applied this ASU on a modified retrospective basis as 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 adoption of the ASU on January 1, 2017.


13



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

In January 2016, the FASB issued an ASU that amended the accounting for equity investments and the presentation and disclosure requirements for financial instruments. The ASU requires equity investments that have a readily determinable fair value (except those accounted for under the equity method of accounting or that result in consolidation) to be measured at fair value, with the changes in fair value recognized in earnings. Available-for-sale equity securities that under current GAAP require the recognition of unrealized gains and losses in other comprehensive income will no longer be permitted. An election will be available to measure equity investments without a readily determinable fair value at cost less impairments, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Changes in the carrying value from this measurement will also be reported in current earnings. A cumulative-effect adjustment will be recorded to the beginning balance of retained earnings in the reporting period in which the guidance is adopted. The ASU is effective for fiscal years beginning after December 15, 2017. As of March 31, 2017, we had $29.8 million of net unrealized gains related to our available-for-sale equity securities in publicly traded companies included in accumulated other comprehensive income in our consolidated balance sheets.

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 contract (i.e., lessees and lessors). The ASU requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not 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 record 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 today. The ASU is expected to result in the recognition of a right-to-use asset and a related liability to account for our future obligations under our ground lease arrangements for which we are the lessee. As of March 31, 2017, the remaining contractual payments under our ground lease agreements aggregated $523.5 million. Additionally, the new ASU will require that lessees and 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 that are incurred, regardless of whether the lease is obtained, will no longer be capitalized as initial direct costs and instead will be expensed as incurred. During the three months ended March 31, 2017, we capitalized $3.3 million of such costs. Lessors will continue to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases, as well as and the accounting treatment for allocated payroll costs. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted, and requires the use of the modified retrospective transition method. We will continue to assess the potential effect the adoption of this ASU will have on our consolidated financial statements.

In May 2014, the FASB issued an ASU on recognition of revenue arising from contracts with customers, and has subsequently issued other ASUs that further clarified the ASU issued in 2014. In February 2017, as part of the new revenue standards, the FASB issued an ASU that eliminates the specific sales model for real estate and requires the recognition of a full gain upon a partial sale of real estate. The core principle underlying these ASUs 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 to in such exchange. Leases are specifically excluded from these standards. The majority of our revenue comprises rental income, which will continue to be governed by the applicable lease accounting standards. However, these updates may have implications in our other revenue streams, including management fees, tenant recoveries, parking revenue, and gains and losses from real estate dispositions. We are currently analyzing our performance obligations set forth in our lease agreements to determine the impact of these standards on the timing of revenue recognition for items other than rental income. The new revenue standards are effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, with the option to adopt earlier. The standards permit the use of either the full retrospective approach (i.e., applied to prior periods currently being presented) or the modified retrospective approach. We continue to assess the potential effect the adoption of this ASU will have on our consolidated financial statements.

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.


14



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

In August 2016, the FASB issued an ASU that provides guidance on the classification in the statement of cash flows of cash distributions received from equity method investments, including unconsolidated joint ventures. The ASU provides two approaches to determine the classification of cash 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 inflows 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 be classified based on the nature of the underlying activity that generated cash distributions. Companies will elect either the “cumulative earnings” or the “nature of the distribution” approach. Entities that elect the “nature of the distribution” approach but lack the information to apply it will 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). During the three months ended March 31, 2017, distributions received from our equity method investees aggregated approximately $125 thousand. We will continue to assess the potential effect the adoption of this ASU will have on our consolidated financial statements

In November 2016, the FASB issued an ASU that will require companies to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. The ASU will require a disclosure of a reconciliation between the statement of financial position and the statement of cash flows when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. Entities with material restricted cash and restricted cash equivalents balances will be required to disclose 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 retrospectively to all periods presented. As of March 31, 2017 and December 31, 2016, we had $18.3 million and $16.3 million of restricted cash, respectively, in 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 showing changes in restricted cash balances will be eliminated from our consolidated statements of cash flows.

In January 2017, the FASB issued an ASU that clarified the definition of a business. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted this update on October 1, 2016. Refer to “Investments in Real Estate and Properties Classified as Held for Sale” above for a discussion of this new accounting pronouncement.

15





3.
Investments in real estate

Our consolidated investments in real estate consisted of the following as of March 31, 2017 and December 31, 2016 (in thousands):
 
 
March 31, 2017
 
December 31, 2016
North America:
 
 
 
 
Land (related to rental properties)
 
$
1,130,352

 
$
1,131,416

Buildings and building improvements
 
8,073,029

 
7,810,269

Other improvements
 
597,937

 
584,565

Rental properties
 
9,801,318

 
9,526,250

Undergoing construction
 
744,221

 
809,254

Marketing and pre-construction
 
91,872

 

Near-term developments
 
111,113

 

Future development projects
 
309,343

 
253,551

Gross investments in real estate – North America
 
11,057,867

 
10,589,055

Less: accumulated depreciation
 
(1,623,228
)
 
(1,546,798
)
Net investments in real estate – North America
 
9,434,639

 
9,042,257

Net investments in real estate – Asia (1)
 
36,028

 
35,715

Investments in real estate
 
$
9,470,667

 
$
9,077,972


(1)
Refer to “Assets classified as held for sale in Asia” in Note 14 – “Assets Classified as Held for Sale” to these unaudited consolidated financial statements for further information.


Acquisitions

Cambridge/Greater Boston

303 Binney Street

In March 2017, we acquired land parcels at 303 Binney Street in the East Cambridge submarket of Greater Boston for a purchase price of $80.3 million. The property is located adjacent to our Alexandria Center® at One Kendall Square campus and is currently entitled for the development of 163,339 RSF for office or office/laboratory use and 45,626 RSF for residential use. We may seek to increase the entitlements for office or office/laboratory use, which may result in additional purchase price consideration.

Mission Bay/SoMa/San Francisco

88 Bluxome Street

In January 2017, we acquired land parcels aggregating 2.6 acres at 88 Bluxome Street in our Mission Bay/SoMa submarket of San Francisco, for a purchase price of $130.0 million. We are currently pursuing entitlements for the development of this site and anticipate an aggregate of 1,070,925 RSF to be available for construction of two buildings in separate phases.

1655 and 1715 Third Street

We executed an agreement to purchase a 10% interest in a joint venture with Uber Technologies, Inc. (“Uber”) and the Golden State Warriors. Our initial cash contribution of $35.0 million will be funded at closing of the joint venture in 2018. The joint venture will acquire land with completed below-grade improvements, building foundation and parking garage, and will complete vertical construction of two buildings aggregating 580,000 RSF, which will be leased to Uber.

16



3.
Investments in real estate (continued)


Greater Stanford/San Francisco

960 Industrial Road

In March 2017, we entered into a definitive purchase and sale agreement to acquire 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. We expect to pursue aggregate entitlements of 500,000 RSF for a multi-building development. We anticipate leasing the existing property back to the seller under a short-term lease until we obtain entitlements and expect to demolish the existing operating property upon securing the entitlements. We expect to complete the acquisition in the second quarter of 2017.

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. These land parcels can support the development of 229,000 RSF in aggregate.

Research Triangle Part/RTP

3054 East Cornwallis Road

In March 2017, we entered into a definitive purchase and sale agreement to acquire a 150,000 RSF redevelopment property at 3054 East Cornwallis Road in our Research Triangle Park submarket for a purchase price of $8.8 million. The property is currently vacant and we plan to redevelop the property for office/laboratory use. We expect to complete the acquisition in the second quarter of 2017.

We evaluated the completed transactions above, under the new framework for determining whether an integrated set of assets and activities meets the definition of 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 the fair value of the gross assets is concentrated in either a single identifiable asset or a group of similar identifiable assets.

We evaluated each of the completed acquisitions and determined that substantially all the fair value related to each acquisition is concentrated in a similar identifiable operating property. Accordingly, these transactions did not meet the definition of a business and consequently were accounted for as asset acquisitions. 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.


17



3.
Investments in real estate (continued)


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 March 31, 2017 were $90.2 million. Remaining proceeds from our partner of $16.1 million are expected to be received primarily in the second half of 2017.

In December 2016, we completed a separate joint venture agreement with TIAA to sell a 45% partial interest in 10300 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 December 31, 2016 were $137.3 million. Remaining proceeds of $12.7 million are expected to be received primarily in the second half of 2017.

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 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, (ii) 50.1% in 1500 Owens Street in our Mission Bay/SoMa submarket, (iii) 60% in 409 and 499 Illinois Street in our Mission Bay/SoMa submarket, and (iv) 55% in 10290 and 10300 Campus Point Drive in our University Town Center submarket.

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 and, in the case of 10290 Campus Point Drive, for managing the redevelopment construction of the project.

For each of our joint ventures with TIAA, we first evaluated the partially owned legal entity that owns the property under the variable interest model to determine whether each entity met any of the three characteristics of a VIE, which are as follows:

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.

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.

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 in Note 2 – “Basis of Presentation and Summary of Significant Accounting Policies” to our consolidated financial statements, TIAA, as the non-managing member of each joint venture, lacks the characteristics of a controlling financial interest in each joint venture because it does not have substantive kick-out rights or substantive participating rights. Therefore, each joint venture meets the criteria to be considered a VIE and accordingly is evaluated for consolidation under the variable interest model.


18



3.
Investments in real estate (continued)

After determining that these joint ventures are VIEs, we determined that we are the primary beneficiary of each real estate joint venture as, in our capacity as managing member, we have the power to make decisions that most significantly influence operations and economic performance of the 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, and therefore, we consolidate each entity.

The following table aggregates the balance sheet information of our consolidated VIEs as of March 31, 2017, and
December 31, 2016 (in thousands):
 
 
March 31, 2017
 
December 31, 2016
Investments in real estate
 
$
986,381

 
$
993,710

Cash and cash equivalents
 
27,294

 
27,498

Other assets
 
62,031

 
57,166

Total assets
 
$
1,075,706

 
$
1,078,374

 
 
 
 
 
Secured notes payable
 
$

 
$

Other liabilities
 
55,356

 
66,711

Total liabilities
 
55,356

 
66,711

Alexandria Real Estate Equities, Inc.’s share of equity
 
539,253

 
538,069

Noncontrolling interests’ share of equity
 
481,097

 
473,594

Total liabilities and equity
 
$
1,075,706

 
$
1,078,374

 
 
 
 
 

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 of each VIE, we present the balance sheet information of these entities on an aggregated basis.

There are no creditors or other partners of our consolidated VIEs who have recourse to our general credit. Our maximum exposure to all our VIEs is limited to our variable interests in each VIE.


Sale of real estate

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.

Commitments to sell real estate

One of our tenants in our San Diego market 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 $7.5 million as of March 31, 2017. The option is exercisable at a purchase price of $20.8 million, excluding any customary and ordinary closing costs.

Our anchor tenant at 360 Longwood Avenue, located in our Longwood Medical Area submarket of Greater Boston exercised its fixed-price option to purchase from us a condominium interest in the property that they currently leases. For additional information, refer to Note 4 – “Investment in Unconsolidated Real Estate Joint Venture” to these consolidated financial statements.    


19





4.
Investment in unconsolidated real estate joint venture

360 Longwood Avenue

We have a 27.5% ownership interest in an unconsolidated real estate joint venture that owns a building aggregating 413,799 RSF in our Longwood Medical Area submarket of Greater Boston. As of March 31, 2017, the project was 76% occupied. Our equity investment in this unconsolidated real estate joint venture was $50.5 million as of March 31, 2017. Our anchor tenant at the property exercised its option to purchase a condominium interest representing 203,090 RSF, or 49%, of the property, pursuant to a fixed-price purchase option in its original lease agreement executed in 2011. The sale of the property is expected to close in July 2017. Our share of the sales price is estimated at $65.7 million, excluding any customary and ordinary closing costs. As of March 31, 2017, our share of the net book value of the portion of the property expected to be sold is $51.2 million. The unconsolidated real estate joint venture has a non-recourse, secured construction loan that includes the following key terms (amounts represent 100% at the joint venture level, dollars in thousands):
Tranche
 
Maturity Date
 
Stated Rate
 
Outstanding Balance
 
Remaining Commitments
 
Total
Fixed rate
 
July 5, 2017
(1 
) 
 
5.25
%
 
 
$
173,226

 
$
2,015

 
$
175,241

Floating rate (2)
 
July 5, 2017
(1 
) 
 
L+3.75
%
 
 
13,075

 
24,884

 
37,959

 
 
 
 
 
 
 
 
$
186,301

 
$
26,899

 
$
213,200


(1)
In March 2017, the unconsolidated real estate joint venture extended the maturity date of the existing secured construction loan to July 5, 2017. We expect to refinance the secured construction loan in connection with the sale of a condominium interest in 203,090 RSF of 360 Longwood Avenue and, receive a net distribution from the joint venture.
(2)
Borrowings under the floating rate tranche have an interest rate floor equal to 5.25% and are subject to an interest rate cap on LIBOR of 3.50%.

As described in Note 2 – “Basis of Presentation and Summary of Significant Accounting Policies” to these consolidated financial statements, we evaluate our unconsolidated real estate joint venture, which is a limited liability company, using the consolidation guidance under the variable interest model first, and then, if the entity is not a VIE, under the voting model. On October 1, 2015, upon our adoption of the consolidation guidance ASU issued in February 2015, we re-evaluated our 360 Longwood Avenue joint venture (27.5% interest held by us). We first evaluated the partially-owned legal entity under the variable interest model, based upon 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.

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.

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 other 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.

Since the joint venture does not meet the VIE criteria, we determined that our 360 Longwood Avenue joint venture does not qualify for evaluation under the variable interest model. Therefore, we evaluate the 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 is limited to 27.5%, and we do not have other contractual rights; therefore we account for this joint venture under the equity method of accounting.


20





5.
Investments

We hold equity investments in certain publicly traded companies, privately held entities, and limited partnerships primarily involved in the life science and technology industries. All of our equity investments in actively traded public companies are considered available-for-sale and are reflected in the accompanying consolidated balance sheets at fair value. Our investments in privately held entities are primarily accounted for under the cost method.

Investments in available-for-sale equity securities with gross unrealized losses as of March 31, 2017, had been in a continuous unrealized loss position for less than 12 months. We have the ability and intent to hold these investments for a reasonable period of time sufficient for the recovery of our investment. We believe that these unrealized losses are temporary. Accordingly, there are no other-than-temporary impairments in accumulated other comprehensive income related to available-for-sale equity securities as of March 31, 2017, and December 31, 2016.

The following table summarizes our investments as of March 31, 2017, and December 31, 2016 (in thousands):
 
March 31, 2017
 
December 31, 2016
Available-for-sale equity securities, cost basis
$
44,383

 
$
41,392

Unrealized gains
36,713

 
25,076

Unrealized losses
(6,866
)
 
(5,783
)
Available-for-sale equity securities, at fair value
74,230

 
60,685

Investments accounted for under cost method
320,241

 
281,792

Total investments
$
394,471

 
$
342,477

    
The following table presents the components of our investment income classified within other income in the accompanying consolidated statements of income (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Investment gains
$
1,795

 
$
5,891

Investment losses
(308
)
 
(1,782
)
Investment income
$
1,487

 
$
4,109



21





6.
Other assets

The following table summarizes the components of other assets as of March 31, 2017 and December 31, 2016 (in thousands):
 
March 31, 2017
 
December 31, 2016
Acquired below-market ground leases
$
12,856

 
$
12,913

Acquired in-place leases
57,214

 
63,408

Deferred compensation plan
12,943

 
11,632

Deferred financing costs $1.65 billion unsecured senior line of credit
13,311

 
14,239

Deposits
5,083

 
3,302

Furniture, fixtures, and equipment, net
12,304

 
12,839

Interest rate hedge assets
4,463

 
4,115

Net investment in direct financing lease
37,680

 
37,297

Notes receivable
674

 
694

Prepaid expenses
14,895

 
9,724

Property, plant, and equipment
20,909

 
19,891

Other assets
14,230

 
11,143

Total
$
206,562

 
$
201,197


The components of our net investment in direct financing lease as of March 31, 2017 and December 31, 2016 are summarized in the table below (in thousands):
 
 
March 31, 2017
 
December 31, 2016
Gross investment in direct financing lease
 
$
264,954

 
$
264,954

Less: unearned income
 
(227,274
)
 
(227,657
)
Net investment in direct financing lease
 
$
37,680

 
$
37,297


Future minimum lease payments to be received under our direct financing lease as of March 31, 2017, were as follows (in thousands):
Year
 
Total
2017
 
$
1,044

2018
 
1,607

2019
 
1,655

2020
 
1,705

2021
 
1,756

Thereafter
 
256,996

Total
 
$
264,763




22


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 utilizing a fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. This hierarchy consists of three broad levels, as follows: (i) quoted prices in active markets for identical assets or liabilities, (ii) significant other observable inputs, and (iii) significant unobservable inputs. Significant other observable inputs can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Significant unobservable inputs are typically based on an entity’s own assumptions, since there is little, if any, related market activity. In instances in which the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level of input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers between the levels in the fair value hierarchy during the three months ended March 31, 2017 and 2016.

The following tables set forth the assets and liabilities that we measure at fair value on a recurring basis by level within the fair value hierarchy as of March 31, 2017 and December 31, 2016 (in thousands):
 
 
 
 
March 31, 2017
Description
 
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Assets:
 
 
 
 
 
 
 
 
Available-for-sale equity securities
 
$
74,230

 
$
74,230

 
$

 
$

Interest rate hedge agreements
 
$
4,463

 
$

 
$
4,463

 
$

Liabilities:
 
 
 
 
 
 
 
 
Interest rate hedge agreements
 
$
1,813

 
$

 
$
1,813

 
$

 
 
 
 
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

 
$


The carrying values of cash and cash equivalents, restricted cash, tenant receivables, other assets, accounts payable, accrued expenses, tenant security deposits, and preferred stock liability approximate 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 consolidated financial statements for further details. The fair values of our secured notes payable, unsecured senior notes payable, $1.65 billion unsecured senior line 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.


23



7.
Fair value measurements (continued)

As of March 31, 2017, and December 31, 2016, the book and estimated fair values of our available-for-sale equity securities, interest rate hedge agreements, secured notes payable, unsecured senior notes payable, unsecured senior line of credit, and unsecured senior bank term loans were as follows (in thousands):

March 31, 2017

December 31, 2016

Book Value

Fair Value

Book Value

Fair Value
Assets:











Available-for-sale equity securities
$
74,230


$
74,230


$
60,685


$
60,685

Interest rate hedge agreements
$
4,463


$
4,463


$
4,115


$
4,115













Liabilities:











Interest rate hedge agreements
$
1,813


$
1,813


$
3,587


$
3,587

Secured notes payable
$
1,083,758

 
$
1,087,324

 
$
1,011,292

 
$
1,016,782

Unsecured senior notes payable
$
2,799,508

 
$
2,888,833

 
$
2,378,262

 
$
2,431,470

Unsecured senior line of credit
$

 
$

 
$
28,000

 
$
27,998

Unsecured senior bank term loans
$
547,420

 
$
552,590

 
$
746,471

 
$
750,422


Nonrecurring fair value measurements

Refer to “Sale of Real Estate” in Note 3 – “Investments in Real Estate” and Note 14 – “Assets Classified as Held for Sale” to these consolidated financial statements for further discussion.

8.
Secured and unsecured senior debt

The following table summarizes our secured and unsecured senior debt as of March 31, 2017 (dollars in thousands):
 
Fixed-Rate/Hedged
Variable-Rate
 
Unhedged
Variable-Rate
 
 
 
 
 
Weighted-Average
 
 
 
 
 
 
 
Interest
 
Remaining Term
(in years)
 
 
 
Total
 
Percentage
 
Rate (1)
 
Secured notes payable
$
868,597

 
$
215,161

 
$
1,083,758

 
24.5
%
 
3.64
%
 
3.3
Unsecured senior notes payable
2,799,508

 

 
2,799,508

 
63.1

 
4.16

 
7.5
$1.65 billion unsecured senior line of credit

 

 

 

 
N/A

 
4.6
2019 Unsecured Senior Bank Term Loan
199,361

 

 
199,361

 
4.5

 
3.00

 
1.8
2021 Unsecured Senior Bank Term Loan
348,059

 

 
348,059

 
7.9

 
2.44

 
3.8
Total/weighted average
$
4,215,525

 
$
215,161

 
$
4,430,686

 
100.0
%
 
3.84
%
 
6.0
Percentage of total debt
95%

 
5%

 
100%

 
 
 
 
 
 

(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 debt premiums (discounts), amortization of loan fees, and other bank fees.




24

    

8.
Secured and unsecured senior debt (continued)

The following table summarizes our outstanding indebtedness and respective principal payments as of March 31, 2017 (dollars in thousands):
 
 
Stated 
Rate
 
Weighted-Average
Interest Rate (1)
 
Maturity
 
Principal Payments Remaining for the Periods Ending December 31,
 
 
 
Unamortized (Deferred Financing Cost), (Discount)/Premium
 
 
Debt
 
 
 
Date (2)
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Principal
 
 
Total
Secured notes payable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Greater Boston
 
L+1.35%

 
2.93
%
 
8/23/18
 
$

 
$
212,289

 
$

 
$

 
$

 
$

 
$
212,289

 
$
(1,020
)
 
$
211,269

Greater Boston
 
L+1.50%

 
2.77

 
1/28/19
(3) 

 

 
288,269

 

 

 

 
288,269

 
(2,188
)
 
286,081

Greater Boston
 
L+2.00%

 
3.34

 
4/20/19
(3) 

 

 
137,603

 

 

 

 
137,603

 
(2,764
)
 
134,839

Greater Boston, Seattle, and Maryland
 
7.75
%
 
8.15

 
4/1/20
 
1,387

 
1,979

 
2,138

 
104,352

 

 

 
109,856

 
(1,002
)
 
108,854

San Diego
 
4.66
%
 
4.93

 
1/1/23
 
1,026

 
1,608

 
1,687

 
1,762

 
1,852

 
28,201

 
36,136

 
(378
)
 
35,758

Greater Boston
 
3.93
%
 
3.19

 
3/10/23
 

 
1,091

 
1,505

 
1,566

 
1,628

 
76,210

 
82,000

 
3,212

 
85,212

Greater Boston
 
4.82
%
 
3.36

 
2/6/24
 

 
2,720

 
3,090

 
3,217

 
3,406

 
190,567

 
203,000

 
17,952

 
220,952

San Francisco
 
6.50
%
 
6.66

 
7/1/36
 
20

 
22

 
23

 
25

 
26

 
677

 
793

 

 
793

Secured debt weighted-average interest rate/subtotal
 
3.95
%
 
3.64

 
 
 
2,433

 
219,709

 
434,315

 
110,922

 
6,912

 
295,655


1,069,946

 
13,812

 
1,083,758

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019 Unsecured Senior Bank Term Loan
 
L+1.20
%
 
3.00

 
1/3/19
 

 

 
200,000

 

 

 

 
200,000

 
(639
)
 
199,361

2021 Unsecured Senior Bank Term Loan
 
L+1.10
%
 
2.44

 
1/15/21
 

 

 

 

 
350,000

 

 
350,000

 
(1,941
)
 
348,059

$1.65 billion unsecured senior line of credit
 
L+1.00
%
(4) 
N/A

 
10/29/21
 

 

 

 

 

 

 

 

 

Unsecured senior notes payable
 
2.75
%
 
2.96

 
1/15/20
 

 

 

 
400,000

 

 

 
400,000

 
(2,211
)
 
397,789

Unsecured senior notes payable
 
4.60
%
 
4.75

 
4/1/22
 

 

 

 

 

 
550,000

 
550,000

 
(3,244
)
 
546,756

Unsecured senior notes payable
 
3.90
%
 
4.04

 
6/15/23
 

 

 

 

 

 
500,000

 
500,000

 
(3,669
)
 
496,331

Unsecured senior notes payable
 
4.30
%
 
4.52

 
1/15/26
 

 

 

 

 

 
300,000

 
300,000

 
(4,229
)
 
295,771

Unsecured senior notes payable
 
3.95
%
 
4.14

 
1/15/27
 

 

 

 

 

 
350,000

 
350,000

 
(4,876
)
 
345,124

Unsecured senior notes payable
 
3.95
%
 
4.10

 
1/15/28
 

 

 

 

 

 
425,000

 
425,000

 
(4,539
)
 
420,461

Unsecured senior notes payable
 
4.50
%
 
4.62

 
7/30/29
 

 

 

 

 

 
300,000

 
300,000

 
(2,724
)
 
297,276

Unsecured debt weighted average/subtotal
 
 
 
3.91

 
 
 

 

 
200,000

 
400,000

 
350,000

 
2,425,000

 
3,375,000

 
(28,072
)
 
3,346,928

Weighted-average interest rate/total
 
 
 
3.84
%
 
 
 
$
2,433

 
$
219,709

 
$
634,315

 
$
510,922

 
$
356,912

 
$
2,720,655

 
$
4,444,946

 
$
(14,260
)
 
$
4,430,686

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balloon payments
 
 
 
 
 
 
 
$

 
$
212,289

 
$
625,872

 
$
503,979

 
$
350,000

 
$
2,708,417

 
$
4,400,557

 
$

 
$
4,400,557

Principal amortization
 
 
 
 
 
 
 
2,433

 
7,420

 
8,443

 
6,943

 
6,912

 
12,238

 
44,389

 
(14,260
)
 
30,129

Total debt
 
 
 
 
 
 
 
$
2,433

 
$
219,709

 
$
634,315

 
$
510,922

 
$
356,912

 
$
2,720,655

 
$
4,444,946

 
$
(14,260
)
 
$
4,430,686

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate/hedged variable-rate debt
 
 
 
 
 
 
 
$
2,433

 
$
157,420

 
$
481,443

 
$
510,922

 
$
356,912

 
$
2,720,655

 
$
4,229,785

 
$
(14,260
)
 
$
4,215,525

Unhedged variable-rate debt
 
 
 
 
 
 
 

 
62,289

 
152,872

 

 

 

 
215,161

 

 
215,161

Total debt
 
 
 
 
 
 
 
$
2,433

 
$
219,709

 
$
634,315

 
$
510,922

 
$
356,912

 
$
2,720,655

 
$
4,444,946

 
$
(14,260
)
 
$
4,430,686

(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 debt premiums (discounts), amortization of loan fees, and other bank fees.
(2)
Reflects any extension options that we control.
(3)
Refer to “Secured Construction Loans” in Note 8 – “Secured and Unsecured Senior Debt” for options to extend maturity dates.
(4)
Our $1.65 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 to the cost of borrowing, the facility is subject to an annual facility fee of 0.20%, based on the aggregate commitments. Unamortized deferred financing costs related to our $1.65 billion unsecured senior line of credit are classified in other assets and are excluded from the calculation of the weighted-average interest rate.

25

    

8.
Secured and unsecured senior debt (continued)


3.95% Unsecured senior notes payable due in 2028
    
In March 2017, we completed a $425.0 million public offering of our unsecured senior notes payable due on January 15, 2028, at a stated interest rate of 3.95%. 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 the net proceeds, after discounts and issuance costs, of $420.5 million to repay outstanding borrowings under our $1.65 billion unsecured senior line of credit.


Repayment of unsecured senior bank term loans
    
During the three months ended March 31, 2017, we repaid $200 million of our 2019 Unsecured Senior Bank Term Loan to reduce the total outstanding balance from $400 million