Secured and Unsecured Debt of the Operating Partnership

6 Months Ended

Jun. 30, 2011

Secured and Unsecured Debt of the Operating Partnership [Abstract]

Secured and Unsecured Debt of the Operating Partnership


5.	Secured and Unsecured Debt of the Operating Partnership

Secured Debt

In January 2011, the Operating Partnership borrowed $135.0 million under a mortgage loan that is scheduled to mature on February 1, 2018. The mortgage loan is secured by our 303 Second Street property in San Francisco, bears interest at an annual rate of 4.27%, and requires interest-only payments for the first two years with a 30-year amortization schedule thereafter. We used a portion of the proceeds to repay borrowings under the Operating Partnership’s unsecured line of credit (the “Credit Facility”).

In April 2011, in connection with the acquisition of four office buildings in Kirkland, Washington, the Operating Partnership assumed a mortgage loan that is secured by the project. The assumed mortgage loan had a principal balance of $30.0 million at the acquisition date and is scheduled to mature on April 15, 2015. This mortgage loan was recorded at fair value on the date of the acquisition resulting in a premium of approximately $1.0 million. This premium will be accreted on a straight-line basis, which approximates the effective interest method, as a reduction to interest expense from the acquisition date through the maturity date of the mortgage loan. The loan bears contractual interest at an annual rate of 4.94% and requires monthly principal and interest payments based on a 30-year amortization period.

Although both new mortgage loans are secured and non-recourse to the Company and the Operating Partnership, the Company provides limited customary secured debt guarantees for items such as voluntary bankruptcy, fraud, misapplication of payments, and environmental liabilities.

Exchangeable Senior Notes

The following table summarizes the balance and significant terms of the Company’s 3.25% Exchangeable Notes due 2012 (the “3.25% Exchangeable Notes”) and 4.25% Exchangeable Notes due 2014 (the “4.25% Exchangeable Notes” and together with the 3.25% Exchangeable Notes, the “Exchangeable Notes”) outstanding as of June 30, 2011 and December 31, 2010:


	3.25% Exchangeable Notes						4.25% Exchangeable Notes
	June 30,			December 31,			June 30,			December 31,
	2011			2010			2011			2010
	(in thousands)

Principal amount	$	148,000		$	148,000		$	172,500		$	172,500
Unamortized discount		(2,485	)		(4,004	)		(14,641	)		(16,532	)

Net carrying amount of liability component	$	145,515		$	143,996		$	157,859		$	155,968

Carrying amount of equity component	$33,675						$19,835
Maturity date	April 2012						November 2014
Stated coupon rate	3.25%⁽¹⁾						4.25%⁽²⁾
Effective interest rate⁽³⁾	5.45%						7.13%
Exchange rate per $1,000 principal value of the Exchangeable Notes, as adjusted⁽⁴⁾	11.3636						27.8307
Exchange price, as adjusted⁽⁴⁾	$88.00						$35.93
Number of shares on which the aggregate consideration to be delivered on conversion is determined⁽⁴⁾	1,681,813						4,800,796


(1)		Interest on the 3.25% Exchangeable Notes is payable semi-annually in arrears on April 15th and October 15th of each year.

(2)		Interest on the 4.25% Exchangeable Notes is payable semi-annually in arrears on May 15th and November 15th of each year.

(3)		The rate at which we record interest expense for financial reporting purposes, which reflects the amortization of the discounts on the Exchangeable Notes. This rate represents our conventional debt borrowing rate at the date of issuance.

(4)		The exchange rate, exchange price, and the number of shares to be delivered upon conversion are subject to adjustment under certain circumstances including increases in our common dividends.

Capped Call Transactions

In connection with the offerings of the Exchangeable Notes, we entered into capped call option transactions (“capped calls”) to mitigate the dilutive impact of the potential exchange of the Exchangeable Notes. The following table summarizes our capped call option positions as of both June 30, 2011 and December 31, 2010:


	3.25% Exchangeable Notes⁽¹⁾		4.25% Exchangeable Notes⁽²⁾

Referenced shares of common stock		1,121,201		4,800,796
Exchange price including effect of capped calls		$102.72		$42.81


(1)		The capped calls mitigate the dilutive impact to us of the potential exchange of two-thirds of the 3.25% Exchangeable Notes into shares of common stock.

(2)		The capped calls mitigate the dilutive impact to us of the potential exchange of all of the 4.25% Exchangeable Notes into shares of common stock.

For the three and six months ended June 30, 2011, the per share average trading price of the Company’s common stock on the New York Stock Exchange (“NYSE”) was higher than the $35.93 exchange price for the 4.25% Exchangeable Notes, as presented below:


	Three Months Ended		Six Months Ended
	June 30, 2011		June 30, 2011

Average Trading Price of the Company’s Stock	$	39.90	$	38.94

As a result, even though there would be no dilutive economic impact to our earnings until the Company’s share price exceeded $42.81, which is the exchange price after the impact of the capped calls, and even though the 4.25% Exchangeable Notes were not convertible as of June 30, 2011, we are required to include the dilutive impact of the 4.25% Exchangeable Notes based on the average share price in our diluted earnings per share and per unit calculations for the six months ended June 30, 2011 (see Notes 14 and 15). We are not required to include the the dilutive impact of the 4.25% Exchangeable Notes in our diluted earnings per share and per unit calculations for the three months ended June 30, 2011, since we had a net loss available to common stockholders and unitholders during this period and the effect would be anti-dilutive (see Notes 14 and 15). If the 4.25% Exchangeable Notes were able to be converted as of June 30, 2011, the approximate fair value of the shares upon conversion at that date would have been equal to approximately $191.4 million, which would exceed the $172.5 million principal amount of the 4.25% Exchangeable Notes by approximately $18.9 million.

Interest Expense for the Exchangeable Notes

The unamortized discount on the Exchangeable Notes is accreted as additional interest expense from the date of issuance through the maturity date of the applicable Exchangeable Notes. The following table summarizes the total interest expense attributable to the Exchangeable Notes based on the effective interest rates set forth above, before the effect of capitalized interest, for the three and six months ended June 30, 2011 and 2010:


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(in thousands)

Contractual interest payments	$	3,035	$	4,241	$	6,070	$	8,495
Amortization of discount		1,722		2,372		3,410		4,679

Interest expense attributable to the Exchangeable Notes	$	4,757	$	6,613	$	9,480	$	13,174

Unsecured Line of Credit

In June 2011, we amended the terms of our Credit Facility to extend the maturity date, and reduce the interest rate and facility fee. The following table summarizes the terms of our Credit Facility as of December 31, 2010 and as amended as of June 30, 2011:


	June 30,		December 31,
	2011		2010
	(in thousands)

Outstanding borrowings	$	245,000	$	159,000
Remaining borrowing capacity		255,000		341,000

Total borrowing capacity⁽¹⁾	$	500,000	$	500,000
Interest rate⁽²⁾		2.87%		2.99%
Facility fee-annual rate⁽³⁾		0.350%		0.575%
Maturity date⁽⁴⁾		August 2015		August 2013


(1)		We may elect to borrow, subject to lender approval, up to an additional $200 million under an accordion feature under the terms of the Credit Facility.

(2)		The Credit Facility interest rate included interest at an annual rate of LIBOR plus 1.750% and 2.675% as of June 30, 2011 and December 31, 2010, respectively.

(3)		The facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, we also incurred debt origination and legal costs of approximately $5.0 million when we entered into the Credit Facility in 2010 and an additional $3.3 million when we amended the Credit Facility in 2011. The unamortized balance of these costs will be amortized as additional interest expense over the extended term of the Credit Facility.

(4)		Under the terms of the Credit Facility, we may exercise an option to extend the maturity date by one year.

The Company intends to borrow amounts under the Credit Facility from time to time for general corporate purposes, to fund potential acquisitions, to finance development and redevelopment expenditures, and to potentially repay long-term debt.

Debt Covenants and Restrictions

The Credit Facility, the unsecured senior notes, and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Some of the more restrictive financial covenants include a maximum ratio of total debt to total asset value, a minimum fixed-charge coverage ratio, a minimum unsecured debt ratio, and a minimum unencumbered asset pool debt service coverage ratio. Noncompliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the associated debt becoming immediately due and payable. We believe we were in compliance with all of our debt covenants as of June 30, 2011.

Debt Maturities

The following table summarizes the stated debt maturities and scheduled amortization payments, excluding debt discounts and premiums, as of June 30, 2011:


Year Ending	(in thousands)

Remaining 2011	$	72,262
2012		305,303
2013		6,373
2014		262,443
2015		602,382
Thereafter		450,028

Total	$	1,698,791	⁽¹⁾


(1)		Includes gross principal balance of outstanding debt before impact of all debt discounts and premiums.

Capitalized Interest and Loan Fees

The following table sets forth our gross interest expense, including debt discount/premium and loan cost amortization, net of capitalized interest, for the three and six months ended June 30, 2011 and 2010. The capitalized amounts are a cost of development and redevelopment, and increase the carrying value of undeveloped land and construction in progress.


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(in thousands)

Gross interest expense	$	23,293		$	15,897		$	46,148		$	30,437
Capitalized interest		(2,065	)		(2,809	)		(4,044	)		(5,393	)

Interest expense	$	21,228		$	13,088		$	42,104		$	25,044

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References+ Details