Forward-looking statements
Certain information and statements included in this quarterly report on Form 10-Q, including, without limitation, statements containing the words "forecast," "guidance," "projects," "estimates," "anticipates," "goals," "believes," "expects," "intends," "may," "plans," "seeks," "should," or "will," or the negative of those 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 agtech 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" 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 endedDecember 31, 2019 , and respective sections within this quarterly report on Form 10-Q. Readers of this quarterly report on Form 10-Q should also read our other documents filed publicly with theSEC for further discussion regarding such factors.
The COVID-19 pandemic
InDecember 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 inWuhan, China . The first case of COVID-19 in theU.S. was reported onJanuary 20, 2020 . OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic, and onMarch 13, 2020 , theU.S. declared a national emergency with respect to COVID-19. As ofOctober 23, 2020 , according to theWorld Health Organization , over 41.6 million novel coronavirus cases have been reported worldwide. TheU.S. has reported more than 8.2 million cases of COVID-19 and over 220,563 deaths as ofOctober 23, 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. Since scientists shared the virus's genetic makeup inJanuary 2020 , intense research has been underway around the world to develop treatments and vaccines for COVID-19. OnOctober 22, 2020 , theFDA approved the antiviral drug Veklury® (remdesivir) for the treatment of COVID-19 patients requiring hospitalization. In addition, theU.S. National Institutes of Health ("NIH") has recommended corticosteroid dexamethasone for patients with severe COVID-19who require supplemental oxygen or mechanical ventilation. Vaccine testing in humans started with record speed inMarch 2020 and as ofOctober 23, 2020 , has evolved to over 135 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. 45 -------------------------------------------------------------------------------- At least 48 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 or Phase II/III 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 volunteer subjectswho 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 ofOctober 23, 2020 , there are 12 potential vaccines in Phase III trials, and six vaccines that have been approved for early or limited use. 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, theU.S. government's Operation Warp Speed program has announced a handful of company partners, including several of our tenants, 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
OnMarch 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, includingNew York ,Massachusetts ,Washington ,Maryland , andNorth Carolina , where our remaining properties outsideCalifornia 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 earlyJune 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 theU.S. , which had declined to approximately 18,000 new daily cases byJune 9, 2020 , from the low- to mid-30,000 daily range inApril 2020 , began to escalate after reopenings commenced across the country. OnOctober 23, 2020 , according to theWorld Health Organization , 63,361 new cases and 1,066 deaths were reported, with hot spots in the Midwest and Great Plains.
Impact to the global and
As a result of the unprecedented measures taken in theU.S. and around the world, the disruption and impact to theU.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. TheInternational Monetary Fund ("IMF") estimated inApril 2020 that the global economy could be facing its worst recession since the Great Depression of the 1930s. As ofOctober 2020 , theIMF is projecting a somewhat less severe, though still deep, global recession with a 4.4% contraction in 2020 rather than an expansion of 3.3% as was projected inJanuary 2020 . 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 theIMF . In 2021, global growth is projected at 5.2%. Overall, this would leave 2021 U.S. gross domestic product some 6.7% lower than in theJanuary 2020 pre-COVID-19 projections. 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. TheIMF is currently projecting all advanced economies will contract in 2020, including a 4.3% contraction in theU.S. Based on the data provided by theU.S. Bureau of Labor Statistics onOctober 2, 2020 , the unemployment rate in theU.S. is up by 4.4% sinceFebruary 2020 to 7.9%, although down from the 8.4% peak from the month before. TheSeptember 2020 data reported 661 thousand jobs created inSeptember 2020 . Stock markets around the globe have rebounded substantially sinceMarch 2020 ; however, since the pandemic was declared, access to capital has become much more challenging for most companies or non-existent for some. 46 -------------------------------------------------------------------------------- The unprecedented disruption and impact to theU.S. and global economies and financial markets from the COVID-19 pandemic resulted in theU.S. President's signing into law onMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), a$2 trillion economic stimulus package. The CARES Act allocated over$140 billion to theU.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 theNIH , a tenant of ours in ourMaryland 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, onApril 24, 2020 , theU.S. President signed the Paycheck Protection Program and Health Care Enhancement Act into law, which provided an additional$484 billion of relief primarily to assist distressed small businesses and prevent them from shutting their operations and laying off 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. OnAugust 8, 2020 , theU.S. President signed four executive actions to provide additional COVID-19 relief. The first action created theLost Wages Assistance Program , which would roll out a$400 weekly payment to those currently receiving more than$100 a week in state-funded unemployment benefits. The plan called for up to$300 to be paid by the federal government and$100 by state governments. The program was retroactive throughAugust 1, 2020 , when the$600 unemployment benefits expansion under the CARES Act ended. The program is set to last throughDecember 6, 2020 , but state funding, which was attained from theFederal Emergency Management Agency's disaster relief fund, was depleted bySeptember 5, 2020 , for states that applied and received funding beginning onAugust 1, 2020 . In recent weeks, theU.S. White House has resumed negotiations with theHouse of Representatives to pass another economic stimulus package to provide relief aid to Americans during financial hardship, with proposals offering as high as$2.2 trillion in funds. The latest proposal by theWhite House includes$1.8 trillion in provisions, which may include another round of$1,200 payments to eligible American adults and$1,000 for qualifying child dependents, a reinstatement of unemployment benefits at a lower level of$400 per week, down from the$600 weekly benefit included in the CARES Act that expired onJuly 31, 2020 , and loan programs for small businesses, as well as aid for hard-hit industries, including the airline industry. As of the date of this filing, the terms of the stimulus package remain under negotiations. Unless theU.S. government extends the deadlines or introduces new relief measures, the impact of expirations of current relief measures on theU.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.
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Overview
We are aMaryland corporation formed inOctober 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 agtech campuses inAAA innovation cluster locations, with a total market capitalization of$29.2 billion and an asset base inNorth America of 47.4 million SF as ofSeptember 30, 2020 . The asset base inNorth America includes 31.2 million RSF of operating properties and 2.8 million RSF of Class A properties undergoing construction, 7.2 million RSF of near-term and intermediate-term development and redevelopment projects, and 6.2 million SF of future development projects. Founded in 1994, we pioneered this niche and have since established a significant market presence in key locations, includingGreater Boston ,San Francisco ,New York City ,San Diego ,Seattle ,Maryland , and Research Triangle. We have a longstanding and proven track record of developing Class A properties clustered in urban life science, technology, and agtech 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 platform. 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
•Investment-grade or publicly traded large cap tenants represented 54% of our total annual rental revenue; •Approximately 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 93% of our leases (on an RSF basis) provided for the recapture of capital expenditures (such as heating, 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 agtech 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 agtech relationships in order to identify and attract new and leading tenants and to source additional value-creation real estate. 48 --------------------------------------------------------------------------------
Executive summary Operating results Nine Months Ended Three Months Ended September 30, September 30, 2020 2019 2020 2019 Net income (loss) attributable toAlexandria's common stockholders - diluted: In millions $ 79.3$ (49.8) $ 324.2 $ 150.4 Per share $ 0.63$ (0.44) $ 2.61 $ 1.35 Funds from operations attributable toAlexandria's common stockholders - diluted, as adjusted: In millions $ 230.7$ 197.1 $ 677.1 $ 579.6 Per share $ 1.83$ 1.75 $ 5.46 $ 5.19
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" section within this Item 2 for additional information.
Bringing together our unique and pioneering strategic vertical platforms of essential Labspace® real estate, strategic venture investments, impactful thought leadership, and purposeful corporate responsibility,Alexandria is at the vanguard and heart of the vital life science ecosystem that is advancing solutions for COVID-19 and other key challenges to human health. Safe and effective vaccines and therapies, in addition to widespread testing, continue to be critically needed to combat the global COVID-19 pandemic. By maintaining continuous operations across our campuses and facilities,Alexandria has enabled our tenants, nearly 100 of which have programs focused on COVID-19, to continue to pursue their essential, mission-critical research, development, manufacturing, and commercialization efforts. Refer to the "Alexandria and its innovative tenants are at the vanguard and heart 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
•$3.9 billion of liquidity as ofSeptember 30, 2020 , proforma for our unsecured senior line of credit amended inOctober 2020 . Refer to the "Liquidity" section within this Item 2 for additional information. •Minimal debt, 1.5% of total outstanding debt, maturing prior to 2024. •10.6 years weighted-average remaining term of debt as ofSeptember 30, 2020 . •Investment-grade credit ratings, which rank 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 ofSeptember 30, 2020 .
Continued dividend strategy to share growth in cash flows with stockholders
Common stock dividend declared for the three months endedSeptember 30, 2020 , of$1.06 per common share, aggregating$4.18 per common share for the twelve months endedSeptember 30, 2020 , up24 cents , or 6%, over the twelve months endedSeptember 30, 2019 . Our FFO payout ratio of 61% for the three months endedSeptember 30, 2020 , allows us to share growth in cash flows from operating activities with our stockholders while also retaining a significant portion for reinvestment.
A REIT industry-leading, high-quality tenant roster
•54% of annual rental revenue from investment-grade or publicly traded large cap tenants. •Weighted-average remaining lease term of 7.7 years. 49 --------------------------------------------------------------------------------
Key strategic transactions generated capital for investment into our highly leased value-creation pipeline
•During the three months endedSeptember 30, 2020 , we completed two strategic transactions in our SoMa submarket that generated capital aggregating$284.2 million for investment into our highly leased development and redevelopment projects currently under construction: •Disposition of945 Market Street , aggregating 255,765 RSF, for a sales price of$198.0 million . •Termination of our contract with Pinterest, Inc. related to a future lease of 488,899 RSF at our88 Bluxome Street development project, which has not commenced vertical construction. We recognized income of$86.2 million that comprise a termination fee of$89.5 million and related expenses of$3.3 million .
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
54 % Class A properties inAAA locations 73 % Occupancy of operating properties inNorth America 94.9 % (1) Operating margin 74 % (2) Adjusted EBITDA margin 67 % Weighted-average remaining lease term: All tenants 7.7 years Top 20 tenants 11.0 years (1)Includes 859,479 RSF, or 2.8%, of vacancy in ourNorth America markets, representing lease-up opportunities at properties recently acquired. Excluding these acquired vacancies, occupancy of operating properties inNorth America was 97.7% as ofSeptember 30, 2020 , up 60 bps from 97.1% as ofJune 30, 2020 . Refer to "Summary of occupancy percentages inNorth America " within this Item 2 for additional information regarding vacancy from recently acquired properties. (2)Includes the effect of a termination fee recognized during the three months endedSeptember 30, 2020 . Refer to the section titled "Income from rentals" in Note 5 - "Leases" to our unaudited consolidated financial statements under Item 1 of this report for additional information. Excluding this effect, our operating margin for the three months endedSeptember 30, 2020 , would have been 70%.
Continued solid net operating income and internal growth
•Total revenues: •$545.0 million, up 39.6%, for the three months endedSeptember 30, 2020 , compared to$390.5 million for the three months endedSeptember 30, 2019 . •$1.4 billion, up 26.6%, for the nine months endedSeptember 30, 2020 , compared to$1.1 billion for the nine months endedSeptember 30, 2019 . •Net operating income (cash basis) of$1.4 billion for the three months endedSeptember 30, 2020 , annualized, increased by$483.7 million , or 50.2%, compared to the three months endedSeptember 30, 2019 , annualized. •94% of our leases contain contractual annual rent escalations approximating 3%. •Same property net operating income growth: •2.9% and 4.9% (cash basis) for three months endedSeptember 30, 2020 , over three months endedSeptember 30, 2019 . •2.3% and 4.8% (cash basis) for the nine months endedSeptember 30, 2020 , over the nine months endedSeptember 30, 2019 . •Continued solid leasing activity and rental rate growth during the nine months endedSeptember 30, 2020 , over expiring rates on renewed and re-leased space: September 30, 2020 Three Months Ended Nine Months Ended Total leasing activity - RSF 1,208,382 2,989,247 Leasing of development and redevelopment space - RSF 313,939 524,210 Lease renewals and re-leasing of space: RSF (included in total leasing activity above) 605,765 1,856,917 Rental rate increases 39.9% 40.7% Rental rate increases (cash basis) 30.9% 21.5% 50 --------------------------------------------------------------------------------
Sustained strength in tenant collections during the ongoing COVID-19 pandemic
•We have collected rents and tenant recoveries as follows: •99.7% for the three months endedSeptember 30, 2020 ; and •99.7% forOctober 2020 as ofOctober 23, 2020 . •As ofJune 30, 2020 andSeptember 30, 2020 , our tenant receivables balances were$7.2 million and$7.6 million , respectively, our two lowest quarter-end balances since 2013. Strategic acquisitions InAugust 2020 , we acquired Alexandria Center® for Life Science -Durham , a 16-building collaborative life science campus aggregating 2.2 million RSF, located in our Research Triangle market for$590.4 million . The campus comprises 12 operating properties, one operating property with future redevelopment opportunities, and three properties that are currently undergoing redevelopment. The 13 operating properties generate 99% of annual rental revenue from investment-grade tenants. The acquisition of this campus, which is in close proximity to renowned academic institutions, includingDuke University ,North Carolina State University , and theUniversity of North Carolina at Chapel Hill , allows us to allocate capital into a key innovation cluster with significant opportunities for incremental net operating income and organic growth.
Refer to the "Acquisitions" subsection of the "Investments in real estate" section within this Item 2 for additional information on our strategic acquisitions.
Highly leased value-creation pipeline, including COVID-19-focused R&D space
•Current and pre-leased near-term projects aggregating 4.1 million RSF, including COVID-19-focused R&D spaces, are highly leased/negotiating at 74% and will generate significant revenues and cash flows. Key highlights include: •Continued leasing/negotiating progress on projects that were under construction as ofJune 30, 2020 , 80% leased/negotiating; •902,381 RSF added to projects under construction that are 54% leased/negotiating; •493,986 RSF of near-term projects that are highly leased/negotiating at 80%. •Annual net operating income (cash basis), including our share of unconsolidated real estate joint ventures, is expected to increase by$27 million upon the burn-off of initial free rent on recently delivered projects.
Balance sheet management
Key metrics as of
•$29.2 billion of total market capitalization. •$21.3 billion of total equity capitalization. •$3.9 billion of liquidity as ofSeptember 30, 2020 , proforma for our unsecured senior line of credit amended inOctober 2020 . Goal for Fourth As of September 30, 2020 Quarter of 2020, Quarter Annualized Trailing 12 Months Annualized Net debt and preferred stock to 5.8x 6.0x Less than or equal to 5.3x Adjusted EBITDA Fixed-charge coverage ratio 4.3x 4.3x Greater than or equal to 4.4x
Value-creation pipeline of new Class A development and redevelopment projects as a percentage of gross investments in real estate
September 30, 2020 Current and pre-leased near-term projects 74% leased/negotiating 7% Income-producing/potential cash flows/covered land play(1) 6% Land 3% (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. 51 --------------------------------------------------------------------------------
Key capital events
•InAugust 2020 , we opportunistically issued$1.0 billion of unsecured senior notes payable due in 2033 at an interest rate of 1.875% ("1.875% Unsecured Senior Notes"). •We used a portion of the proceeds from our 1.875% Unsecured Senior Notes to refinance$500.0 million of our 3.90% unsecured senior notes payable due in 2023, pursuant to a partial cash tender offer completed onAugust 5, 2020 , and a subsequent call for redemption for the remaining outstanding amounts, which settled onSeptember 4, 2020 . As a result of our debt refinancing, we recognized a loss on early extinguishment of debt of$50.8 million , including the write-off of unamortized loan fees. •OnOctober 6, 2020 , we amended our unsecured senior line of credit. Key changes include: New Agreement
Change
Commitments available for borrowing$3.0 billion Up$800 million Interest rate LIBOR+0.825% Added a 0% LIBOR floor Maturity date January 6, 2026 Extended 2 years •InJanuary 2020 andJuly 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 underwriters' options, at public offering prices of$155.00 per share and$160.50 per share, respectively, before underwriting discounts. •InMarch 2020 , we settled 3.4 million shares and received proceeds of$500.0 million . InSeptember 2020 , we settled 8.7 million shares and received proceeds of$1.3 billion . •As of the date of this report, 1.8 million shares of our common stock remain outstanding under forward equity sales agreements, for which we expect to receive proceeds of$267.4 million , to be further adjusted as provided in the sales 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. •During the three months endedSeptember 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$788.8 million and unrealized gains of$542.1 million , as ofSeptember 30, 2020 . •Investment income of$3.3 million during the three months endedSeptember 30, 2020 , included$17.4 million in realized gains and$14.0 million in unrealized losses. 52 --------------------------------------------------------------------------------
Leader in corporate responsibility: catalyzing and leading the way for positive societal change
Industry leadership •InJuly 2020 , Alexandria Venture Investments, our strategic venture capital platform, was recognized as the most active biopharma investor by new deal volume from 2019 to the six months endedJune 30, 2020 , bySilicon Valley Bank in its "Mid-Year 2020 Healthcare Investments and Exits Report."Alexandria's venture activity provides us with, among other things, mission-critical data and knowledge on innovations and trends. •InSeptember 2020 ,Alexandria won theCommercial Brokers Association ("CBA") Boston Landlord of the Year award. The CBA was established as a freestanding division of the Greater Boston Real Estate Board in 2001 and represents over 400 members in the commercial brokerage community throughoutMassachusetts .
Pioneering social responsibility initiatives to continue to drive unique, disruptive, and highly impactful solutions to tackle some of society's most complex and pressing challenges
Alexandria is profoundly committed to driving forward significant collaborative and innovative solutions to address some of today's most urgent and widespread societal challenges, including the COVID-19 pandemic, the opioid crisis, poverty, and disparities in educational opportunities. We align every aspect of our multifaceted business model and visionary social responsibility efforts to support our mission to advance human health, as well as to drive tangible and positive results in our local communities.
At the vanguard and heart of the life science ecosystem that is crucial to advancing innovative solutions for COVID-19
•Alexandria has enabled notable life science tenants to continue their essential on-site operations as part of the industry's collective efforts to improve the quality, capacity, and turnaround time for COVID-19 testing. In addition, we have leveraged our network of experts to focus on the health, safety, and well-being of our tenants and their employees by increasing and improving their access to COVID-19 testing in critical locations, such asNew York City andCambridge . •Alexandria has pioneered and implemented robust, cutting-edge initiatives for safer buildings, which have been reviewed and validated by ourCOVID-19 Advisory Board , along with building optimization measures and operational protocols that encompass a variety of research-backed initiatives, including informational health and safety graphics, disinfectant cleaning guidelines, improved air filtration, effective health security communications, and the implementation of building-specific guidelines and policies that call for active cooperation of building occupants and service providers. •As a testament to our comprehensive and industry-leading COVID19 prevention guidelines and practices, which expand upon our existing rigorous health and safety standards, we were recognized by theCenter for Active Design , the operator of Fitwel, as the first-ever company to achieve a Fitwel Viral Response Certification with Distinction, the highest designation within the new Viral Response Module developed by the world's leading healthy building certification system. •Alexandria has sourced over 54,000 pieces of personal protective equipment worldwide and donated these mission-critical supplies to protect and support healthcare workers in some of the nation's hardest-hit cities, includingNew York City ,Boston ,Seattle ,Los Angeles , andSan Diego . •Alexandria has donated more than$1 million to several highly impactful national and regional organizations supporting communities severely affected by the pandemic, including ROAR (Relief Opportunities forAll Restaurants ), which makes financial relief available toNew York City's nearly 1 million restaurant workers, andRobin Hood ,New York City's largest poverty-fighting organization, of which our executive chairman and founder,Joel S. Marcus , has served on the board of directors since 2016.
Pioneering a fully integrated ecosystem to reverse the trajectory of the opioid epidemic and support addiction recovery
•Determined to reverse the trajectory of theU.S. opioid crisis, which is one of the most pervasive public health challenges in our nation's history,Alexandria , in partnership with Verily Life Sciences, envisioned an innovative, non-profit healthcare ecosystem dedicated to the full and sustained recovery of people living with addiction. To realize this vision,Alexandria and Verily Life Sciences pioneered a fully integrated campus to house an evidence-based comprehensive treatment model encompassing a full continuum of care with dedicated facilities and services for treatment, residential housing, group therapy, family reunification, workforce development programs, job placement, and community transition. •As the strategic real estate partner in this mission-critical initiative,Alexandria catalyzed the vision for and led the design and development of the 4.3-acre, 59,000 RSF campus inDayton, Ohio , aimed at revolutionizing the way addiction is treated. Since the opening of theOutpatient Clinic in the fall of 2019 and the Crisis Stabilization Unit in the winter of 2020, OneFifteen has served more than 1,500 patients and carried out more than 2,000 virtual visits. InSeptember 2020 ,Alexandria delivered OneFifteen Living, a three-story residential housing facility that serves as a safe place for patients to live as they access on-campus treatment services. •As overdose deaths rise dramatically against the backdrop of the COVID-19 pandemic,Alexandria is committed to addressing this public health crisis and developing effective, scalable solutions. It is our hope that OneFifteen's groundbreaking, evidence-based, comprehensive treatment strategy will drive superior health outcomes and serve as a model of recovery for the rest of the country to replicate. 53 --------------------------------------------------------------------------------
Empowering students through educational opportunities that build foundations and pave paths for long-term success
•Alexandria is deeply committed to driving educational opportunities and providing the support and resources needed to build the foundations for underprivileged students to succeed and become engaged and leading members of society. Understanding that education is one of the most fundamental foundations for a safe, healthy, and good life and essential for opportunity and economic mobility, we have forged deep partnerships in our communities with highly impactful organizations that provide holistic educational resources to underserved populations. •InDurham, North Carolina , we work closely with the Emily Krzyzewski Center, a non-profit organization that paves a path to success in higher education for academically focused, low-income K-12 students. Through programs that build and accelerate students' scholastic skills, the center has supported exceptional achievement throughout the students' years in high school and higher education and in their careers. Students receive holistic support that encompasses academic skills development, personal management and leadership training, college planning, and career exploration. Of thosewho complete Emily K's Scholars to College program, 100% are accepted to college each year. •Through our long-term, hands-on partnership with CS4ALL (Computer Science for All), we are helping to ensure that all ofNew York City's 1.1 million public school students, 72.8% of whom are considered low income, have access to high-quality computer science coursework throughout their K-12 education. We believe that STEM (science, technology, engineering, and mathematics) education is important for preparing students for academic success, the 21st-century job market, and beyond. •InAugust 2020 , we pledged to donate$1.5 million to theSan Carlos School District and theSan Carlos Education Foundation , extending our strong commitment to enhancing neighborhoods where we develop and operate. The generous donation fills the school district's funding gap resulting from the economic impact of COVID-19 and, importantly, will enable San Carlos public schools to continue to offer quality education to its students. •InAugust 2020 , we made a pledge to theSouth San Francisco Unified School District through theCalifornia Life Sciences Institute andCalifornia Life Sciences Association's joint South San Francisco Empowerment Initiative, which aims to build science competency while closing the digital gap. Through this contribution, we provided iPads, Chromebooks, and MacBook Airs to help K-12 students and teachers inSouth San Francisco stay connected in a digital learning environment. 54 -------------------------------------------------------------------------------- [[Image Removed: are-20200930_g1.jpg]]
(1)Represents an illustrative subset of nearly 100 tenants focused on COVID-19-related efforts, with some of these companies working on multiple efforts that span testing, treatment, and/or vaccine development.
55 -------------------------------------------------------------------------------- [[Image Removed: are-20200930_g2.jpg]] (1)Source:Scott Gottlieb , MD, Twitter,October 13, 2020 ,6:19 a.m. (2)Announced award value and clinical trial stage as ofOctober 23, 2020 . (3)Johnson & Johnson has temporarily paused further dosing in all of its COVID-19 vaccine candidate clinical trials, including the Phase III ENSEMBLE trial, due to an unexplained illness in a study participant. AstraZeneca similarly paused its Phase III vaccine trial in early September due to an unexplained case of transverse myelitis in a study participant. As ofOctober 23, 2020 , the clinical holds for both Johnson & Johnson and AstraZeneca have been lifted after review by independent data safety monitoring boards and approval from theFDA . 56 --------------------------------------------------------------------------------
Safe and effective vaccines and therapies, in addition to widespread testing, continue to be critically needed to combat the global COVID-19 pandemic. By maintaining essential continuous operations across our campuses,Alexandria has enabled several of our life science tenants to pursue 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 nearly 100 tenants across our cluster markets that 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 working tirelessly on over 135 COVID-19 vaccine programs, with at least 48 vaccine candidates in human trials. •In an effort to expedite the development, manufacturing, and distribution of COVID-19 vaccines, theU.S. government has called for unprecedented public-private collaboration, allocating several billions of dollars through various initiatives, including Operation Warp Speed. Leveraging their vaccine development expertise and innovative technology platforms, our tenants AstraZeneca plc, Moderna, Inc., and Pfizer Inc. have the most advanced vaccine programs in late-stage clinical development, each of which has been further supported by government funding. Each company expects to announce critical data in the fourth quarter of 2020 which could form the basis for emergency use authorization ("EUA") from theFDA by year-end 2020 or in early 2021. •Additional tenants, including Emergent BioSolutions Inc., FUJIFILM Diosynth Biotechnologies, GlaxoSmithKline, Johnson &Johnson, Merck & Co. , Inc., Novavax, Inc., and Sanofi have also been awarded government support for their efforts in the development, manufacturing, and/or distribution of COVID-19 vaccines. Clinical trial data and progress will continue to be reported by these companies over the coming months, with the goal of expediting the widespread delivery of a safe and effective COVID-19 vaccine to the public within the next 12 months. Advancing new and repurposed therapies •OnOctober 22, 2020 , theFDA approved Gilead Sciences, Inc.'s antiviral drug Veklury® (remdesivir) for the treatment of COVID-19 patients requiring hospitalization. In addition, over 250 experimental therapies to treat COVID-19 are being studied in over 600 clinical trials around the world in addition to more than 150 therapeutic candidates in preclinical development. A substantial number of these programs are sponsored by our tenants and include the following notable efforts: •Eli Lilly and Company is developing multiple potential antibody therapies for the treatment and potential prevention of COVID-19. OnOctober 7, 2020 , the company announced that it was seeking emergency use authorization from theFDA for its most advanced antibody (bamlanivimab), developed in partnership with AbCellera and theNIH , for the treatment of high-risk patients with mild to moderate COVID-19. OnOctober 13, 2020 , theNIH announced that it would pause enrollment of its Phase III study testing Lilly's antibody treatment in hospitalized patients out of "an abundance of caution" to allow an independent safety review of the trial data. •Vir Biotechnology, Inc. ("Vir") and GlaxoSmithKline ("GSK") have entered into a strategic partnership to utilize Vir's neutralizing antibody platform to identify novel drug candidates that may be used as therapeutic or preventative COVID-19 treatments. OnOctober 6, 2020 , Vir and GSK announced that their most advanced antibody therapy for the early treatment of patients with COVID-19 has entered Phase III; they expect initial study data by year-end 2020 and complete results in the first quarter of 2021. •Several otherAlexandria tenants, including AbbVie Inc., Amgen, AstraZeneca plc, Atreca 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 •Abbott Laboratories, Adaptive Biotechnologies Corporation, Color,Cue Health Inc. , Laboratory Corporation of America Holdings, Quest Diagnostics, Quidel Corporation, Roche, Thermo Fisher Scientific Inc., Verily Life Sciences, and others are working to improve testing quality, capacity, and turnaround time to more effectively determinewho has an active COVID-19 infection,who has been exposed to the virus, andwho has developed immunity against it. The increased availability of widespread COVID-19 testing is critical for curtailing the pandemic and facilitating a safer reopening of workplaces, communities, and society overall. 57 --------------------------------------------------------------------------------
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%
[[Image Removed: are-20200930_g3.jpg]] [[Image Removed: are-20200930_g4.jpg]] Stable cash flows Percentage of triple 93% net leases Lower capex burden Percentage of leases providing for the recapture of capital 93% expenditures Historical Rental Rate: Renewed/Re-Leased Space Margins(2) Operating(3) Adjusted EBITDA [[Image Removed: are-20200930_g5.jpg]] [[Image Removed: are-20200930_g6.jpg]] 74% 67% (1)Percentages calculated based on RSF as ofSeptember 30, 2020 . (2)Represents percentages for the three months endedSeptember 30, 2020 . (3)Includes the effect of a termination fee recognized during the three months endedSeptember 30, 2020 . Refer to the section titled "Income from rentals" in Note 5 - "Leases" to our unaudited consolidated financial statements under Item 1 of this report for additional information. Excluding this effect, our operating margin for the three months endedSeptember 30, 2020 , would have been 70%. 58 -------------------------------------------------------------------------------- Long-Duration Cash Flows From High-Quality, Diverse, and Innovative Tenants Investment-Grade or Long-Duration Lease Terms Publicly Traded Large Cap Tenants 54% 7.7 Years of ARE's Weighted-Average Annual Rental Revenue(1) Remaining Term(2) Tenant Mix [[Image Removed: are-20200930_g7.jpg]] Percentage of ARE's Annual Rental Revenue(1) (1)Represents annual rental revenue in effect as ofSeptember 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 ofSeptember 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)Represents annual rental revenue currently generated from office space that is targeted for a future change in use. The weighted-average remaining term of these leases is 4.1 years. (4)Represents annual rental revenue from publicly traded tenants with an average daily market capitalization greater than$200 billion for the twelve months endedSeptember 30, 2020 . (5)Represents primarily annual rental revenue from investment-grade or publicly traded large cap tenants. Refer to definition of "Investment-grade or publicly traded large cap tenants" in the "Non-GAAP measures and definitions" section within this Item 2 for additional information. (6)Annual rental revenues from our other tenants, aggregating 3.0%, comprise 2.6% of annual rental revenue from technology, professional services, finance, telecommunications, and construction/real estate companies and only 0.4% from retail-related tenants. 59 --------------------------------------------------------------------------------
High-Quality Cash Flows FromClass A Properties inAAA Locations Class A Properties inAAA Locations AAA Locations 73% [[Image Removed: are-20200930_g8.jpg]] of ARE's
Annual Rental Revenue(1)
Percentage of ARE's Annual Rental Revenue(1) Solid Historical Occupancy Across Key Locations(3) Occupancy(2) 96% [[Image Removed: are-20200930_g9.jpg]] Over 10 Years (1)Represents annual rental revenue in effect as ofSeptember 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 inNorth America as of eachDecember 31 for the last 10 years and as ofSeptember 30, 2020 . (3)As ofSeptember 30, 2020 . (4)Refer to the "Summary of occupancy percentages inNorth America " section within this Item 2 for additional information. 60 --------------------------------------------------------------------------------
Leasing
The following table summarizes our leasing activity at our properties:
Three Months Ended Nine Months Ended Year EndedSeptember 30, 2020 September 30, 2020 December 31, 2019 Including Including Including Straight-Line Rent Cash Basis Straight-Line Rent Cash Basis Straight-Line Rent Cash Basis (Dollars per RSF) Leasing activity: Renewed/re-leased space(1) Rental rate changes 39.9% 30.9% 40.7% 21.5% 32.2% 17.6% New rates$45.44 $41.88 $49.71 $46.73 $58.65 $56.19 Expiring rates$32.48 $31.99 $35.33 $38.47 $44.35 $47.79 RSF 605,765 1,856,917 2,427,108 Tenant improvements/leasing commissions$54.25 $31.48 $20.28 Weighted-average lease term 5.7 years 5.5 years 5.7 years Developed/redeveloped previously vacant space leased New rates$53.19 $51.44 $54.56 $52.35 $55.95 $52.19 RSF 602,617 1,132,330 2,635,614 Tenant improvements/leasing commissions$21.51 $20.01 $13.74 Weighted-average lease term 8.2 years 8.6 years 9.8 years Leasing activity summary (totals): New rates$49.30 $46.65 $51.55 $48.85 $57.25 $54.11 RSF 1,208,382 2,989,247 (2) 5,062,722 Tenant improvements/leasing commissions$37.92 $27.14 $16.88 Weighted-average lease term 7.0 years 6.6 years 7.8 years Lease expirations(1) Expiring rates$34.35
$33.96 $35.84 $38.66 $43.43 $46.59 RSF 878,172 2,732,463 2,822,434
Leasing activity includes 100% of results for each property in which we have an
investment in
(1)Excludes month-to-month leases aggregating 85,921 RSF and 41,809 RSF as ofSeptember 30, 2020 , andDecember 31, 2019 , respectively. (2)During the nine months endedSeptember 30, 2020 , we granted tenant concessions/free rent averaging 2.0 months with respect to the 2,989,247 RSF leased. Approximately 60% of the leases executed during the nine months endedSeptember 30, 2020 , did not include concessions for free rent. 61 --------------------------------------------------------------------------------
Summary of contractual lease expirations
The following table summarizes information with respect to the contractual lease
expirations at our properties as of
Percentage of Annual Rental Revenue Percentage of Total Year RSF Occupied RSF (Per RSF)(1) Annual Rental Revenue 2020 (2) 334,386 1.1 %$ 33.85 0.8 % 2021 1,859,483 6.3 %$ 40.55 5.2 % 2022 2,280,636 7.7 %$ 45.13 7.1 % 2023 3,191,670 10.8 %$ 43.17 9.5 % 2024 2,241,387 7.6 %$ 45.44 7.1 % 2025 2,019,632 6.9 %$ 48.70 6.8 % 2026 1,817,562 6.2 %$ 47.04 5.9 % 2027 2,524,893 8.6 %$ 50.93 8.9 % 2028 2,418,414 8.2 %$ 50.18 8.4 % 2029 1,802,961 6.1 %$ 54.41 6.8 % Thereafter 8,955,870 30.5 %$ 53.92 33.5 % (1)Represents amounts in effect as ofSeptember 30, 2020 . (2)Excludes month-to-month leases aggregating 85,921 RSF as ofSeptember 30, 2020 . The following tables present information by market with respect to our lease expirations inNorth America as ofSeptember 30, 2020 , for the remainder of 2020, and all of 2021:
2020 Contractual Lease Expirations (in RSF)
Targeted for Negotiating/ Development/ Remaining Annual Rental Revenue Market Leased Anticipating Redevelopment Expiring Leases Total(1) (Per RSF)(2) Greater Boston 20,411 - - 34,461 54,872$ 50.34 San Francisco - 8,392 - 2,150 10,542 50.84 New York City - - - 1,588 1,588 N/A San Diego 71,814 - - 60,355 132,169 34.84 Seattle 15,704 - - 5,386 21,090 46.45 Maryland 8,800 - - 11,963 20,763 28.78 Research Triangle 31,776 7,442 - 28,837 68,055 14.74 Canada - 5,200 - 15,753 20,953 N/A Non-cluster markets - 4,354 - - 4,354 54.00 Total 148,505 25,388 - 160,493 334,386$ 33.85 Percentage of expiring leases 44 % 8 % - % 48 % 100 %
2021 Contractual Lease Expirations (in RSF)
Targeted for Negotiating/ Development/ Remaining Annual Rental Revenue Market Leased Anticipating Redevelopment Expiring Leases(3) Total (per RSF)(2) Greater Boston 11,957 70,332 281,529 (4) 220,296 584,114$ 44.92 San Francisco 43,156 159,190 26,738 324,437 553,521 43.53 New York City - - - 2,564 2,564 N/A San Diego 89,780 - 41,475 291,231 (5) 422,486 33.63 Seattle - - - 41,073 41,073 51.33 Maryland 14,109 70,310 - 25,760 110,179 25.76 Research Triangle 18,976 - - 89,509 108,485 31.16 Canada - - - 13,672 13,672 23.48 Non-cluster markets - - - 23,389 23,389 64.49 Total 177,978 299,832 349,742 1,031,931 1,859,483$ 40.55 Percentage of expiring leases 10 % 16 % 19 % 55 % 100 % (1)Excludes month-to-month leases aggregating 85,921 RSF as ofSeptember 30, 2020 . (2)Represents amounts in effect as ofSeptember 30, 2020 . (3)The largest remaining contractual lease expiration in 2021 is 89,576 RSF at a Class A office/laboratory building in ourUniversity Town Center submarket. (4)Includes 79,101 RSF at The Arsenal on theCharles in ourCambridge /Inner Suburbs submarket and 202,428 RSF at the recently acquired Reservoir Woods property in ourRoute 128 submarket, which we plan to redevelop into office/laboratory space upon the expiration of existing leases. (5)Includes 78,573 RSF at9363 and 9393 Towne Centre Drive in ourUniversity Town Center submarket and 31,688 RSF at4025 and 4031 Sorrento Valley Boulevard in ourSorrento Valley submarket, sites that are under evaluation to be developed, subject to market conditions. 62 --------------------------------------------------------------------------------
Top 20 tenants
85% of Top 20 Annual Rental Revenue From 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 3.7% of our annual rental revenue in effect as ofSeptember 30, 2020 . The following table sets forth information regarding leases with our 20 largest tenants inNorth America based upon annual rental revenue in effect as ofSeptember 30, 2020 (dollars in thousands, except average market cap amounts): Annual Percentage of Aggregate Remaining Lease Term(1) Aggregate Rental Annual Rental Revenue Investment-Grade Credit Ratings Average Market Cap(1) Tenant (in Years) RSF Revenue(1) (1) Moody's (in billions) S&P 1 Bristol-Myers Squibb Company 8.0 896,867 $ 52,042 3.7 % A2 A+$ 131.3 2 Takeda Pharmaceutical Company Ltd. 8.9 606,249 39,342 2.8 Baa2 BBB+$ 57.9 3 Facebook, Inc. 11.3 903,786 38,953 2.8 - -$ 611.1 4 Illumina, Inc. 9.9 891,495 35,907 2.5 - BBB$ 47.2 5 Sanofi 7.7 494,693 33,868 2.4 A1 AA$ 122.3 6 Eli Lilly and Company 8.7 531,784 33,527 2.4 A2 A+$ 134.5 7 Novartis AG 7.6 441,894 31,220 2.2 A1 AA-$ 220.6 8 Moderna, Inc. 11.8 597,478 30,607 2.2 - -$ 15.5 9 Uber Technologies, Inc. 62.2 (2) 1,009,188 27,379 1.9 - -$ 54.7 10 Roche 2.9 (3) 649,482 24,129 1.7 Aa3 AA$ 287.1 11 bluebird bio, Inc. 6.7 312,805 23,076 1.6 - -$ 4.1 12 Maxar Technologies 4.7 478,000 21,577 1.5 - -$ 0.9 13Massachusetts Institute of Technology 8.2 257,626 21,145 1.5 AaaAAA $ - 14 Merck & Co., Inc. 12.9 321,063 20,056 1.4 A1 AA-$ 209.2 15Jazz Pharmaceuticals, Inc. 9.9 198,041 20,003 1.4 - -$ 7.0 16New York University 11.0 204,691 19,523 1.4 Aa2 AA- $ - 17 Pfizer Inc. 4.4 416,979 17,762 1.3 A1 AA-$ 202.9 18Stripe, Inc. 7.0 295,333 17,736 1.3 - - $ - 19 Amgen Inc. 3.5 407,369 16,838 1.2 Baa1 A-$ 135.2 20 United States Government 7.0 287,638 16,550 1.2 Aaa AA+ $ - Total/weighted-average 11.0 (2) 10,202,461$ 541,240 38.4 %
Annual rental revenue and RSF include 100% of each property managed by us in
(1)Based on aggregate annual rental revenue in effect as ofSeptember 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 (i) ground leases for land at1455 and 1515 Third Street (two buildings aggregating 422,980 RSF), and (ii) leases at1655 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 8.4 years as ofSeptember 30, 2020 . (3)Includes 197,787 RSF expiring in 2022 at our recently acquired property at651 Gateway Boulevard in ourSouth San Francisco submarket. Upon expiration of the lease,651 Gateway Boulevard will be redeveloped into a Class A office/laboratory building. Excluding this 197,787 RSF, the weighted-average remaining term of space occupied by Roche is 3.3 years. 63 --------------------------------------------------------------------------------
Locations of properties
The locations of our properties are diversified among a number of life science, technology, and agtech cluster markets. The following table sets forth the total RSF, number of properties, and annual rental revenue in effect as ofSeptember 30, 2020 , in each of our markets inNorth America (dollars in thousands, except per RSF amounts): RSF Annual Rental Revenue Market Operating Development Redevelopment Total % of Total Total % of Total Per RSF Number of PropertiesGreater Boston 8,273,935 - 281,444 8,555,379 25 % 70$ 505,016 36 %$ 62.12 San Francisco 7,832,137 841,178 92,147 8,765,462 26 62 378,635 27 57.85New York City 1,127,580 - 140,098 1,267,678 4 5 77,631 5 72.95San Diego 6,047,894 - 63,774 6,111,668 18 77 223,660 16 39.48Seattle 1,580,845 100,086 - 1,680,931 5 18 75,930 5 52.76Maryland 2,820,680 261,096 - 3,081,776 9 43 78,581 6 29.34 Research Triangle 2,810,670 410,000 652,381 3,873,051 11 35 60,859 4 23.93Canada 256,967 - - 256,967 1 3 5,022 - 21.72 Non-cluster markets 354,879 - - 354,879 1 11 9,092 1 36.71 Properties held for sale 123,862 - - 123,862 - 2 942 - N/ANorth America 31,229,449 1,612,360 1,229,844 34,071,653 100 % 326$ 1,415,368 100 %$ 49.55 2,842,204
Summary of occupancy percentages in
The following table sets forth the occupancy percentages for our operating properties and our operating and redevelopment properties in each of ourNorth America markets, excluding properties held for sale, as of the following dates: Operating and Redevelopment Operating Properties Properties Market 9/30/20 6/30/20 9/30/19 9/30/20 6/30/20 9/30/19 Greater Boston 98.3 % 98.2 % 98.1 % 95.0 % 95.6 % 97.8 % San Francisco 95.3 (1) 94.7 99.0 94.2 90.6 94.0 New York City 95.5 97.1 99.2 84.8 86.2 88.1 San Diego 93.7 (1) 91.8 92.8 92.7 90.8 92.8 Seattle 91.0 (2) 95.1 97.7 91.0 95.1 97.7 Maryland 96.0 93.9 96.2 96.0 93.2 94.7 Research Triangle 90.5 (1) 96.8 97.8 73.4 96.8 96.6 Subtotal 95.2 95.1 97.0 91.5 92.6 94.8 Canada 90.0 90.0 93.7 90.0 90.0 93.7 Non-cluster markets 69.8 70.8 75.6 69.8 70.8 75.6 North America 94.9 % (1) 94.8 % 96.6 % 91.3 % 92.3 % 94.5 % (1)Includes 859,479 RSF, or 2.8%, of vacancy in ourNorth America markets, representing lease-up opportunities at properties recently acquired (noted below). Excluding these acquired vacancies, occupancy of operating properties inNorth America was 97.7% as ofSeptember 30, 2020 , up 60 bps from 97.1% as ofJune 30, 2020 . As ofSeptember 30, 2020 As ofJune 30, 2020 Vacant Occupancy Impact Vacant Occupancy Impact Property Submarket/Market RSF Region Consolidated RSF Region Consolidated Alexandria Center® for Research Triangle/Research 251,465 8.9 % 0.8 % N/A N/A N/A Life Science - Durham Triangle 601, 611, and 651 Gateway South San Francisco/San 202,871 2.6 % 0.7 201,570 2.6 % 0.7 % Boulevard Francisco SD Tech by Alexandria Sorrento Mesa/San Diego 76,639 1.3 % 0.2 182,484 3.0 % 0.6 5505 Morehouse Drive Sorrento Mesa/San Diego 71,021 1.2 % 0.2 71,016 1.2 % 0.3 Other acquisitions Various 257,483 N/A 0.9 192,701 N/A 0.7 859,479 2.8 % 647,771 2.3 % (2)Includes 50,387 RSF at 2301 5th Avenue in our Lake Union submarket that became vacant during the three months endedSeptember 30, 2020 . This space is leased to an investment-grade rated technology tenant that is expected to occupy the space during the three months endingDecember 31, 2020 . Excluding this temporary vacancy,Seattle occupancy would have been 94.2% as ofSeptember 30, 2020 .
Refer to the "Non-GAAP measures and definitions" section within this Item 2 for additional information.
64 --------------------------------------------------------------------------------
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 collaborative life science, technology, and agtech campuses inAAA 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 value. Our pre-construction activities are undertaken in order to get the property ready for its intended use and include entitlements, permitting, design, site work, and other activities preceding commencement of construction of aboveground building improvements. As of the date of this report, construction activities were in process at all of our active construction projects. 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
Development and Redevelopment Under Near Intermediate Operating Construction Term Term Future Subtotal Total Investments in real estate Book value as of September 30, 2020(1)$ 17,263,040 $
1,396,144
$ 3,381,526 $ 20,644,566 Square footage Operating 31,229,449 - - - - - 31,229,449 New Class A development and redevelopment properties - 2,842,204 4,209,933 4,071,592 7,548,480 18,672,209 18,672,209 Value-creation square feet currently included in rental properties(2) - - (300,010) (800,828) (1,411,797) (2,512,635) (2,512,635) Total square footage 31,229,449 2,842,204 3,909,923 3,270,764 6,136,683 16,159,574 47,389,023 (1)Balances exclude our share of the cost basis associated with our properties held by our unconsolidated real estate joint ventures, 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. 65 --------------------------------------------------------------------------------
Acquisitions
Our real estate asset acquisitions during the nine months ended
Square Footage Unlevered Yields Operating Active Operating With Future Property Submarket/Market Date of Purchase Number of Properties OccupancyFuture Development Redevelopment Development/ Redevelopment Operating Initial Stabilized Initial Stabilized (Cash) Purchase Price Nine months endedSeptember 30, 2020 : Alexandria Center® for Life Research Triangle/8/21/20 16 84 % - 652,381 100,145 1,485,621 (1) (1) $ 590,412 Science - Durham Research Triangle Reservoir WoodsRoute 128 /8/25/20 3 100 440,000 - 515,273 - (2) (2) 325,307 Greater Boston275 Grove Street Route 128 /1/10/20 1 99 - - - 509,702 8.0 % 6.7 % 226,512 Greater Boston 601, 611, and 651Gateway South San Francisco /1/28/20 3 73 (3) 260,000 - 300,010 475,993 Boulevard (51% interest inSan Francisco (4) (4) (4) consolidated JV)3181 Porter Drive GreaterStanford /8/6/20 1 100 - - - 104,011 7.2 % 5.0 % 115,200 San Francisco987 and 1075 Commercial Street GreaterStanford /4/14/20 2 N/A 700,000 (5) - 26,738 - (2) (2) 113,250 San FranciscoOne Upland Road Route 128 /8/19/20 1 100 450,000 - - 243,082 6.3 % (6) 5.6 % (6) 110,257 Greater Boston3330 and 3412 Hillview Avenue GreaterStanford /2/5/20 2 100 - - - 106,316 7.6 % 4.2 % 105,000 San Francisco9808 and 9868 Scranton Road (7) Sorrento Mesa/1/10/20 2 88 - - - 219,628 7.3 % 6.8 % 102,250 San Diego 11255 and 11355North Torrey Pines Torrey Pines /7/22/20 2 100 240,000 (5) - 139,135 - (2) (2) 97,500 Road San Diego4555 Executive Drive University Town Center /San Diego 6/2/20 1 100 200,000 - 41,475 - (2) (2) 43,000 Other Various Various 5 44 907,313 63,774 113,401 180,960 N/A N/A 154,061 39 86 % 3,197,313 716,155 1,236,177 3,325,313 $ 1,982,749 (1)The campus includes 16 properties, of which three properties aggregating 652,381 RSF are currently undergoing active redevelopment. We expect to achieve unlevered initial stabilized yields of 6.2% and 5.8% (cash basis) for the 13 operating properties. These operating properties generate 99% of annual rental revenue from investment-grade tenants. Refer to "New Class A development and redevelopment properties: current projects" within this Item 2 for additional details on the three properties undergoing active redevelopment. (2)We expect to provide total estimated costs and related yields for development and redevelopment projects in the future, subsequent to the commencement of construction. (3)Includes 202,871 RSF of vacancy as ofSeptember 30, 2020 . Refer to the "Summary of occupancy percentages inNorth America " section earlier within this Item 2 for additional details. (4)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. (5)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 properties 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. (6)Represents unlevered initial stabilized yields for the operating property excluding excess land. (7)InApril 2020 , we completed the sale of properties at9808 and 9868 Scranton Road to the existing SD Tech byAlexandria 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. 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. 66 --------------------------------------------------------------------------------
Dispositions
Our completed dispositions of real estate assets during the nine months endedSeptember 30, 2020 , consisted of the following (dollars in thousands, except for sales price per RSF): Property Submarket/Market Date of Sale Interest Sold RSF Sales Price Sales Price per RSF Gain945 Market Street (1) SoMa/San Francisco 9/4/20 99.5% 255,765 $ 198,000$ 774 $ - 9808 and 9868 Scranton Sorrento Mesa/San Diego 4/13/20 50% 219,628 51,104$ 465 Road (2) OtherRoute 495 /Greater Boston 8/7/20 100% 60,759 3,350$ 55 1,603 536,152 $ 252,454$ 1,603 (1)Upon approval for sale by our Board of Directors inSeptember 2020 , the asset met the criteria for classification as held for sale, and we recognized an impairment charge of$6.8 million to lower the carrying amount to the estimated fair value less costs to sell. InSeptember 2020 , we completed the disposition and sold our ownership interest in this recently acquired property, which is expected to be used as retail space by the buyer. Refer to Note 15 - "Assets classified as held for sale" to our unaudited consolidated financial statements under Item 1 of this report for further discussion. (2)We completed the sale of properties at9808 and 9868 Scranton Road in our Sorrento Mesa submarket to the existing SD Tech byAlexandria consolidated real estate joint venture, in which we have a 50% ownership interest. We continue to control and consolidate this real estate joint venture; therefore, we accounted for the difference between the consideration received and the book value of the interest sold as an equity transaction, with no gain or loss recognized in earnings. --------------------------------------------------------------------------------
Sustainability
[[Image Removed: are-20200930_g10.jpg]] (1)13 projects have been certified and another 31 projects are in process targeting WELL or Fitwel certification. (2)Relative to a 2015 baseline for buildings in operation thatAlexandria directly manages. (3)Relative to a 2015 baseline for buildings in operation thatAlexandria indirectly and directly manages. (4)Reflects sum of annual like-for-like progress from 2015 to 2019. (5)Reflects progress for all buildings in operation in 2019 thatAlexandria indirectly and directly manages. 68 -------------------------------------------------------------------------------- [[Image Removed: are-20200930_g11.jpg]] 69 --------------------------------------------------------------------------------
New Class A development and redevelopment properties: current projects
Alexandria District for The Arsenal on the Charles 201 Haskins Way Science and Technology Greater Boston/ San Francisco/South San Francisco San Francisco/Greater Stanford
281,444 RSF 315,000 RSF 526,178 RSF [[Image Removed: are-20200930_g12.jpg]] [[Image Removed: are-20200930_g13.jpg]] [[Image Removed: are-20200930_g14.jpg]] Alexandria Center® - 3160 Porter Drive Long Island City 9877 Waples Street San Francisco/Greater Stanford New York City/New York City San Diego/Sorrento Mesa 92,147 RSF 140,098 RSF 63,774 RSF
[[Image Removed: are-20200930_g15.jpg]] [[Image Removed: are-20200930_g16.jpg]] [[Image Removed: are-20200930_g17.jpg]]
70 --------------------------------------------------------------------------------
New Class A development and redevelopment properties: current projects (continued)
1165 Eastlake Avenue East 9804 Medical Center Drive 9950 Medical Center Drive Seattle/Lake Union Maryland/Rockville Maryland/Rockville 100,086 RSF 176,832 RSF 84,264 RSF [[Image Removed: are-20200930_g18.jpg]] [[Image Removed: are-20200930_g19.jpg]] [[Image Removed: are-20200930_g20.jpg]] Alexandria Center® for Alexandria Center® for Life Science - Durham Alexandria Center® for AgTech Advanced Technologies Research Triangle/Research Triangle Research Triangle/Research Triangle Research Triangle/Research Triangle 652,381 RSF 160,000 RSF 250,000 RSF [[Image Removed: are-20200930_g21.jpg]] [[Image Removed: are-20200930_g22.jpg]] [[Image Removed: are-20200930_g23.jpg]] 71
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New Class A development and redevelopment properties: current projects (continued)
The following tables set forth a summary of our new Class A development and
redevelopment properties under construction and pre-leased near-term projects as
of
Square Footage Percentage Initial Property/Market/Submarket Dev/Redev In Service CIP Total Leased Leased/Negotiating Occupancy(1)
Under construction in 2Q20
554,844 (2) 281,444 836,288 73 % 91 % 2021201 Haskins Way /San Francisco /South San Francisco Dev - 315,000 315,000 42 88 2Q21
Dev - 526,178 526,178 59 81 1Q213160 Porter Drive /San Francisco /Greater Stanford Redev - 92,147 92,147 20 20 1H21
Alexandria Center® - Long Island City/
Redev 36,661 140,098 176,759 21 43 1Q219877 Waples Street /San Diego /Sorrento Mesa Redev - 63,774 63,774 100 100 1Q211165 Eastlake Avenue East /Seattle/Lake Union Dev - 100,086 100,086 100 100 2Q219804 Medical Center Drive /Maryland /Rockville Dev - 176,832 176,832 100 100 1Q219950 Medical Center Drive /Maryland /Rockville Dev - 84,264 84,264 100 100 2021 Alexandria Center® for AgTech/Research Triangle/Research Redev/Dev 180,400 160,000 340,400 55 55 2021 Triangle(3) 771,905 1,939,823 2,711,728 63 80 Additions in 3Q20 Alexandria Center® for Life Science -Durham /Research Triangle/ Redev - 652,381 652,381 50 58 1H21/2022 Research Triangle(4) Alexandria Center® for Advanced Technologies/Research Triangle/ Dev - 250,000 250,000 (5) 40 (5) 44 (5) 2H21/2022 Research Triangle - 902,381 902,381 47 54 Pre-leased near-term projects3115 Merryfield Row /San Diego /Torrey Pines (6) Dev - 146,456 146,456 (6) 41 80Alexandria Point/San Diego/University Town Center (7) Dev - 171,102 171,102 (7) 100 100 SD Tech byAlexandria /San Diego /Sorrento Mesa(8) Dev - 176,428 176,428 (8) 59 59 - 493,986 493,986 68 80 Total 771,905 3,336,190 4,108,095 60 % 74 % (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 79,101 RSF of office spaces (acquired leases included in operating RSF) into office/laboratory space upon expiration of the existing leases in the next few quarters. (3)The new strategic collaborative agtech campus consists of Phase I at5 Laboratory Drive , including campus amenities, and Phase II at9 Laboratory Drive . (4)The recently acquired Alexandria Center® for Life Science -Durham redevelopment project includes three properties at40 Moore Drive ,2400 Ellis Road , and14 TW Alexander Drive .2400 Ellis Road is 100% leased, with initial occupancy anticipated in the first half of 2021 and stabilized occupancy expected for the remaining buildings in 2022. (5)Represents 150,000 RSF with 7% negotiating at8 Davis Drive and 100,000 RSF with 100% leased at10 Davis Drive . Vertical construction at10 Davis Drive is expected to commence in the second quarter of 2021. (6)We expect to commence vertical construction in the fourth quarter of 2020. (7)Represents our4150 Campus Point Court property and is expected to commence vertical construction in the second quarter of 2021. (8)Represents our10055 Barnes Canyon Road property and is expected to commence vertical construction in the second quarter of 2021. 72 -------------------------------------------------------------------------------- New Class A development and redevelopment properties: current projects (continued) Unlevered Yields Our Ownership Cost to Total at Property/Market/Submarket Interest In Service CIP Complete Completion Initial Stabilized Initial Stabilized (Cash Basis) Under construction in 2Q20 The Arsenal on the Charles/Greater Boston/Cambridge/Inner$ 156,773 TBD Suburbs 100 %$ 397,281 201 Haskins Way /San Francisco /South San Francisco 100 % - 236,338$ 133,662 $ 370,000 (1) 6.4 % 6.2 % Alexandria District for Science and Technology/San (1) Francisco/Greater Stanford 100 % - 419,909$ 210,091 $ 630,000 6.4 % 6.1 % 3160 Porter Drive/San Francisco/Greater Stanford 100 % - 49,239 TBD Alexandria Center® - Long Island City/New York City/New York 124,088$ 43,585 $ 184,300 City 100 % 16,627 5.5 % 5.6 %9877 Waples Street /San Diego /Sorrento Mesa 100 % - 21,985$ 7,215 $ 29,200 8.6 % 7.9 %1165 Eastlake Avenue East /Seattle/Lake Union 100 % - 91,267$ 46,733 $ 138,000 6.5 % (2) 6.3 % (2)9804 Medical Center Drive /Maryland /Rockville 100 % - 70,735$ 24,665 $ 95,400 7.7 % 7.2 %9950 Medical Center Drive /Maryland /Rockville 100 % - 40,105$ 14,195 $ 54,300 7.3 % 6.8 % Alexandria Center® for AgTech/Research Triangle/Research TBD Triangle 100 % 88,645 45,880 502,553 1,256,319
Additions in 3Q20
Alexandria Center® for Life Science -
100 % - 117,197 TBD Alexandria Center® for Advanced Technologies/Research Triangle/Research Triangle 100 % - 22,628 - 139,825 Pre-leased near-term projects 3115 Merryfield Row/San Diego/Torrey Pines 100 % - 56,428 Alexandria Point/San Diego/University Town Center 55 % (3) - 25,422 SD Tech by Alexandria/San Diego/Sorrento Mesa 50 % (3) - 13,536 - 95,386 Total$ 502,553 $ 1,491,530 (1)Increases to our projected total cost at completion are primarily due to the development of our Alexandria GradLabsTM and other changes in design.Alexandria GradLabsTM is a highly flexible, 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. (2)Unlevered yields represent anticipated aggregate returns for1165 Eastlake Avenue East , an amenity-rich research headquarters for Adaptive Biotechnologies Corporation, and1208 Eastlake Avenue East , an adjacent multi-tenant office/laboratory building. (3)Refer to the "Consolidated and unconsolidated real estate joint ventures" section under this Item 2 for additional information. 73 --------------------------------------------------------------------------------
New Class A development and redevelopment properties: summary of pipeline
The following table summarizes the key information for all our development and redevelopment projects inNorth America as ofSeptember 30, 2020 (dollars in thousands): Square Footage Development and Redevelopment Our Ownership Near Intermediate Property/Submarket Interest Book ValueUnder Construction Term Term Future TotalGreater Boston The Arsenal on theCharles /Cambridge /Inner Suburbs 100 %$ 174,275 281,444 - - 200,000 481,444325 Binney Street /Cambridge 100 % 122,218 - 450,000 - - 450,00015 Necco Street /Seaport Innovation District 98.0 % 180,915 - 350,000 - -
350,000
57 Coolidge Avenue /Cambridge /Inner Suburbs 75.0 % 45,469 - 275,000 - -
275,000
10 Necco Street /Seaport Innovation District 100 % 90,156 - - 175,000 - 175,000 Reservoir Woods/Route 128 100 % 41,341 - - 202,428 (1) 752,845 (1) 955,273215 Presidential Way /Route 128 100 % 6,724 - - 112,000 -
112,000
Alexandria Technology Square®/Cambridge 100 % 7,881 - - - 100,000 100,00099 A Street /Seaport Innovation District 95.8 % 44,040 - - - 235,000
235,000
OneUpland Road and100 Tech Drive /Route 128 100 % 8,039 - - - 750,000 750,000231 Second Avenue /Route 128 100 % 1,093 - - - 32,000 32,000 Other value-creation projects 100 % 9,763 - - - 16,955 16,955 731,914 281,444 1,075,000 489,428 2,086,800 3,932,672San Francisco 201 Haskins Way /South San Francisco 100 % 236,338 315,000 - - -
315,000
Alexandria District for Science and Technology/Greater (1) (1)Stanford 100 % 667,179 526,178 - 700,000 587,000 1,813,1783160 Porter Drive /Greater Stanford 100 % 49,239 92,147 - - - 92,14788 Bluxome Street /SoMa 100 % 269,775 - 1,070,925 - - 1,070,925 Alexandria Technology Center® - Gateway/South San (1) Francisco 45.0 % 44,537 - 517,010 - 291,000 808,0103825 and 3875 Fabian Way /Greater Stanford 100 % - - - 250,000 (1) 228,000 (1)
478,000
505 Brannan Street , Phase II/SoMa 99.7 % 18,979 - - 165,000 -
165,000
East Grand Avenue /South San Francisco 100 % 6,112 - - - 90,000 90,000 Other value-creation projects 100 % 54,603 - - 191,000 25,000 216,000$ 1,346,762 933,325 1,587,935 1,306,000 1,221,000 5,048,260 (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 or redevelopment opportunities, with the intent to demolish or redevelop 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. 74 -------------------------------------------------------------------------------- New Class A development and redevelopment properties: summary of pipeline (continued) Square Footage Development and Redevelopment Our Ownership Near Intermediate Property/Submarket Interest Book ValueUnder Construction Term Term Future Total New York City Alexandria Center® -Long Island City/New York City 100 %$ 124,088 140,098 - - -
140,098
47-50 30th Street /New York City 100 % 28,746 - 135,938 - -
135,938
Alexandria Center® for Life Science - New York (1) City/New York City 100 % 52,503 - - 550,000 - 550,000219 East 42nd Street /New York City 100 % - - - - 579,947 (2) 579,947 205,337 140,098 135,938 550,000 579,947 1,405,983San Diego 9877 Waples Street /Sorrento Mesa 100 % 21,985 63,774 - - -
63,774
3115 Merryfield Row /Torrey Pines 100 % 56,428 - 146,456 - -
146,456
Alexandria Point/University Town Center (3) 101,350 - 351,102 249,164 (4) 320,281 (4)
920,547
SD Tech byAlexandria /Sorrento Mesa (3) 88,128 - 366,502 160,000 333,845
860,347
Townsgate byAlexandria/Del Mar Heights 100 % 22,057 - 185,000 - -
185,000
10931 and 10933 Torrey Pines Road /Torrey Pines 100 % - - - 242,000 (4) -
242,000
University District/University Town Center 100 % 52,820 - - 600,000 (4)(5) -
600,000
11255 and 11355 North Torrey Pines Road /Torrey (4) Pines 100 % 105,236 - - - 240,000 240,0005200 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 100 % (4) Valley 7,669 - - - 149,000 149,000 Other value-creation projects 100 % - - - - 50,000 50,000 472,150 63,774 1,049,060 1,251,164 1,707,958 4,071,956Seattle 1165 Eastlake Avenue East /Lake Union 100 % 91,267 100,086 - - -
100,086
701 Dexter Avenue North /Lake Union 100 % 49,737 - 217,000 - -
217,000
1150 Eastlake Avenue East /Lake Union 100 % 44,932 - - 260,000 -
260,000
601 Dexter Avenue North /Lake Union 100 % 34,931 - - - 188,400 (4) 188,4001010 4th Avenue South /SoDo 100 % 48,812 - - - 544,825 544,825830 4th Avenue South /SoDo 100 % - - - - 52,488 (4) 52,488 Other value-creation projects 100 % 5,673 - - - 35,000 35,000$ 275,352 100,086 217,000 260,000 820,713 1,397,799 (1)We are currently negotiating a long-term ground lease with theCity of New York for the future site of a new building approximating 550,000 RSF. (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. 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)Includes our recently acquired project at4555 Executive Drive and 9363, 9373, and9393 Towne Centre Drive in ourUniversity Town Center submarket, which are currently under evaluation for development, subject to future market conditions. 75 -------------------------------------------------------------------------------- New Class A development and redevelopment properties: summary of pipeline (continued) Square Footage Development and Redevelopment Our Ownership Near Intermediate Property/Submarket Interest Book ValueUnder Construction Term Term Future Total
9804 and 9800 Medical Center Drive /Rockville 100 %$ 72,306 176,832 - - 64,000
240,832
9950 Medical Center Drive /Rockville 100 % 40,105 84,264 - - -
84,264
14200 Shady Grove Road /Rockville 100 % 27,969 - 145,000 145,000 145,000 435,000 140,380 261,096 145,000 145,000 209,000 760,096 Research Triangle Alexandria Center® for Life Science -Durham /Research Triangle 100 % 117,197 652,381 - - -
652,381
Alexandria Center® for AgTech, Phase II/Research Triangle 100 % 45,880 160,000 - - -
160,000
Alexandria Center® for Advanced 100 % 38,517 250,000 - 70,000 700,000
1,020,000
Technologies/Research Triangle Other value-creation projects 100 % 4,195 - - - 76,262 76,262 205,789 1,062,381 - 70,000 776,262 1,908,643 Other value-creation projects 100 % 3,842 - - - 146,800 146,800 Total 3,381,526 2,842,204 4,209,933 4,071,592 7,548,480 18,672,209 (1) Key pending acquisitionMercer Mega Block/Lake Union TBD TBD - - - 800,000 800,000$ 3,381,526 2,842,204 4,209,933 4,071,592 8,348,480 19,472,209 (1)Total square footage includes 2,512,635 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. 76 --------------------------------------------------------------------------------
Summary of capital expenditures
Our construction spending for the nine months ended
Nine Months Ended Construction Spending September 30, 2020 Additions to real estate - consolidated projects$ 1,072,102 Investments in unconsolidated real estate joint ventures 3,291 Contributions from noncontrolling interests (14,515) Construction spending (cash basis)
1,060,878
Change in accrued construction (15,980)
Construction spending for the nine months ended
1,044,898
Projected construction spending for the three months ending December 31, 2020 305,102 Guidance midpoint$ 1,350,000
The following table summarizes the total projected construction spending for the
year ending
Projected Construction Spending Year Ending December 31, 2020 Development, redevelopment, and pre-construction projects $ 1,170,000
Contributions from noncontrolling interests (consolidated real estate joint ventures)
(20,000) Revenue-enhancing and repositioning capital expenditures 144,000 Non-revenue-enhancing capital expenditures 56,000 Guidance midpoint $ 1,350,000 77
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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 endedDecember 31, 2019 , and our subsequent quarterly reports on Form 10-Q. We believe such tabular presentation promotes a better understanding for investors of the corporate-level decisions made and activities performed that significantly affect 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 of 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 on non-real estate investments, impairments of real estate and non-real estate investments, and significant termination fees are not related to the operating performance of our real estate assets as they result from strategic, corporate-level 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 non-real estate investments when their fair values decline below their respective carrying values due to changes in general market or other 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. Key items included in net income attributable toAlexandria's common stockholders for the three and nine months endedSeptember 30, 2020 and 2019, were as follows: Three Months EndedSeptember 30 , Nine Months Ended September 30, 2020 2019 2020 2019 2020 2019 2020 2019 (In millions, except per share amounts) Amount Per Share - Diluted Amount Per Share - Diluted Unrealized (losses) gains on non-real estate investments$ (14.0) $ (70.0) $ (0.11) $ (0.62) $ 140.5 $ 13.2 $ 1.13 $ 0.12 Gain on sales of real estate 1.6 - 0.01 - 1.6 - 0.01 - Impairment of real estate (7.7) - (0.06) - (30.5) (1) - (0.24) - Impairment of non-real estate investments - (7.1) - (0.06) (24.5) (7.1) (0.20) (0.06) Loss on early extinguishment of debt (52.8) (40.2) (0.42) (0.36) (52.8) (47.6) (0.42) (0.43) Loss on early termination of interest rate hedge agreements - (1.7) - (0.02) - (1.7) - (0.02) Termination fee(2) 86.2 - 0.69 - 86.2 - 0.69 - Acceleration of stock compensation expense due to executive officer resignation (4.5) - (0.04) - (4.5) - (0.04) - Preferred stock redemption charge - - - - - (2.6) - (0.02) Total$ 8.8 $ (119.0) $ 0.07 $ (1.06) $ 116.0 $ (45.8) $ 0.93 $ (0.41) (1)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 endedMarch 31, 2020 , and was classified in equity in earnings of unconsolidated real estate joint ventures within our consolidated statements of operations. (2)Refer to the section titled "Income from rentals" in Note 5 - "Leases" to our unaudited consolidated financial statements under Item 1 of this report for detail. 78 --------------------------------------------------------------------------------
Same properties
We supplement an evaluation of our results of operations with an evaluation of operating performance of certain of our properties, referred to asSame Properties . For additional information on the determination of ourSame Properties portfolio, refer to the definition of "Same property comparisons" in the "Non-GAAP measures and definitions" section within this Item 2. The following table presents information regarding ourSame Properties for the three and nine months endedSeptember 30, 2020 :
Three Months Ended Nine Months Ended Percentage change in net operating income over comparable period from prior year 2.9% 2.3%
Percentage change in net operating income (cash basis) over comparable period from prior year
4.9% 4.8% Operating margin 72% 73% Number of Same Properties 231 212 RSF 21,976,080 21,187,350 Occupancy - current-period average 96.4% 96.6% Occupancy - same-period prior-year average 96.3% 96.8%
The following table reconciles the number of
Development - under construction Properties9804 Medical Center Drive 19950 Medical Center Drive 1Alexandria District for Science and Technology 2201 Haskins Way 11165 Eastlake Avenue East 19 Laboratory Drive 1 Alexandria Center® for Advanced Technologies 2 9 Development - placed into service afterJanuary 1, 2019 Properties399 Binney Street 1279 East Grand Avenue 1188 East Blaine Street 1 3 Redevelopment - under construction Properties Alexandria Center® -Long Island City 13160 Porter Drive 1 The Arsenal on theCharles 59877 Waples Street 1 Alexandria Center® for Life Science -Durham 3 11
Redevelopment - placed into service after
4681 and 685 Gateway Boulevard 2266 and 275 Second Avenue 25 Laboratory Drive 1 9 Acquisitions afterJanuary 1, 2019
Properties
25, 35, and45 West Watkins Mill Road 33170 and 3181 Porter Drive 2Shoreway Science Center 2 3911, 3931, and4075 Sorrento Valley Boulevard 3260 Townsend Street 15 Necco Street 1601 Dexter Avenue North 1 4224/4242 Campus Point Court and10210 Campus Point Drive 33825 and 3875 Fabian Way 2 SD Tech byAlexandria 11 The Arsenal on theCharles 6275 Grove Street 1 601, 611, and651 Gateway Boulevard 33330 and 3412 Hillview Avenue 29605 Medical Center Drive 1220 2nd Avenue South 1987 and 1075 Commercial Street 24555 Executive Drive 1 Alexandria Center® for Life Science -Durham 13 Reservoir Woods 3One Upland Road 1830 4th Avenue South 111255 and 11355 North Torrey Pines Road 2 Other 8 74 Unconsolidated real estate JVs 6 Properties held for sale 2 Total properties excluded fromSame Properties 114Same Properties 212
(1)
Total properties inNorth America as ofSeptember 30, 2020 326 (1)Includes 9880 Campus Point Drive and3545 Cray Court . The9880 Campus Point Drive building was occupied throughJanuary 2018 and is currently in active development, and3545 Cray Court was delivered during the three months endedSeptember 30, 2020 . 79 --------------------------------------------------------------------------------
Comparison of results for the three months ended
The following table presents a comparison of the components of net operating income for ourSame Properties andNon-Same Properties for the three months endedSeptember 30, 2020 , compared to the three months endedSeptember 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 (loss), respectively. For additional discussion related to the COVID-19 pandemic and its impact to us, refer to "The COVID-19 pandemic" section 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 September 30, (Dollars in thousands) 2020 2019 $ Change % Change Income from rentals: Same Properties$ 277,811 $ 274,419 $ 3,392 1.2 % Non-Same Properties(1) 160,582 18,763 141,819 755.8 Rental revenues 438,393 293,182 145,211 49.5 Same Properties 91,820 87,801 4,019 4.6 Non-Same Properties 13,199 4,793 8,406 175.4 Tenant recoveries 105,019 92,594 12,425 13.4 Income from rentals 543,412 385,776 157,636 40.9 Same Properties 95 85 10 11.8 Non-Same Properties 1,535 4,623 (3,088) (66.8) Other income 1,630 4,708 (3,078) (65.4) Same Properties 369,726 362,305 7,421 2.0 Non-Same Properties 175,316 28,179 147,137 522.2 Total revenues 545,042 390,484 154,558 39.6 Same Properties 102,074 102,292 (218) (0.2) Non-Same Properties 38,369 14,158 24,211 171.0 Rental operations 140,443 116,450 23,993 20.6 Same Properties 267,652 260,013 7,639 2.9 Non-Same Properties 136,947 14,021 122,926 876.7 Net operating income$ 404,599 $ 274,034 $ 130,565 47.6 % Net operating income - Same Properties$ 267,652 $ 260,013 $ 7,639 2.9 % Straight-line rent revenue (20,840) (23,666) 2,826 (11.9) Amortization of acquired below-market leases (3,651) (4,545) 894 (19.7) Net operating income -Same Properties (cash basis)$ 243,161 $ 231,802 $ 11,359 4.9 % (1)Includes a termination fee recognized during the three months endedSeptember 30, 2020 . Refer to the section titled "Income from rentals" in Note 5 - "Leases" to our unaudited consolidated financial statements under Item 1 of this report for detail. Income from rentals Total income from rentals for the three months endedSeptember 30, 2020 , increased by$157.6 million , or 40.9%, to$543.4 million , compared to$385.8 million for the three months endedSeptember 30, 2019 , as a result of increases in rental revenues and tenant recoveries, as discussed below. 80 --------------------------------------------------------------------------------
Rental revenues
Total rental revenues for the three months endedSeptember 30, 2020 , increased by$145.2 million , or 49.5%, to$438.4 million , compared to$293.2 million for the three months endedSeptember 30, 2019 . The increase was primarily due to an increase in rental revenues from ourNon-Same Properties aggregating$141.8 million , which included a termination fee of$89.5 million recognized in connection with the termination of our contract for a future lease at our development project at88 Bluxome Street in our SoMa submarket during three months endedSeptember 30, 2020 . Refer to the section titled "Income from rentals" in Note 5 - "Leases" to our unaudited consolidated financial statements under Item 1 of this report for detail. The remaining increase in rental revenues from ourNon-Same Properties was primarily due to the 241,312 RSF of development and redevelopment projects placed into service subsequent toJuly 1, 2019 , and 61 operating properties aggregating 6.3 million RSF acquired subsequent toJuly 1, 2019 . Rental revenues from ourSame Properties for the three months endedSeptember 30, 2020 , increased by$3.4 million , or 1.2%, to$277.8 million , compared to$274.4 million for the three months endedSeptember 30, 2019 . The increase was primarily due to rental rate increases on lease renewals and re-leasing of space sinceJuly 1, 2019 . The increase was partially offset by the effect of reduced revenues generated from our transient parking, retail tenants, and amenities, which had no or limited operations due to COVID-19 restrictions.
Tenant recoveries
Tenant recoveries for the three months endedSeptember 30, 2020 , increased by$12.4 million , or 13.4%, to$105.0 million , compared to$92.6 million for the three months endedSeptember 30, 2019 . The increase was primarily from ourNon-Same Properties related to our development and redevelopment projects placed into service and properties acquired subsequent toJuly 1, 2019 , as discussed above under "Rental revenues."Same Properties' tenant recoveries for the three months endedSeptember 30, 2020 , increased by$4.0 million , or 4.6%, primarily due to an increase in recoverable property tax expenses resulting from higher assessed values of our properties, higher property insurance, and higher repairs and maintenance expenses during the three months endedSeptember 30, 2020 , as discussed under "Rental operations" below. As ofSeptember 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 endedSeptember 30, 2020 and 2019, was$1.6 million and$4.7 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 endedSeptember 30, 2020 , increased by$24.0 million , or 20.6%, to$140.4 million , compared to$116.5 million for the three months endedSeptember 30, 2019 . The increase was primarily due to incremental expenses related to ourNon-Same Properties , which consist of development and redevelopment projects placed into service and acquired properties, as discussed above under "Income from rentals."Same Properties' rental operating expenses decreased by$0.2 million , or 0.2%, to$102.1 million during the three months endedSeptember 30, 2020 , compared to$102.3 million for the three months endedSeptember 30, 2019 . The decrease was primarily due to the reduced operating expenses related to retail tenants and amenities, which had no or limited operations due to COVID-19 restrictions during the three months endedSeptember 30, 2020 . The decrease was partially offset by the increase in recoverable property tax expenses resulting from higher assessed values of our properties, higher property insurance, and higher repairs and maintenance expenses.
General and administrative expenses
General and administrative expenses for the three months endedSeptember 30, 2020 , increased by$9.0 million , or 32.2%, to$36.9 million , compared to$27.9 million for the three months endedSeptember 30, 2019 . Approximately$4.5 million of the increase was the result of the acceleration of stock compensation expense recognized in connection with the resignation of an executive officer during the three months endedSeptember 30, 2020 . This former executive officer remains a consultant to the company. A portion of unvested stock outstanding will continue to vest pursuant to the original terms of the awards. This was deemed a modification for accounting purposes due to a significant reduction in future services to the company and resulted in an acceleration of unamortized compensation. The remaining increase was related 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 toJuly 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 endedSeptember 30, 2020 and 2019, were 9.9% and 9.7%, respectively. 81 --------------------------------------------------------------------------------
Interest expense
Interest expense for the three months ended
Three Months Ended September 30, Component 2020 2019 Change Interest incurred $ 75,874$ 70,761 $ 5,113 Capitalized interest (32,556) (24,558) (7,998) Interest expense $ 43,318$ 46,203 $ (2,885) Average debt balance outstanding(1)$ 8,070,031 $ 6,775,130 $ 1,294,901 Weighted-average annual interest rate(2) 3.8 % 4.2 % (0.4) % (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 endedSeptember 30, 2020 , compared to the three months endedSeptember 30, 2019 , resulted from the following (dollars in thousands): Effective Component Interest Rate(1) Date Change Increases in interest incurred due to: Issuances of debt:$700 million unsecured senior notes payable 3.91 % July/September 2019$ 2,734 $750 million unsecured senior notes payable 3.48 % July 2019 988$400 million unsecured senior notes payable 2.87 % September 2019 2,181$700 million unsecured senior notes payable 5.05 % March 2020 8,585$1.0 billion unsecured senior notes payable 1.97 % August 2020 2,939 Fluctuations in interest rate and average balance:$1.0 billion commercial paper program 512 Other increase in interest 198 Total increases 18,137 Decreases in interest incurred due to: Repayments of debt:$550 million unsecured senior notes payable 4.75 % July/August 2019 (1,746)$400 million unsecured senior notes payable 2.96 % July/August 2019 (675)$500 million unsecured senior notes payable 4.04 % August/September 2020 (2,255) Unsecured senior bank term loan Various Various (1,360) Unsecured senior line of credit (5,277) Interest rate hedge agreement in effect during the three months ended September 30, 2019 (1,711) Total decreases (13,024) Change in interest incurred 5,113 Increase in capitalized interest (7,998) Total change in interest expense$ (2,885)
(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 endedSeptember 30, 2020 , increased by$41.3 million , or 30.4%, to$176.8 million , compared to$135.6 million for the three months endedSeptember 30, 2019 . The increase was primarily due to additional depreciation from 241,312 RSF of development and redevelopment projects placed into service subsequent toJuly 1, 2019 , and 61 operating properties aggregating 6.3 million RSF acquired subsequent toJuly 1, 2019 . 82 --------------------------------------------------------------------------------
Gain on sales of real estate
During the three months endedSeptember 30, 2020 , we recognized a gain on sale of real estate of$1.6 million in connection with our sale of30 Bearfoot Road in ourRoute 495 submarket. We completed the sale of the real estate asset inAugust 2020 for a sales price of$3.4 million .
Impairment charges
During the three months endedSeptember 30, 2020 , we recognized impairment charges aggregating$7.7 million , which primarily consisted of an impairment of$6.8 million recognized to lower the carrying amount of our real estate asset located at945 Market Street in our SoMa submarket to its estimated fair value less costs to sell, upon its classification as held for sale. InSeptember 2020 , we completed the sale of the real estate asset for a sales price of$198.0 million with no gain or loss.
Investment income
During the three months endedSeptember 30, 2020 , we recognized investment income aggregating$3.3 million , which consisted of$17.4 million of realized gains and$14.0 million of unrealized losses. Realized gains primarily related to sales of investments and distributions received during the three months endedSeptember 30, 2020 . Unrealized losses of$14.0 million primarily consisted of decreases in fair values of our investments in publicly traded companies during the three months endedSeptember 30, 2020 . During the three months endedSeptember 30, 2019 , we recognized investment loss aggregating$63.1 million , which consisted of$7.0 million of realized gains and$70.0 million of unrealized losses. 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.
Loss on early extinguishment of debt
During the three months endedSeptember 30, 2020 , we refinanced our 3.90% unsecured senior notes payable due in 2023 aggregating$500.0 million and recognized a loss on early extinguishment of debt of$50.8 million , including the write-off of unamortized loan fees. Additionally, we recognized a loss on early extinguishment of debt of$1.9 million due to the termination of our$750.0 million unsecured senior line of credit. During the three months endedSeptember 30, 2019 , we repaid the outstanding balance of our unsecured senior bank term loan of$350.0 million and refinanced an aggregate of$950.0 million of unsecured senior notes payable comprising$400.0 million of 2.75% unsecured senior notes payable due in 2020 and$550.0 million of 4.60% unsecured senior notes payable due in 2022. As a result, we recognized losses of$40.2 million related to the early extinguishment of debt. 83 --------------------------------------------------------------------------------
Comparison of results for the nine months ended
The following table presents a comparison of the components of net operating income for ourSame Properties andNon-Same Properties for the nine months endedSeptember 30, 2020 , compared to the nine months endedSeptember 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. For additional discussion related to the COVID-19 pandemic and its impact to us, refer to "The COVID-19 pandemic" section 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. Nine Months Ended September 30, (Dollars in thousands) 2020 2019 $ Change % Change Income from rentals: Same Properties$ 795,390 $ 784,317 $ 11,073 1.4 % Non-Same Properties(1) 322,500 73,053 249,447 341.5 Rental revenues 1,117,890 857,370 260,520 30.4 Same Properties 250,068 237,943 12,125 5.1 Non-Same Properties 48,915 16,830 32,085 190.6 Tenant recoveries 298,983 254,773 44,210 17.4 Income from rentals 1,416,873 1,112,143 304,730 27.4 Same Properties 209 350 (141) (40.3) Non-Same Properties 4,835 10,689 (5,854) (54.8) Other income 5,044 11,039 (5,995) (54.3) Same Properties 1,045,667 1,022,610 23,057 2.3 Non-Same Properties 376,250 100,572 275,678 274.1 Total revenues 1,421,917 1,123,182 298,735 26.6 Same Properties 285,586 279,509 6,077 2.2 Non-Same Properties 107,871 44,131 63,740 144.4 Rental operations 393,457 323,640 69,817 21.6 Same Properties 760,081 743,101 16,980 2.3 Non-Same Properties 268,379 56,441 211,938 375.5 Net operating income$ 1,028,460 $ 799,542 $ 228,918 28.6 % Net operating income - Same Properties$ 760,081 $ 743,101 $ 16,980 2.3 % Straight-line rent revenue (53,492) (67,441) 13,949 (20.7) Amortization of acquired below-market leases (9,925) (10,753) 828 (7.7) Net operating income -Same Properties (cash basis)$ 696,664 $ 664,907 $ 31,757 4.8 % (1)Includes a termination fee recognized during the three months endedSeptember 30, 2020 . Refer to the section titled "Income from rentals" in Note 5 - "Leases" to our unaudited consolidated financial statements under Item 1 of this report for detail. Income from rentals Total income from rentals for the nine months endedSeptember 30, 2020 , increased by$304.7 million , or 27.4%, to$1.4 billion , compared to$1.1 billion for the nine months endedSeptember 30, 2019 , as a result of increases in rental revenues and tenant recoveries, as discussed below. 84 --------------------------------------------------------------------------------
Rental revenues
Total rental revenues for the nine months endedSeptember 30, 2020 , increased by$260.5 million , or 30.4%, to$1.1 billion , compared to$857.4 million for the nine months endedSeptember 30, 2019 . The increase was primarily due to an increase in rental revenues from ourNon-Same Properties aggregating$249.4 million primarily related to 926,892 RSF of development and redevelopment projects placed into service subsequent toJanuary 1, 2019 , and 74 operating properties aggregating 6.7 million RSF acquired subsequent toJanuary 1, 2019 . The increase in total rental revenues for the nine months endedSeptember 30, 2020 , also included a termination fee of$89.5 million recognized in connection with the termination of our contract for a future lease at our development project at88 Bluxome Street in our SoMa submarket during the nine months endedSeptember 30, 2020 . Rental revenues from ourSame Properties for the nine months endedSeptember 30, 2020 , increased by$11.1 million , or 1.4%, to$795.4 million , compared to$784.3 million for the nine months endedSeptember 30, 2019 . The increase was primarily due to rental rate increases on lease renewals and re-leasing of space sinceJanuary 1, 2019 . The increase was partially offset by the effect of reduced revenues generated from our transient parking, retail tenants, and amenities, which had no or limited operations due to COVID-19 restrictions. The increase in total rental revenues was also partially offset by a$5.2 million reduction to rental revenues recognized during the nine months endedSeptember 30, 2020 , related to the specific write-off aggregating$1.6 million and a general allowance aggregating$3.6 million related to deferred rent balances of tenants that are or may potentially be impacted by uncertainties surrounding COVID-19. Tenant recoveries Tenant recoveries for the nine months endedSeptember 30, 2020 , increased by$44.2 million , or 17.4%, to$299.0 million , compared to$254.8 million for the nine months endedSeptember 30, 2019 . This increase is consistent with the increase in our rental operating expenses of$69.8 million , or 21.6%, as discussed under "Rental operations" below.Same Properties' tenant recoveries for the nine months endedSeptember 30, 2020 , increased by$12.1 million , or 5.1%, primarily due to the increase in recoverable property tax expenses resulting from higher assessed values of our properties, higher property insurance, and higher repairs and maintenance expenses during the nine months endedSeptember 30, 2020 , as discussed under "Rental operations" below. As ofSeptember 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 nine months endedSeptember 30, 2020 and 2019, was$5.0 million and$11.0 million , respectively, primarily consisting of construction management fees and interest income earned during each respective period. The decrease was primarily a result of lower construction management fees recognized due to the completion of certain projects.
Rental operations
Total rental operating expenses for the nine months endedSeptember 30, 2020 , increased by$69.8 million , or 21.6%, to$393.5 million , compared to$323.6 million for the nine months endedSeptember 30, 2019 . The increase was primarily due to incremental expenses from ourNon-Same Properties primarily related to 926,892 RSF of development and redevelopment projects placed into service subsequent toJanuary 1, 2019 , and 74 operating properties aggregating 6.7 million RSF acquired subsequent toJanuary 1, 2019 .Same Properties' rental operating expenses increased by$6.1 million , or 2.2%, to$285.6 million during the nine months endedSeptember 30, 2020 , compared to$279.5 million for the nine months endedSeptember 30, 2019 . The increase was primarily due to an increase in recoverable property tax expenses resulting from higher assessed values of our properties, higher property insurance, and higher repairs and maintenance expenses, which were partially offset by reduced operating expenses related to retail tenants and amenities, which had no or limited operations due to COVID-19 restrictions during the nine months endedSeptember 30, 2020 .
General and administrative expenses
General and administrative expenses for the nine months endedSeptember 30, 2020 , increased by$21.6 million , or 27.3%, to$100.7 million , compared to$79.0 million for the nine months endedSeptember 30, 2019 . Approximately$4.5 million of the increase was the result of the acceleration of stock compensation expense recognized in connection with the resignation of an executive officer during the three months endedSeptember 30, 2020 . This former executive officer remains a consultant to the company. A portion of unvested stock outstanding will continue to vest pursuant to the original terms of the awards. This was deemed a modification for accounting purposes due to a significant reduction in future services to the company and resulted in an acceleration of unamortized compensation. The remaining increase was primarily due to continued growth in the depth and breadth of our operations in multiple markets, including development and redevelopment projects placed into service and properties acquired subsequent toJanuary 1, 2019 , as discussed under "Income from rentals" above. As a percentage of net operating income, our general and administrative expenses for the trailing twelve months endedSeptember 30, 2020 and 2019, were 9.9% and 9.7%, respectively. 85 --------------------------------------------------------------------------------
Interest expense
Interest expense for the nine months ended
Nine Months Ended September 30, Component 2020 2019 Change Interest incurred$ 222,100 $ 192,923 $ 29,177 Capitalized interest (88,029) (64,741) (23,288) Interest expense$ 134,071 $ 128,182 $ 5,889 Average debt balance outstanding(1)$ 7,626,396 $ 6,245,444 $ 1,380,952 Weighted-average annual interest rate(2) 3.9 % 4.1 % (0.2) % (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 nine months ended
Component Interest Rate(1) Effective Date
Change
Increases in interest incurred due to: Issuances of debt:$650 million unsecured senior notes payable 4.03 % June 2018/$ 1,784 - green bond March 2019$350 million unsecured senior notes payable - green bond 3.96 % March 2019 2,969$300 million unsecured senior notes payable 4.93 % March 2019 3,236$750 million unsecured senior notes payable 3.48 % July 2019 13,684$700 million unsecured senior notes payable 3.91 % July/September 2019 16,576$400 million unsecured senior notes payable 2.87 % September 2019 7,712$700 million unsecured senior notes payable 5.05 % March 2020 17,647$1.0 billion unsecured senior notes payable 1.97 % August 2020 2,939 Fluctuations in interest rate and average balance:$1.0 billion commercial paper program 4,111 Interest rate hedge agreement in effect during the nine months ended September 30, 2019 105 Other increase in interest 921 Total increases 71,684 Decreases in interest incurred due to: Repayments of debt:$550 million unsecured senior notes payable 4.75 % July/August 2019 (14,424)$400 million unsecured senior notes payable 2.96 % July/August 2019 (6,257)$500 million unsecured senior notes payable 4.04 % August/September 2020 (2,252) Secured construction loan 3.29 % March 2019 (1,778) Unsecured senior bank term loan Various Various (7,335) Unsecured senior line of credit (10,461) Total decreases (42,507) Change in interest incurred 29,177 Increase in capitalized interest (23,288) Total change in interest expense$ 5,889
(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.
86 --------------------------------------------------------------------------------
Depreciation and amortization
Depreciation and amortization expense for the nine months endedSeptember 30, 2020 , increased by$116.3 million , or 28.8%, to$520.4 million , compared to$404.1 million for the nine months endedSeptember 30, 2019 . The increase was primarily due to additional depreciation from 926,892 RSF of development and redevelopment projects placed into service subsequent toJanuary 1, 2019 , and 74 operating properties aggregating 6.7 million RSF acquired subsequent toJanuary 1, 2019 .
Gain on sales of real estate
During the nine months endedSeptember 30, 2020 , we recognized a gain on sale of real estate of$1.6 million in connection with our sale of30 Bearfoot Road in ourRoute 495 submarket. We completed the sale of the real estate asset inAugust 2020 for a sales price of$3.4 million .
Impairment charges
During the nine months ended
We recognized impairment charges aggregating
In addition, during the nine months endedSeptember 30, 2020 , we recognized impairment charges of$7.7 million , which primarily consisted of an impairment of$6.8 million recognized to lower the carrying amount of our real estate asset located at945 Market Street in our SoMa submarket to its estimated fair value less costs to sell, upon its classification as held for sale. InSeptember 2020 , we completed the sale of the real estate asset for a sales price of$198.0 million with no gain or loss.
Investment income
During the nine months endedSeptember 30, 2020 , we recognized investment income aggregating$166.2 million , which consisted of$25.7 million of realized gains and$140.5 million of unrealized gains. Realized gains consisted of$50.2 million of gains on sales of investments and distributions received, partially offset by impairments of$24.5 million related to investments in privately held entities that do not report NAV. Unrealized gains of$140.5 million during the nine months endedSeptember 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 nine months endedSeptember 30, 2019 , we recognized investment income aggregating$42.0 million , which consisted of$28.8 million of realized gains and$13.2 million of unrealized gains.
Loss on early extinguishment of debt
During the nine months endedSeptember 30, 2020 , we refinanced our 3.90% unsecured senior notes payable due in 2023 aggregating$500.0 million and recognized a loss on early extinguishment of debt of$50.8 million , including the write-off of unamortized loan fees. Additionally, we recognized a loss on early extinguishment of debt of$1.9 million due to the termination of our$750.0 million unsecured senior line of credit.
During the nine months ended
We recognized losses of$40.2 million related to the repayment of the outstanding balance of our unsecured senior bank term loan of$350.0 million and the refinancing of an aggregate of$950.0 million of unsecured senior notes payable comprising$400.0 million of 2.75% unsecured senior notes payable due 2020 and$550.0 million of 4.60% unsecured senior notes payable due in 2022.
In addition, we recognized a loss on early extinguishment of debt of
During the nine months endedSeptember 30, 2019 , we also recognized a loss on early extinguishment of debt of$269 thousand related to the early repayment of the remaining$193.1 million balance of our secured construction loan related to 50/60 Binney Street . 87 --------------------------------------------------------------------------------
Equity in earnings of unconsolidated real estate joint ventures
During the nine months ended
InMarch 2020 , the impact of COVID-19 pandemic and the resultingState 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 operations for the nine months endedSeptember 30, 2020 . 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 information.
Preferred stock redemption charge
During the nine months endedSeptember 30, 2019 , we repurchased, in privately negotiated transactions, 275,000 outstanding shares of our Series D Convertible Preferred Stock and recognized a preferred stock redemption charge of$2.6 million . 88 --------------------------------------------------------------------------------
Projected results
We present updated guidance for EPS attributable toAlexandria's common stockholders - diluted, and funds from operations per share attributable toAlexandria's common stockholders - diluted, as adjusted, based on our current view of existing market conditions and other assumptions for the year endingDecember 31, 2020 , as set forth, in the tables below. The tables below also provide a reconciliation of EPS attributable toAlexandria's common stockholders - diluted, the most directly comparable GAAP measure, to funds from operations per share and funds from operations per share, as adjusted, non-GAAP measures, and other key assumptions included in our updated guidance for the year endingDecember 31, 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" within this Item 2.
Projected 2020 Earnings per Share and Funds From Operations
per Share Attributable to
As of 10/26/20 As of 7/27/20 Earnings per share(1)$3.09 to$3.11 $3.00 to$3.08 Depreciation and amortization of real estate assets 5.15 5.15 Gain on sale of real estate (0.01) - Impairment of real estate - rental properties(2) 0.12 0.06 Allocation of unvested restricted stock awards (0.05) (0.05) Funds from operations per share(3)$8.30 to$8.32 $8.16 to$8.24 Unrealized gains on non-real estate investments (1.13) (1.25) Impairment of non-real estate investments 0.20 0.20 Impairment of real estate(4) 0.12 0.12 Loss on early extinguishment of debt(5) 0.42 - Termination fee(6) (0.69) -
Acceleration of stock compensation expense due to executive officer resignation
0.04 - Allocation to unvested restricted stock awards/other 0.03 0.03 Funds from operations per share, as adjusted(1)$7.29 to$7.31 $7.26 to$7.34 Midpoint$7.30 $7.30 (1)Excludes unrealized gains or losses afterSeptember 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 recognized during the three months endedMarch 31, 2020 , on our investment in a recently developed retail property held by our unconsolidated real estate joint venture. Additionally, during the three months endedSeptember 30, 2020 , we recognized an impairment charge of$7.7 million primarily to reduce the carrying amount of our property at945 Market Street to its estimated fair value. We completed the disposition of this asset inSeptember 2020 . (3)Calculated in accordance with standards established by theAdvisory 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 toAlexandria Real Estate Equities, Inc.'s common stockholders" in the "Non-GAAP measures and definitions" section within this Item 2 for additional information. (4)Includes an impairment charge of$10 million recognized inApril 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. (5)Includes losses on early extinguishment of debt aggregating$53.4 million comprising (i)$50.8 million related to the refinancing of our 3.90% unsecured senior notes payable due in 2023 during the three months endedSeptember 30, 2020 , (ii)$1.9 million related to the termination of our$750 million unsecured senior line of credit during the three months endedSeptember 30, 2020 , and (iii)$651 thousand related to the amendment of our unsecured senior line of credit inOctober 2020 . (6)Refer to Note 5 - "Leases" to our unaudited consolidated financial statements under Item 1 of this report for further discussion. 89 -------------------------------------------------------------------------------- Key Assumptions(1) As of 10/26/20 As of 7/27/20 (Dollars in millions) Low High Low High Occupancy percentage for operating properties in North America as of December 31, 2020 94.8% 95.4% 94.8% 95.4% Lease renewals and re-leasing of space: Rental rate increases 30.5% 33.5% 28.0% 31.0% Rental rate increases (cash basis) 16.0% 19.0% 14.0% 17.0% Same property performance: Net operating income increase 1.0% 3.0% 1.0% 3.0% Net operating income increase (cash basis) 4.5% 6.5% 4.5% 6.5% Straight-line rent revenue$ 98 $ 108 $ 98 $ 108 General and administrative expenses(2)$ 126 $ 131 $ 121 $ 126 Capitalization of interest$ 117 $ 127 $ 117 $ 127 Interest expense$ 170 $ 180 $ 170 $ 180 (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 endedDecember 31, 2019 , as well as in "Item 1A. Risk factors" within "Part II - Other information" of this quarterly report on Form 10-Q. (2)Increase in the guidance range for general and administrative expenses is attributable to the acceleration of stock compensation expense due to the resignation of an executive officer during the three months endedSeptember 30, 2020 . Key Credit Metrics
2020 Guidance Net debt and preferred stock to Adjusted EBITDA - fourth quarter of 2020, annualized
Less than or equal to 5.3x
Greater than or equal to Fixed-charge coverage ratio - fourth quarter of 2020, annualized
4.4x
90 --------------------------------------------------------------------------------
Consolidated and unconsolidated real estate joint ventures
We present components of balance sheet and operating results information for the noncontrolling 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 Noncontrolling(1) Property/Market/Submarket Interest Share225 Binney Street /Greater Boston /Cambridge /Inner Suburbs 70.0 % 75/125 Binney Street /Greater Boston /Cambridge /Inner Suburbs 60.0 %57 Coolidge Avenue /Greater Boston /Cambridge /Inner Suburbs 25.0 %409 and 499 Illinois Street /San Francisco/Mission Bay 40.0 %1500 Owens Street /San Francisco/Mission Bay 49.9 %
Alexandria Technology Center® -
55.0 %500 Forbes Boulevard /San Francisco /South San Francisco 90.0 %Alexandria Point/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 byAlexandria /San Diego /Sorrento Mesa(4) 50.0 %
Property/Market/Submarket Our Ownership Share(5)1655 and 1725 Third Street /San Francisco/Mission Bay 10.0 % Menlo Gateway/San Francisco /Greater Stanford 49.0 %704 Quince Orchard Road /Maryland /Gaithersburg 56.8 % (6) (1)In addition to the consolidated real estate joint ventures listed, various partners hold insignificant noncontrolling interests in six other joint ventures inNorth America . (2)Excludes 600, 630, 650, 901, and951 Gateway Boulevard in ourSouth 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 ourUniversity Town Center submarket. (4)Excludes 5505 Morehouse Drive and10121 and 10151 Barnes Canyon Road 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 inNorth America . (6)Represents our ownership interest; our voting interest is limited to 50%. Our unconsolidated real estate joint ventures have the following secured loans that include the following key terms as ofSeptember 30, 2020 (dollars in thousands): 100% at Joint Venture Level Unconsolidated Joint Venture Our Share
Maturity Date Stated Rate Interest Rate(1) Debt Balance(2) 704 Quince Orchard Road 56.8% 3/16/23 L+1.95% 3.22 % (3)$ 12,326 1655 and 1725 Third Street 10.0% 3/10/25 4.50% 4.57 % 598,126 Menlo Gateway, Phase II 49.0% 5/1/35 4.53% 4.59 % 106,603 Menlo Gateway, Phase I 49.0% 8/10/35 4.15% 4.18 % 140,203$ 857,258
(1)Includes interest expense and amortization of loan fees.
(2)Represents outstanding principal, net of unamortized deferred financing
costs, as of
91 -------------------------------------------------------------------------------- The following tables present information related to the operating results and financial positions of our consolidated and unconsolidated real estate joint ventures (in thousands): Our Share of Noncontrolling Interest Share of Consolidated Unconsolidated Real Estate Joint Ventures Real Estate Joint Ventures September 30, 2020 September 30, 2020 Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended Total revenues $ 40,827 $ 118,473 $ 10,509 $ 31,164 Rental operations (10,911) (31,308) (1,636) (4,253) 29,916 87,165 8,873 26,911 General and administrative (165) (384) (54) (188) Interest - - (2,105) (6,087) Depreciation and amortization (15,256) (46,901) (2,936) (8,437) Impairment of real estate - - - (7,644) Fixed returns allocated to redeemable noncontrolling interests(1) 248 683 - - $ 14,743 $ 40,563 $ 3,778 $ 4,555 Straight-line rent and below-market lease revenue $ 1,050 $ 4,286 $ 5,713 $ 17,264 Funds from operations(2) $ 29,999 $ 87,464 $ 6,714 $ 20,636 (1)Represents an allocation of joint venture earnings to redeemable noncontrolling interests primarily in one property in ourSouth 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 toAlexandria 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. As of
Noncontrolling Interest Our Share of Share of Consolidated Unconsolidated Real Estate Joint Real Estate Joint Ventures Ventures Investments in real estate $ 1,500,412 $ 458,603 Cash, cash equivalents, and restricted cash 49,499 9,635 Other assets 165,451 55,541 Secured notes payable - (186,393) Other liabilities (82,056) (6,594) Redeemable noncontrolling interests (11,232) - $ 1,622,074 $ 330,792
During the nine months ended
92 --------------------------------------------------------------------------------
Investments
We present our equity investments at fair value whenever fair value or NAV is readily available. Adjustments for our limited partnership investments represent changes in 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.September 30 ,
2020
(In thousands) Three Months Ended Nine Months Ended Year Ended December 31, 2019 Realized gains $ 17,361$ 25,689 (1)$ 33,158 (2) Unrealized (losses) gains (14,013) 140,495 161,489 Investment income $ 3,348$ 166,184 $ 194,647 Investments Unrealized (In thousands) Cost Gains Carrying Amount Fair value: Publicly traded companies$ 175,538 $ 240,415 (3)$ 415,953 Entities that report NAV 319,564 226,081 545,645 Entities that do not report NAV: Entities with observable price changes 50,127 75,642 125,769 Entities without observable price changes 243,578 - 243,578 September 30, 2020$ 788,807 (4)$ 542,138 $ 1,330,945 June 30, 2020$ 762,314 $ 556,151 $ 1,318,465 (1)Includes realized gains of$50.2 million and impairments related to investments in privately held entities that do not report NAV of$24.5 million for the nine months endedSeptember 30, 2020 . (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 year endedDecember 31, 2019 . (3)Includes gross unrealized gains and losses of$257.6 million and$17.2 million , respectively, as ofSeptember 30, 2020 . (4)Represents 3.2% of total gross assets as ofSeptember 30, 2020 . Public/Private Mix (Cost) [[Image Removed: are-20200930_g24.jpg]] Tenant/Non-Tenant Mix (Cost) [[Image Removed: are-20200930_g25.jpg]] 93
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Liquidity
Minimal Outstanding Borrowings
and Significant Availability on Unsecured
Liquidity Senior Line of Credit (in millions)$3.9B (In millions) Availability under our unsecured senior line of credit, net of [[Image Removed: are-20200930_g26.jpg]] amounts outstanding under our commercial paper program$ 1,950 Outstanding forward equity sales agreements(1) 267 Cash, cash equivalents, and restricted cash 485 Investments in publicly traded companies 416 Liquidity as ofSeptember 30, 2020 3,118 Unsecured senior line of credit amended inOctober 2020 (2) 800 Total$ 3,918 Net Debt and Preferred Stock to Adjusted EBITDA(3)
Fixed-Charge Coverage Ratio(3)
[[Image Removed: are-20200930_g27.jpg]] [[Image
Removed: are-20200930_g28.jpg]]
(1)Represents expected net proceeds from the future settlement of the remaining 1.8 million shares outstanding under our forward equity sales agreements. (2)OnOctober 6, 2020 , we amended our unsecured senior line of credit and increased commitments available for borrowing by$800 million to an aggregate of$3.0 billion . (3)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, and payment of 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 unsecured senior line of credit, issuance under our commercial paper program, and 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. 94 --------------------------------------------------------------------------------
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; •Improve credit profile and relative long-term cost of capital; •Maintain diverse sources of capital, including sources from net cash provided by operating activities, unsecured debt, secured debt, selective real estate asset sales, 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 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 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 unsecured senior line of credit less amounts outstanding under our commercial paper program; outstanding forward equity sales agreements; cash, cash equivalents, and restricted cash; and investments in publicly traded companies as ofSeptember 30, 2020 (dollars in thousands): Aggregate Outstanding Remaining Description Stated Rate Commitments Balance Commitments/Liquidity Availability under our unsecured senior line of credit L+0.825 %$ 2,200,000 $ 249,989 $ 1,950,011 Outstanding forward equity sales agreements 267,443 Cash, cash equivalents, and restricted cash 485,043 Investments in publicly traded companies 415,953 Total liquidity as of September 30, 2020 3,118,450 Unsecured senior line of credit amended in October 2020(1) 800,000 Total $ 3,918,450
(1)On
Cash, cash equivalents, and restricted cash
As ofSeptember 30, 2020 , andDecember 31, 2019 , we had$485.0 million and$242.7 million , respectively, of cash, cash equivalents, and restricted cash. We expect existing cash, cash equivalents, and restricted cash, net cash from operating activities, proceeds from real estate asset sales and partial interest sales, non-real estate investment sales, borrowings under our unsecured senior line of credit, 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, distributions to noncontrolling interests, scheduled debt repayments, acquisitions, and certain capital expenditures, including expenditures related to construction activities.
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 nine months endedSeptember 30, 2020 and 2019 (in thousands): Nine Months Ended September 30, 2020 2019 Change Net cash provided by operating activities $ 708,941$ 505,566 $ 203,375 Net cash used in investing activities$ (2,865,016) $ (2,350,870) $ (514,146) Net cash provided by financing activities$ 2,398,781
95 --------------------------------------------------------------------------------
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 collectibility 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 nine months endedSeptember 30, 2020 , increased to$708.9 million , compared to$505.6 million for the nine months endedSeptember 30, 2019 . This increase was primarily attributable to (i) cash flows generated from our highly leased development and redevelopment projects recently placed into service, (ii) income-producing acquisitions sinceJanuary 1, 2019 , and (iii) increases in rental rates on lease renewals and re-leasing of space sinceJanuary 1, 2019 . Investing activities
Cash used in investing activities for the nine months ended
Nine Months Ended
2020 2019 Increase (Decrease) Sources of cash from investing activities: Sales of non-real estate investments $ 103,670$ 85,093 $ 18,577 Proceeds from sale of real estate 199,537 - 199,537 Return of capital from unconsolidated real estate joint ventures 20,225 - 20,225 Change in escrow deposits - 1,899 (1,899) 323,432 86,992 236,440 Uses of cash for investing activities: Purchases of real estate 1,989,648 1,289,319 700,329 Additions to real estate 1,072,102 914,722 157,380 Investments in unconsolidated real estate joint ventures 3,291 99,955 (96,664) Change in escrow deposits 7,041 - 7,041 Additions to non-real estate investments 116,366 133,866 (17,500) 3,188,448 2,437,862 750,586 Net cash used in investing activities$ 2,865,016
The increase in net cash used in investing activities for the nine months endedSeptember 30, 2020 , was primarily due to an increased use of cash for purchases of real estate and additions to real estate, partially offset by the proceeds from sale of real estate. Refer to Note 3 - "Investments in real estate" to our unaudited consolidated financial statements under Item 1 of this report for further information. 96 --------------------------------------------------------------------------------
Financing activities
Cash flows provided by financing activities for the nine months ended
Nine Months Ended
2020 2019 Change
Repayments of borrowings from secured notes payable $ (4,741)
$ (304,455) $ 299,714 Proceeds from issuance of unsecured senior notes payable 1,697,651 2,721,169 (1,023,518) Repayments of unsecured senior notes payable (500,000) (950,000) 450,000 Borrowings from unsecured senior line of credit 2,700,000 4,068,000 (1,368,000)
Repayments of borrowings from unsecured senior line of credit
(3,084,000) (3,933,000) 849,000
Repayments of borrowings from unsecured senior bank term loan
- (350,000) 350,000 Premium paid for early extinguishment of debt (48,653) (34,677) (13,976) Proceeds from issuances under commercial paper program 18,818,900 - 18,818,900 Repayments of borrowings under commercial paper program (18,568,900) - (18,568,900) Payments of loan fees (16,990) (33,854) 16,864 Changes related to debt 993,267 1,183,183 (189,916) Contributions from and sales of noncontrolling interests 64,207 1,015,874 (951,667) Distributions to and redemption of noncontrolling interests (66,095) (38,882) (27,213) Proceeds from issuance of common stock 1,813,573 235,487 1,578,086 Dividend payments (389,940) (335,596) (54,344) Taxes paid related to net settlement of equity awards (16,231) (25,150) 8,919
Repurchase of 7.00% Series D cumulative convertible preferred stock
- (9,240) 9,240 Net cash provided by financing activities$ 2,398,781
97 --------------------------------------------------------------------------------
Capital resources
We expect that our principal liquidity needs for the year endingDecember 31, 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. As of 10/26/20 Key Sources and Uses of Capital Certain (In millions) Range Midpoint Completed Items As of 7/27/20 Midpoint Sources of capital: Net cash provided by operating activities after dividends(1)$ 185 $ 225 $ 205 $ 205 Incremental debt 635 575 605 see below 495 Real estate dispositions and partial interest sales 1,000 1,300 1,150 (2) 1,250 Common equity 2,080 2,600 2,340$ 2,078 (3) 2,090 Total sources of capital$ 3,900 $ 4,700 $ 4,300 $ 4,040 Uses of capital: Construction (refer to the "Investments in real estate" section within Item 2 for additional information)$ 1,200 $ 1,500 $ 1,350 $
1,350
Acquisitions (refer to the "Executive summary" section within Item 2 for additional information) 2,400 2,800 2,600$ 2,091
1,800
Proceeds from complete unsecured senior notes offering held in cash 300 400 350$300 -$400 - Total uses of capital$ 3,900 $ 4,700 $ 4,300 $ 3,150
Incremental debt (included above):
Issuance of unsecured senior notes payable
$
700
Principal repayments of unsecured senior notes payable (500) (500) (500)$ (500) - Unsecured senior line of credit, commercial paper, and other (565) (625) (595) (205) Incremental debt$ 635 $ 575 $ 605 $ 495 Excess sources of capital $ - $ 890 (1)Excludes significant termination fee proceeds. (2)Refer to the "Dispositions" subsection of the "Investments in real estate" section within this Item 2 for additional information. (3)Refer to Note 13 - "Stockholders' equity" to our unaudited consolidated financial statements under Item 1 of this report for additional details on our forward equity sales agreements activity. 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, and leasing activity. Our expected sources and uses of capital are subject to a number of variables and uncertainties, including those discussed as "Forward-looking statements" under Part I; "Item 1A. Risk factors"; "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 endedDecember 31, 2019 ; and "Item 1A. Risk factors" within "Part II - Other information" of this quarterly report. We expect to update our forecast of sources and uses of capital on a quarterly basis. 98 --------------------------------------------------------------------------------
Sources of capital
Net cash provided by operating activities after dividends
We expect to retain$185.0 million to$225.0 million of net cash flows from operating activities after payment of common stock dividends, and distributions to noncontrolling interests. For purposes of this calculation, changes in operating assets and liabilities are excluded as they represent timing differences. We also excluded significant contract termination fees that represent an ancillary source of cash that is not associated with any ongoing activity at any of our operating properties. For the year endingDecember 31, 2020 , we expect our recently delivered projects, our highly pre-leased value-creation projects expected to be completed, along with contributions fromSame Properties and recently acquired properties, to contribute significant increases in income from rentals, net operating income, and cash flows. We anticipate significant contractual near-term growth in annual cash rents of$27 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 nine months endedSeptember 30, 2020 .
Debt
As ofSeptember 30, 2020 , we have no outstanding balance on our unsecured senior line of credit. Our unsecured senior line of credit bears an interest rate of LIBOR plus 0.825%. In addition to the cost of borrowing, the unsecured senior line of credit is subject to an annual facility fee of 0.15% based on the aggregate commitments outstanding. OnOctober 6, 2020 , we amended our unsecured senior line of credit to increase commitments available for borrowing by$800 million to an aggregate of$3.0 billion and to extend the maturity date toJanuary 6, 2026 . Among other things, the amended credit agreement includes a 0% LIBOR floor on the interest rate and is subject to certain annual sustainability measures entitling us to a temporary reduction in the interest rate margin of one basis point, but not below zero percent per year. We use our unsecured senior line of credit to fund working capital, construction activities, and, from time to time, acquisition of properties. Borrowings under the unsecured senior line of credit bear interest at a "Eurocurrency Rate," a "LIBOR Floating Rate," or a "Base Rate" specified in the unsecured senior line of credit agreement plus, in any case, the Applicable Margin. The Eurocurrency Rate specified in the unsecured senior line of credit agreement is, as applicable, the rate per annum equal to either (i) the LIBOR or a successor rate thereto as agreed 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 inU.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 the Administrative Agent as its "prime rate," and (iii) the Eurocurrency Rate plus 1.00%. Our unsecured senior line of credit contains a feature that allows lenders to competitively bid on the interest rate for borrowings under the facility. This may result in an interest rate that is below the stated rate. We expect to fund a portion of our capital needs for the remainder of 2020 from the settlement of our outstanding forward equity sales agreements, from issuances under our commercial paper program discussed below, from borrowings under our unsecured senior line of credit, and from real estate dispositions and partial interest sales. We established a commercial paper program that provides us 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 unsecured senior line of credit, and at all times we expect to retain a minimum undrawn amount of borrowing capacity under our 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 unsecured senior line of credit, we expect to borrow under the unsecured senior line of credit at LIBOR plus 0.825%. The commercial paper notes sold during the three months ended September 30, 2020, were issued at a weighted-average yield to maturity of 0.25%. As of September 30, 2020, we had $250.0 million outstanding notes under our commercial paper program. In March 2020, we completed an offering of $700.0 million of unsecured senior notes payable due 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 our unsecured senior line of credit and commercial paper program. 99 -------------------------------------------------------------------------------- In August 2020, we completed an offering of $1.0 billion of unsecured senior notes payable due on February 1, 2033, at an interest rate of 1.875% for net proceeds of $989.1 million. A portion of the proceeds was used to refinance our 3.90% unsecured senior notes payable due in 2023, aggregating $500.0 million, pursuant to a partial cash tender offer and a subsequent call for redemption. On August 5, 2020, we tendered $247.0 million, or 49.4%, of our outstanding 3.90% unsecured senior notes payable and settled the call for redemption of the remaining outstanding balance on September 4, 2020. As a result of our debt refinancing, we recognized a loss on early extinguishment of debt of $50.8 million, including the write-off of unamortized loan fees.
Since January 1, 2019, we have completed the issuances of $4.4 billion in unsecured senior notes, with a weighted-average interest rate of 3.48% and a weighted-average maturity of 14.3 years, as of September 30, 2020.
Proactive management of transition away from LIBOR
LIBOR has been used extensively in theU.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 theU.S. the Alternative Reference Rates Committee ("ARRC") was established to help 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 byU.S. Treasury securities, as its preferred replacement forU.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 eliminated outstanding LIBOR-based borrowings under our unsecured senior bank term loans and secured construction loans through repayments. From January 2017 through September 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 September 30, 2020, we had $250.0 million of borrowings outstanding under our commercial paper program. •We prudently manage outstanding borrowings under our unsecured senior line of credit. As of September 30, 2020, we have not drawn any amounts on our unsecured senior line of credit. •Our unsecured senior line of credit contains 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 Note 10 - "Secured and 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 about our management of risks related to the transition away from LIBOR.
Real estate dispositions and partial interest sales
We expect to continue the disciplined execution of select sales of operating assets. Future 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, 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 2020, we expect real estate dispositions and partial interest sales ranging from $1.0 billion to $1.3 billion. 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. During the nine months ended September 30, 2020 and as of the date of this report, we have received proceeds of $252.5 million toward our 2020 forecast, primarily related to our sale of properties at 9808 and 9868 Scranton Road in our Sorrento Mesa submarket and 945 Market Street in our SoMa submarket. The proceeds received were primarily used to fund development and redevelopment projects in our highly leased value-creation pipeline and to fund acquisitions completed in 2020. As a REIT, generally we are subject to a 100% tax on the net income from real estate asset sales that theIRS 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. 100 --------------------------------------------------------------------------------
Common equity transactions
During the nine months ended September 30, 2020, we executed forward equity sales agreements for an aggregate of 13.8 million shares of common stock, including the exercise of an underwriters' option, for aggregate net proceeds of approximately $2.1 billion, as follows:
•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 underwriters' options) at public offering prices of $155.00 per share and $160.50 per share, respectively, before underwriting discounts. •In March 2020, we settled 3.4 million shares and received proceeds of $500.0 million. In September 2020, we settled 8.7 million shares from our forward equity sales agreements and received proceeds of $1.3 billion. •We expect to settle the remaining 1.8 million shares outstanding in 2020 and receive proceeds of approximately $267.4 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 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 September 30, 2020, we have $843.7 million available under our ATM program.
Other sources
Under our current shelf registration statement filed with theSEC , we may offer common stock, preferred stock, debt, and other securities. These securities may be issued, from time to time, at our discretion based on our needs and market conditions, including, as necessary, to balance our use of incremental debt capital. Additionally, we hold interests, together with joint venture partners, in real estate joint ventures that we consolidate in our financial statements. These joint venture partners may contribute equity into these entities primarily related to their share of funds for construction and financing-related activities. During the nine months ended September 30, 2020, we received $64.2 million of contributions from and sales of noncontrolling interests. 101 --------------------------------------------------------------------------------
Uses of capital
Summary of capital expenditures
One of our primary uses of capital relates to the development, redevelopment, pre-construction, and construction of properties. We currently have projects in our growth pipeline aggregating 2.8 million RSF of Class A office/laboratory and tech office space undergoing construction, 7.2 million RSF of near-term and intermediate-term development and redevelopment projects, and 6.2 million SF of future development projects inNorth 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 the "New Class A development and redevelopment properties: current projects" and "Summary of 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 nine months ended September 30, 2020 and 2019, of $88.0 million and $64.7 million, respectively, was 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 $47.6 million and $33.0 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in capitalized payroll and other indirect project costs for the nine months ended September 30, 2020, compared to the same period in 2019 was primarily due to an increase in our value-creation pipeline projects undergoing construction and pre-construction activities aggregating seven projects with 5.9 million RSF in 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. Should we cease activities necessary to prepare an asset for its intended use, the interest, taxes, insurance, and certain other direct project costs related to this asset would be expensed as incurred. 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 $13.6 million for the nine months ended September 30, 2020. We use third-party brokers to assist in our leasing activity,who are paid on a contingent basis upon successful leasing. We are required to capitalize initial direct costs related 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 been successfully executed. During the nine months ended September 30, 2020, we capitalized total initial direct leasing costs of $36.2 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 other costs, are expensed as incurred.
Acquisitions
Refer to the "Acquisitions" section of Note 3 - "Investments in real estate" to our unaudited consolidated financial statements under Item 1 of this report, and the "Acquisitions" subsection of the "Investments in real estate" section within this Item 2 for information on our acquisitions.
Dividends
During the nine months ended September 30, 2020 and 2019, we paid the following dividends (in thousands): Nine Months Ended September 30, 2020 2019 Change Common stock $ 389,940 $ 332,458 $ 57,482 Series D Convertible Preferred Stock - 3,138 (3,138) $ 389,940 $ 335,596 $ 54,344 102
-------------------------------------------------------------------------------- The increase in dividends paid on our common stock during the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was primarily due to an increase in number of common shares outstanding subsequent to January 1, 2019, as a result of issuances of common stock under our ATM program and settlement of forward equity sales agreements, and partially due to the increase in the related dividends to $3.12 per common share paid during the nine months ended September 30, 2020, from $2.94 per common share paid during the nine months ended September 30, 2019. The decrease in dividends paid on our Series D Convertible Preferred Stock during the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was due to the repurchase of 275,000 outstanding shares of our Series D Convertible Preferred Stock and the conversion of the remaining 2.3 million outstanding shares of our Series D Convertible Preferred Stock into shares of our common stock during 2019. As a result, we had no outstanding shares of Series D Convertible Preferred Stock as of December 31, 2019, and therefore paid no dividends on Series D Convertible Preferred Stock during the nine months ended September 30, 2020.
Contractual obligations and commitments
Contractual obligations as of September 30, 2020, consisted of the following (in thousands):
Payments by Period Total 2020 2021-2022 2023-2024 Thereafter
Secured and unsecured debt(1)(2) $ 7,857,698 $ 1,677
$ 14,127 $ 1,188,107 $ 6,653,787 Estimated interest payments on fixed-rate debt(3)
3,137,761 50,439 567,492 538,805 1,981,025 Ground lease obligations - operating leases 766,253 3,883 32,742 33,311 696,317 Ground lease obligations - finance lease 35,971 104 832 840 34,195 Other obligations 27,405 655 4,895 5,469 16,386 Total $ 11,825,088 $ 56,758 $ 620,088 $ 1,766,532 $ 9,381,710 (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 September 30, 2020, consisted of six notes secured by 11 properties. Our secured notes payable typically require monthly payments of principal and interest and had a weighted-average interest rate of approximately 3.57%. As of September 30, 2020, the total book value of our investments in real estate securing debt was approximately $1.2 billion. Additionally, as of September 30, 2020, our entire secured notes payable balance of $342.4 million, including unamortized discounts and deferred financing costs, was fixed-rate debt.
Unsecured senior notes payable and unsecured senior line of credit
The requirements of, and our actual performance with respect to, the key financial covenants under our unsecured senior notes payable as of September 30, 2020, were as follows:
Covenant Ratios(1) Requirement September 30, 2020 Total Debt to Total Assets Less than or equal to 60% 33% Secured Debt to Total Assets Less than or equal to 40% 1%
Consolidated EBITDA(2) to Interest Expense Greater than or equal to 1.5x
7.8x Unencumbered Total Asset Value to Unsecured Debt Greater than or equal to 150% 286% (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. 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. 103 --------------------------------------------------------------------------------
The requirements of, and our actual performance with respect to, the key financial covenants under our unsecured senior line of credit as of September 30, 2020, were as follows:
Covenant Ratios(1) Requirement September 30, 2020 Leverage Ratio Less than or equal to 60.0% 28.7% Secured Debt Ratio Less than or equal to 45.0% 1.2% Greater than or equal to Fixed-Charge Coverage Ratio 1.50x 3.84x Greater than or equal to Unsecured Interest Coverage Ratio 1.75x 6.26x
(1)All covenant ratio titles utilize terms as defined in each respective credit agreement.
Estimated interest payments
Estimated interest payments on our fixed-rate debt were calculated based upon contractual interest rates, including interest payment dates and scheduled maturity dates. As of September 30, 2020, 97% of our debt was fixed-rate debt. For additional information regarding our debt, refer to Note 10 - "Secured and unsecured senior debt" to our unaudited consolidated financial statements under Item 1 of this report.
Ground lease obligations
Operating lease agreements
Ground lease obligations as of September 30, 2020, included leases for 34 of our properties, which accounted for approximately 10% 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 $7.3 million as of September 30, 2020, 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 September 30, 2020, the remaining contractual payments under ground and office lease agreements in which we are the lessee aggregated $766.3 million and $27.4 million, respectively. We are required to recognize a right-of-use asset and a related liability to account for our future obligations under operating lease arrangements in which we are the lessee. The operating lease liability is measured based on the 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 September 30, 2020, the present value of the remaining contractual payments, aggregating $793.7 million, under our operating lease agreements, including our extension options that we are reasonably certain to exercise, was $326.0 million, which was classified in accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets. As of September 30, 2020, the weighted-average remaining lease term of operating leases in which we are the lessee was approximately 44 years, and the weighted-average discount rate was 4.97%. 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 $317.1 million. We classify the right-of-use asset in other assets in our consolidated balance sheets. Refer to the "Lease accounting" section of Note 2 - "Summary of significant accounting policies" to our unaudited consolidated financial statements under Item 1 of this report for additional information.
Commitments
As of September 30, 2020, remaining aggregate costs under contract for the construction of properties undergoing development, redevelopment, and improvements under the terms of leases approximated $1.1 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. In addition, we have letters of credit and performance obligations aggregating $11.1 million primarily related to construction projects. We are committed to funding approximately $220.4 million for non-real estate investments 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 8.4 years as of September 30, 2020. 104 --------------------------------------------------------------------------------
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.
Foreign currency translation gains and losses
The following table presents the change in accumulated other comprehensive loss attributable toAlexandria Real Estate Equities, Inc.'s stockholders during the nine months ended September 30, 2020, due to the changes in the foreign exchange rates for our real estate investments inCanada andAsia . We reclassify unrealized foreign currency translation gains and losses into net income as we dispose of these holdings. (In thousands) Total Balance as of December 31, 2019 $ (9,749) Other comprehensive loss before reclassifications (889) Net other comprehensive loss (889) Balance as of September 30, 2020 $ (10,638) 105
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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 byAlexandria 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 September 30, 2020, and December 31, 2019, and results of operations and comprehensive income for the nine months ended September 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 as of September 30, 2020, and December 31, 2019, and for the nine months ended September 30, 2020, and year ended December 31, 2019, for the Issuer and Guarantor Subsidiary. Amounts provided do not represent our total consolidated amounts (in thousands): September 30, 2020 December 31, 2019 Assets: Cash, cash equivalents, and restricted cash $ 283,445 $ 4,432 Other assets 84,937 71,036 Total assets $ 368,382 $ 75,468 Liabilities: Unsecured senior notes payable $ 7,230,819 $ 6,044,127 Unsecured senior line of credit and commercial paper 249,989 384,000 Other liabilities 304,832 278,858 Total liabilities $ 7,785,640 $ 6,706,985 Year Ended Nine Months Ended December 31, September 30, 2020 2019 Total revenues $ 16,916 $ 22,731 Total expenses (285,870) (317,896) Net loss (268,954) (295,165)
Net income attributable to unvested restricted stock awards and preferred stock
(5,304) (12,170)
Net loss attributable to
$ (274,258) $ (307,335)
Critical accounting policies
Refer to our annual report on Form 10-K for the year ended December 31, 2019, for a discussion of our critical accounting policies related to REIT compliance, investments in real estate, impairment of long-lived assets, equity investments, interest rate hedge agreements, liability and right-of-use assets related to operating leases in which we are the lessee, and monitoring of tenant credit quality. 106 --------------------------------------------------------------------------------
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
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 Nareit 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 acquisition and disposition decisions, financing decisions, capital structure, capital market transactions, variances resulting from the volatility of market conditions outside of our control, or other corporate activities that may not be representative of the operating performance of our properties. On January 1, 2019, we adopted standards established by the Nareit Board of Governors in its November 2018 White Paper (the "Nareit White Paper") on a prospective basis. The Nareit White Paper defines funds from operations as net income (computed in accordance with GAAP), excluding gains or losses on sales of real estate, and impairments of real estate, plus 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 Nareit White Paper, excluding significant gains, losses, and impairments realized on non-real estate investments, unrealized gains or losses on non-real estate investments, gains or losses on early extinguishment of debt, gains or losses on early termination of interest rate hedge agreements, significant termination fees, acceleration of stock compensation expense due to the resignation of an executive officer, preferred stock redemption charges, 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 nine months ended September 30, 2020 (in thousands): Our Share of Noncontrolling Interest Share of Consolidated Unconsolidated Real Estate Joint Ventures Real Estate Joint Ventures September 30, 2020 September 30, 2020 Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended Net income $ 14,743 $ 40,563 $ 3,778 $ 4,555 Depreciation and amortization 15,256 46,901 2,936 8,437 Impairment of real estate - - - 7,644 Funds from operations $ 29,999 $ 87,464 $ 6,714 $ 20,636 107
-------------------------------------------------------------------------------- The following tables present a reconciliation of net income attributable toAlexandria Real Estate Equities, Inc.'s common stockholders, the most directly comparable financial measure presented in accordance with GAAP, including our share of amounts from consolidated and unconsolidated real estate joint ventures, to funds from operations attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted, and funds from operations attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted, as adjusted, and the related per share amounts for the three and nine months ended September 30, 2020 and 2019. Per share amounts may not add due to rounding. Nine Months Ended Three Months Ended September 30, September 30, (In thousands) 2020 2019 2020 2019 Net income (loss) attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - basic and diluted $ 79,326 $ (49,773) $ 324,171 $ 150,408 Depreciation and amortization of real estate assets 173,622 135,570 511,290 404,094 Noncontrolling share of depreciation and amortization from consolidated real estate JVs (15,256) (8,621) (46,901) (20,784) Our share of depreciation and amortization from unconsolidated real estate JVs 2,936 1,845 8,437 3,664 Gain on sales of real estate (1,586) - (1,586) - Impairment of real estate - rental properties 7,680 - 15,324 - Allocation to unvested restricted stock awards (1,261) - (5,692) (2,929) Funds from operations attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted(1) 245,461 79,021 805,043 534,453 Unrealized losses (gains) on non-real estate investments 14,013 70,043 (140,495) (13,221) Impairment of non-real estate investments - 7,133 24,482 7,133 Impairment of real estate - - 15,221 - Loss on early extinguishment of debt 52,770 40,209 52,770 47,570 Loss on early termination of interest rate hedge agreements - 1,702 - 1,702 Termination fee (86,179) - (86,179) - Acceleration of stock compensation expense due to executive officer resignation 4,499 - 4,499 - Preferred stock redemption charge - - - 2,580 Allocation to unvested restricted stock awards 179 (1,002) 1,804 (657) Funds from operations attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted, as adjusted $ 230,743 $ 197,106 $ 677,145 $ 579,560
(1)Calculated in accordance with standards established by the Nareit Board of Governors.
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Nine Months Ended Three Months Ended September 30, September 30, (Per share) 2020 2019 2020 2019 Net income (loss) per share attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted $ 0.63 $ (0.44) $ 2.61 $ 1.35 Depreciation and amortization of real estate assets 1.28 1.14 3.81 3.46 Gain on sales of real estate (0.01) - (0.01) - Impairment of real estate - rental properties 0.06 - 0.12 - Allocation to unvested restricted stock awards (0.01) - (0.04) (0.03) Funds from operations per share attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted 1.95 0.70 6.49 4.78 Unrealized losses (gains) on non-real estate investments 0.11 0.62 (1.13) (0.12) Impairment of non-real estate investments - 0.06 0.20 0.06 Impairment of real estate - - 0.12 - Loss on early extinguishment of debt 0.42 0.36 0.42 0.43 Loss on early termination of interest rate hedge agreements - 0.02 - 0.02 Termination fee (0.69) - (0.69) - Acceleration of stock compensation expense due to executive officer resignation 0.04 - 0.04 - Preferred stock redemption charge - - - 0.02 Allocation to unvested restricted stock awards - (0.01) 0.01 - Funds from operations per share attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted, as adjusted $ 1.83 $ 1.75 $ 5.46 $ 5.19 Weighted-average shares of common stock outstanding(1) for calculations of: EPS - diluted 125,828 112,120 124,027 111,712 Funds from operations - diluted, per share 125,828 112,562 124,027 111,712 Funds from operations - diluted, as adjusted, per share 125,828 112,562 124,027 111,712
(1)Refer to the definition of "Weighted-average shares of common stock outstanding - diluted" within this section of this Item 2 for additional information.
Adjusted EBITDA and Adjusted EBITDA margin
We use Adjusted EBITDA as a supplemental performance measure of our operations, for financial and operational decision-making, and as a supplemental 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, impairments of real estate, and significant termination fees. 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 as it allows investors to evaluate the operating performance of our business activities without having to account for differences recognized because of investing and financing decisions related to our real estate and non-real estate investments, our capital structure, capital market transactions, and variances resulting from the volatility of market conditions outside of our control. For example, we exclude gains or losses on the early extinguishment of debt to allow investors to measure our performance independent of our indebtedness and capital structure. We believe that adjusting for the effects of impairments and gains or losses on sales of real estate, significant impairments and gains on the sale of non-real estate investments, and significant termination fees allows investors to evaluate performance from period to period on a consistent basis without having to account for differences recognized because of investing and financing decisions related to our real estate and non-real estate investments or other corporate activities that may not be representative of the operating performance of our properties. In addition, 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 expenditures or future requirements for capital expenditures or contractual commitments. While Adjusted EBITDA is a relevant measure of performance, 109 -------------------------------------------------------------------------------- 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. In order to calculate Adjusted EBITDA margin, we also make comparable adjustments to our revenues. We adjust our total revenues by realized gains, losses, and impairments related to our non-real estate investments and significant termination fees to arrive at revenues, as adjusted. Our calculation of Adjusted EBITDA margin divides Adjusted EBITDA by our revenues, as adjusted. We believe that consistent application of these comparable adjustments to both components 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 measures calculated and presented in accordance with GAAP, to Adjusted EBITDA and revenues, as adjusted, respectively, for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands): Nine Months Ended Three Months Ended September 30, September 30, 2020 2019 2020 2019 Net income (loss) $ 95,799 $ (36,003) $ 370,038 $ 187,994 Interest expense 43,318 46,203 134,071 128,182 Income taxes 2,430 887 5,177 3,074 Depreciation and amortization 176,831 135,570 520,354 404,094 Stock compensation expense 12,994 (1) 10,935 32,108 33,401 Loss on early extinguishment of debt 52,770 40,209 52,770 47,570 Gain on sales of real estate (1,586) - (1,586) - Unrealized losses (gains) on non-real estate investments 14,013 70,043 (140,495) (13,221) Impairment of real estate 7,680 - 30,545 - Impairment of non-real estate investments - 7,133 24,482 7,133 Termination fee (86,179) - (86,179) - Adjusted EBITDA $ 318,070 $ 274,977 $ 941,285 $ 798,227 Revenues $ 545,042 $ 390,484 $ 1,421,917 $ 1,123,182 Non-real estate investments - realized gains 17,361 6,967 25,689 28,759 Impairment of non-real estate investments - 7,133 24,482 7,133 Termination fee (86,179) - (86,179) - Revenues, as adjusted $ 476,224 $ 404,584
$ 1,385,909 $ 1,159,074
Adjusted EBITDA margin 67% 68% 68% 69% (1)Includes acceleration of stock compensation expense recognized due to the resignation of an executive officer during the three months ended September 30, 2020. Annual rental revenue Annual rental revenue represents the annualized fixed base rental obligations, calculated in accordance with GAAP, for leases in effect as of the end of the period, related to our operating RSF. 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. Annual rental revenue per RSF is computed by dividing annual rental revenue by the sum of 100% of the RSF of our consolidated properties and our share of the RSF of properties held in unconsolidated real estate joint ventures. As of September 30, 2020, 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. 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 income from rentals in our consolidated statements of operations. 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). Refer to the definition of "Fixed-charge coverage ratio" 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. 110 --------------------------------------------------------------------------------
Class A properties and
Class A properties are properties clustered inAAA 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.
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 collaborative life science, technology, and agtech campuses inAAA 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, tech office, or agtech space. We generally will not commence new development projects for aboveground construction of new Class A office/laboratory, 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 a 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 the associated costs for renewed and re-leased space. 111 --------------------------------------------------------------------------------
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 nine months ended September 30, 2020 and 2019 (dollars in thousands): Nine Months Ended Three Months Ended September 30, September 30, 2020 2019 2020 2019 Adjusted EBITDA $ 318,070 $ 274,977 $ 941,285 $ 798,227 Interest expense $ 43,318 $ 46,203 $ 134,071 $ 128,182 Capitalized interest 32,556 24,558 88,029 64,741 Amortization of loan fees (2,605) (2,251) (7,589) (6,864) Amortization of debt premiums 910 1,287 2,686 2,870 Cash interest 74,179 69,797 217,197 188,929 Dividends on preferred stock - 1,173 - 3,204 Fixed charges $ 74,179 $ 70,970 $ 217,197 $ 192,133 Fixed-charge coverage ratio: - period annualized 4.3x 3.9x 4.3x 4.2x - trailing 12 months 4.3x 4.1x 4.3x 4.1x
Initial stabilized yield (unlevered)
Initial stabilized yield is calculated as the estimated amounts of net operating income at stabilization divided 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. 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.
Investment-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 September 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 tenant's market capitalization to decline below $10 billion, which are not immediately reflected in the twelve-month average, may result in their exclusion from this measure. 112 --------------------------------------------------------------------------------
Investments in real estate - value-creation square footage currently in rental properties
The following table represents RSF of buildings in operation as of September 30, 2020, that will be redeveloped or replaced with new development RSF upon commencement of future construction:
RSF Property/Submarket Development Redevelopment Total Near-term project: 651 Gateway Boulevard/South San Francisco - 300,010 300,010 Intermediate-term projects: 50 and 60 Sylvan Road/Route 128 - 202,428 202,428 3825 Fabian Way/Greater Stanford - 250,000 250,000 987 and 1075 Commercial Street/Greater Stanford 26,738 - 26,738 10931 and 10933 North Torrey Pines Road/Torrey Pines 92,450 - 92,450 10260 Campus Point Drive/University Town Center 109,164 - 109,164 9363 and 9393 Towne Centre Drive/University Town Center 78,573 - 78,573 4555 Executive Drive/University Town Center 41,475 - 41,475 348,400 452,428 800,828 Future projects: 40 Sylvan Road/Route 128 - 312,845 312,845 3875 Fabian Way/Greater Stanford - 228,000 228,000 960 Industrial Road/Greater Stanford 110,000 - 110,000 219 East 42nd Street/New York City 349,947 - 349,947 11255 and 11355 North Torrey Pines Road/Torrey Pines 139,135 - 139,135 4161 Campus Point Court/University Town Center 159,884 - 159,884 4075 Sorrento Valley Boulevard/Sorrento Valley 40,000 - 40,000 4045 Sorrento Valley Boulevard/Sorrento Valley 10,926 - 10,926 601 Dexter Avenue North/Lake Union 18,680 - 18,680 830 4th Avenue South/SoDo 42,380 - 42,380 870,952 540,845 1,411,797 Total value-creation RSF currently included in rental properties 1,219,352 1,293,283 2,512,635
Joint venture financial information
We present components of balance sheet and operating results information related to our real estate joint ventures, which are not presented, or intended to be presented, 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. For 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. 113 -------------------------------------------------------------------------------- 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. 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 operations 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
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. Refer to the definition of "Adjusted 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 computes the ratio to Adjusted EBITDA as of September 30, 2020, and December 31, 2019 (dollars in thousands):
September 30, 2020 December 31, 2019 Secured notes payable $ 342,363 $ 349,352 Unsecured senior notes payable 7,230,819 6,044,127 Unsecured senior line of credit and commercial paper 249,989 384,000 Unamortized deferred financing costs 58,284 47,299 Cash and cash equivalents (446,255) (189,681) Restricted cash (38,788) (53,008) Net debt $ 7,396,412 $ 6,582,089 Adjusted EBITDA: - quarter annualized $ 1,272,280 $ 1,148,620 - trailing 12 months $ 1,228,440 $ 1,085,382 Net debt to Adjusted EBITDA: - quarter annualized 5.8x 5.7x - trailing 12 months 6.0x 6.1x 114
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Net operating income, net operating income (cash basis), and operating margin
The following table reconciles net income to net operating income, and to net operating income (cash basis) for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands): Nine Months Ended Three Months Ended September 30, September 30, 2020 2019 2020 2019 Net income (loss) $ 95,799 $ (36,003) $ 370,038 $ 187,994 Equity in earnings of unconsolidated real estate joint ventures (3,778) (2,951) (4,555) (5,359) General and administrative expenses 36,913 27,930 100,651 79,041 Interest expense 43,318 46,203 134,071 128,182 Depreciation and amortization 176,831 135,570 520,354 404,094 Impairment of real estate 7,680 - 22,901 - Loss on early extinguishment of debt 52,770 40,209 52,770 47,570 Gain on sales of real estate (1,586) - (1,586) - Investment (income) loss (3,348) 63,076 (166,184) (41,980) Net operating income 404,599 274,034 1,028,460 799,542 Straight-line rent revenue (28,822) (27,394) (72,786) (79,835) Amortization of acquired below-market leases (13,979) (5,774) (43,730) (20,976) Net operating income (cash basis) $ 361,798 $
240,866 $ 911,944 $ 698,731
Net operating income (cash basis) - annualized $ 1,447,192 $
963,464 $ 1,215,925 $ 931,641
Net operating income (from above) $ 404,599 $
274,034 $ 1,028,460 $ 799,542 Total revenues
$ 545,042 $ 390,484 $ 1,421,917 $ 1,123,182 Operating margin(1) 74% 70% 72% 71% (1)Includes the effect of a termination fee recognized during the three months ended September 30, 2020. Refer to the section titled "Income from rentals" in Note 5 - "Leases" to our unaudited consolidated financial statements under Item 1 of this report for additional information. Excluding this effect, our operating margin for the three and nine months ended September 30, 2020, would have been 70% and 71%, respectively. 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 of our unconsolidated real estate joint ventures, general and administrative expenses, interest expense, depreciation and amortization, impairments of real estate, gains or losses on early extinguishment of debt, gains or losses on sales of real 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 investors 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 straight-line rent revenue and the amortization of acquired above- and below-market leases. 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 or loss. Net operating income can be used to measure the initial stabilized yields of our properties by calculating net operating income generated by a property divided 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 or a deterioration in market conditions. We also exclude realized and unrealized investment income or loss, which results from investment decisions that 115 -------------------------------------------------------------------------------- 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 losses on early extinguishment of debt, as these charges often relate to corporate strategy. Property operating expenses 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 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 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, occupancy percentage, leasing activity, 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 the number of properties, RSF, occupancy percentage, leasing activity, and contractual lease expirations at 100% for all properties 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 income 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 theSEC 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, 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 September 30, 2020, to the three months ended September 30, 2019" and "Comparison of results for the nine months ended September 30, 2020, to the nine months ended September 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. 116 --------------------------------------------------------------------------------
The following table reconciles income from rentals to tenant recoveries for the three and nine months ended September 30, 2020 and 2019 (in thousands):
Nine Months Ended Three Months Ended September 30, September 30, 2020 2019 2020 2019 Income from rentals $ 543,412 $ 385,776 $ 1,416,873 $ 1,112,143 Rental revenues (438,393) (293,182) (1,117,890) (857,370) Tenant recoveries $ 105,019 $ 92,594 $ 298,983 $ 254,773 Total market capitalization Total market capitalization is equal to the outstanding shares of common stock at the end of the period 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 nine months ended September 30, 2020 and 2019 (dollars in thousands): Nine Months Ended Three Months Ended September 30, September 30, 2020 2019 2020 2019
Unencumbered net operating income $ 388,575 $ 259,128 $ 979,934 $ 753,716 Encumbered net operating income
16,024 14,906 48,526 45,826 Total net operating income $ 404,599 $ 274,034 $ 1,028,460 $ 799,542 Unencumbered net operating income as a percentage of total net operating income 96% 95% 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, to 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 September 30, 2020, we had Forward Agreements outstanding to sell an aggregate of 1.8 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 7.00% 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 to both numerator and denominator may result in a per share effect of less than a half cent, which would appear as zero in our per share calculation, 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. 117 -------------------------------------------------------------------------------- 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 nine months ended September 30, 2020 and 2019, are calculated as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Weighted-average shares of common stock outstanding: Basic shares for EPS 124,901 112,120 123,561 111,540 Outstanding forward equity sales agreements 927 - 466 172 Series D Convertible Preferred Stock - - - - Diluted shares for EPS 125,828 112,120 124,027 111,712 Basic shares for EPS 124,901 112,120 123,561 111,540 Outstanding forward equity sales agreements 927 442 466 172 Series D Convertible Preferred Stock - - - - Diluted shares for FFO 125,828 112,562 124,027 111,712 Basic shares for EPS 124,901 112,120 123,561 111,540 Outstanding forward equity sales agreements 927 442 466 172 Series D Convertible Preferred Stock - - - - Diluted shares for FFO, as adjusted 125,828 112,562 124,027 111,712 118
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