Secured and Unsecured Debt of the Operating Partnership

Secured Debt

The following table sets forth the composition of our secured debt as of December 31, 2012 and 2011:



	Annual Stated	GAAP		December 31,
Type of Debt	Interest Rate ⁽¹⁾	Effective Rate ⁽¹⁾⁽²⁾	Maturity Date	2012 ⁽¹¹⁾		2011 ⁽¹¹⁾
				(in thousands)
Mortgage note payable	4.27%	4.27%	February 2018	$	135,000	$	135,000
Mortgage note payable ⁽³⁾⁽⁹⁾	4.48%	4.48%	July 2027	97,000		—
Mortgage note payable⁽⁴⁾⁽⁹⁾	6.37%	3.55%	April 2013	83,116		—
Mortgage note payable ⁽⁵⁾	5.57%	5.57%	August 2012	—		71,517
Mortgage note payable	6.51%	6.51%	February 2017	68,615		69,507
Mortgage note payable ⁽⁶⁾⁽⁹⁾	5.23%	3.50%	January 2016	56,302		—
Mortgage note payable ⁽⁷⁾⁽⁹⁾	5.57%	3.25%	February 2016	43,016		—
Mortgage note payable⁽⁸⁾⁽⁹⁾	5.09%	3.50%	August 2015	35,379		—
Mortgage note payable ⁽⁹⁾	4.94%	4.00%	April 2015	28,941		30,191
Mortgage note payable ⁽⁵⁾	4.95%	4.95%	August 2012	—		29,754
Mortgage note payable	7.15%	7.15%	May 2017	11,210		13,294
Public facility bonds ⁽¹⁰⁾	Various	Various	Various	2,517		2,562
Total				$	561,096	$	351,825

_______________________


(1)	All interest rates presented are fixed-rate interest rates.


(2)	This represents the rate at which interest expense is recorded for financial reporting purposes, which reflects the amortization of discounts/premiums, excluding debt issuance costs.


(3)	In June 2012, we obtained a mortgage loan that is secured by one office property located in Irvine, California and two office properties located in Los Angeles, California and requires monthly principal and interest payments based on a 30 year amortization period with an initial 3 years of interest only payments.

(4)

In July 2012, in connection with the acquisition of one office building in Bellevue, Washington, we assumed a mortgage loan that is secured by the project. The assumed mortgage loan had a principal balance of $83.6 million at the acquisition date and was recorded at fair value on the date of the acquisition resulting in a premium of approximately $1.4 million. The loan requires monthly principal and interest payments based on a 30 year amortization period. In January 2013, we repaid this loan prior to the stated maturity.


(5)	In May 2012, we repaid these loans prior to the stated maturity.

(6)

In July 2012, in connection with the acquisition of one office building in Los Angeles, California, we assumed a mortgage loan that is secured by the project. The assumed mortgage had a principal balance of $53.9 million at the acquisition date and was recorded at fair value on the date of the acquisition resulting in a premium of approximately $3.1 million. The loan requires monthly principal and interest payments based on a 30 year amortization period.


(7)	In October 2012, in connection with the acquisition of one office building in Los Angeles, California, we assumed a mortgage loan that is secured by the project. The assumed mortgage loan had a principal balance of $40.7 million at the acquisition date and was recorded at fair value at the date of acquisition resulting in an initial premium of

approximately $2.7 million.


(8)	In June 2012, in connection with the acquisition of two office buildings in Seattle, Washington, we assumed a mortgage loan that is secured by the project. The assumed mortgage loan had a principal balance of $34.0 million at the acquisition date and was recorded at fair value at the date of acquisition resulting in an initial premium of

approximately $1.7 million.


(9)	The secured debt and the related properties that secure the debt are held in a special purpose entity and the properties are not available to satisfy the debts and other obligations of the Company or the Operating Partnership.

(10)

The public facility bonds (the “Bonds”), the proceeds from which were used to finance infrastructure improvements on one of the Company’s undeveloped land parcels, were issued in February 2008 by the City of Carlsbad. The Bonds have annual maturities from September 1, 2013 through September 1, 2038, with interest rates ranging from 4.74% to 6.20%. Principal and interest payments for the Bonds will be charged through the assessment of special property taxes.


(11)	Amounts reported include the amounts of unamortized debt premiums and discounts for the periods presented.

The Operating Partnership’s secured debt was collateralized by 20 operating properties as of December 31, 2012 with a combined net book value of $1.0 billion and 18 operating properties at December 31, 2011 with a combined net book value of $567.8 million.

Although our 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.

As of December 31, 2012, nine of the Operating Partnership's ten secured loans contained restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt. The mortgage notes payable are secured by deeds of trust on certain of our properties and the assignment of certain rents and leases associated with those properties. The Bonds are secured by property tax payments.

Exchangeable Senior Notes

The following table summarizes the balance and significant terms of the Company's 3.25% Exchangeable Notes due April 2012 (the "3.25% Exchangeable Notes") and 4.25% Exchangeable Notes due November 2014 (the "4.25% Exchangeable Notes" and together with the 3.25% Exchangeable Notes, the "Exchangeable Notes") outstanding as of December 31, 2012 and 2011. The Company repaid the 3.25% Exchangeable Notes in April 2012 upon maturity.



	3.25% Exchangeable Notes					4.25% Exchangeable Notes
	December 31, 2012		December 31, 2011			December 31, 2012			December 31, 2011
	(in thousands)
Principal amount	$	—	$	148,000		$	172,500		$	172,500
Unamortized discount	—		(924		)	(8,556		)	(12,684		)
Net carrying amount of liability component	$	—	$	147,076		$	163,944		$	159,816
Carrying amount of equity component			$33,675			$19,835
Issuance date			April 2007			November 2009
Maturity date			April 2012			November 2014
Stated coupon rate ⁽¹⁾			3.25%			4.25%
Effective interest rate ⁽²⁾			5.45%			7.13%
Exchange rate per $1,000 principal value of the Exchangeable Notes, as adjusted ⁽³⁾						27.8307
Exchange price, as adjusted ⁽³⁾						$35.93
Number of shares on which the aggregate consideration to be delivered on conversion is determined ⁽³⁾						4,800,796

_______________


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


(2)	The rate at which we record interest expense for financial reporting purposes, which reflects the amortization of the discounts on the Exchangeable Notes (see Note 2). This rate represents our conventional debt borrowing rate at the date of issuance.


(3)	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.

The 4.25% Exchangeable Notes are exchangeable for shares of the Company’s common stock prior to maturity only upon the occurrence of certain events as follows: (i) during any calendar quarter, if the closing sale price per share of the common stock of the Company is more than 130% of the exchange price per share of the Company’s common stock for at least 20 trading days in a specified period, (ii) during the five consecutive trading-day period following any five consecutive trading days in which the trading price per $1,000 principal amount of the Exchangeable Notes was less than 98% of the product of the closing sale price per share of the Company’s common stock multiplied by the applicable exchange rate, (iii) if the Exchangeable Notes have been called for redemption, (iv) upon the occurrence of specified corporate transactions, (v) if the Company’s common stock ceases to be listed or approved for quotation for 30 consecutive trading days, or (vi) on or after August 15, 2014.

Upon exchange, the holders of the 4.25% Exchangeable Notes will receive (i) cash up to the principal amount of the Exchangeable Notes and (ii) to the extent the exchange value exceeds the principal amount of the 4.25% Exchangeable Notes, shares of the Company’s common stock. At any time prior to August 15, 2014, the Operating Partnership may irrevocably elect, in its sole discretion without the consent of the holders of the 4.25% Exchangeable Notes, to settle all of the future exchange obligations of the 4.25% Exchangeable Notes in shares of common stock. Any shares of common stock delivered for settlement will be based on a daily exchange value calculated on a proportionate basis for each day of a 30 trading-day observation period.

During the third quarter of 2012, the closing sale price per share of the common stock of the Company was more than 130% of the exchange price per share of the Company’s common stock for at least 20 trading days in the specified period. As a result, for the three months ended December 31, 2012, the 4.25% Exchangeable Notes were exchangeable at the exchange rate stated above, however no holders exchanged any of the 4.25% Exchangeable Notes during this period. The 4.25% Exchangeable notes may again be exchangeable if one or more of the events were again to occur during future measurement periods.

For the years ended December 31, 2012 and December 31, 2011, the per share average trading price of the Company's common stock on the NYSE was higher than the $35.93 exchange price for the 4.25% Exchangeable Notes, as presented below:



	Year Ended December 31,
	2012	2011
Per share average trading price of the Company's common stock	$45.72	$37.27

The average trading price of the Company's common stock on the NYSE was below the exchange price for the 4.25% Exchangeable Notes during year ended December 31, 2010 and below the exchange price for the 3.25% Exchangeable Notes, which were repaid in April 2012, during the years ended December 31, 2011 and 2010. See Notes 19 and 20 for a discussion of the impact of the Exchangeable Notes on our diluted earnings per share and unit calculations for the periods presented.

Using the per share average trading price presented in the table above, the approximate fair value of the shares upon conversion of the 4.25% Exchangeable Notes as of December 31, 2012 and December 31, 2011 would have been as follows:



	December 31, 2012 ⁽¹⁾		December 31, 2011 ⁽²⁾
	(in thousands)
Approximate fair value of shares upon conversion	$	221,200	$	179,100
Principal amount of 4.25% Exchangeable Notes	172,500		172,500
Approximate fair value in excess amount of principal amount	$	48,700	$	6,600

_______________


(1)	Although the 4.25% Exchangeable Notes were exchangeable during the three months ended December 31, 2012, no 4.25% Exchangeable Notes were exchanged during the period. The 4.25% Exchangeable Notes were not exchangeable during the remainder of the year.


(2)	The 4.25% Exchangeable Notes were not exchangeable during the year ended December 31, 2011.

Exchangeable Note Tender Offer and Note Repurchases

In June 2010, we repurchased 3.25% Exchangeable Notes with an aggregate stated principal amount of $150.0 million for approximately $151.1 million in cash, including transaction costs, pursuant to a tender offer. As a result of the transaction, we recorded a net loss on early extinguishment of debt of approximately $4.6 million and charged approximately $2.7 million, representing the amount of the cash repurchase proceeds allocated to the equity component, to additional paid-in capital.

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 years ended December 31, 2012, 2011, and 2010:



	Year Ended December 31,
	2012		2011		2010
	(in thousands)
Contractual interest payments	$	8,721	$	12,141	$	14,565
Amortization of discount	5,052		6,928		7,965
Interest expense attributable to Exchangeable Notes	$	13,773	$	19,069	$	22,530

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 conversion of the Exchangeable Notes. The capped calls, as amended, are separate transactions entered into by us with the relevant financial institutions, are not part of the terms of the Exchangeable Notes, and do not affect the holders’ rights under the Exchangeable Notes. The strike prices of the capped calls, which are subject to customary anti-dilution adjustments, correspond to the exchange prices of the applicable Exchangeable Notes.

The capped calls for the 3.25% Exchangeable Notes, which referenced a total of 1,121,201 shares of common stock with an exchange price of $102.72 at December 31, 2011, were terminated when the 3.25% Exchangeable Notes were repaid in April 2012. The table below summarizes our capped call option positions for the 4.25% Exchangeable Notes as of both December 31, 2012 and 2011:



	4.25% Exchangeable Notes ⁽¹⁾
Referenced shares of common stock	4,800,796
Exchange price including effect of capped calls	$42.81

________________________


(1)	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.

The capped calls are expected to terminate upon the earlier of the maturity date of the 4.25% Exchangeable Notes or upon the date upon which the 4.25% Exchangeable Notes are no longer outstanding resulting from an exchange or repurchase by us. The initial cost of capped calls were recorded as a reduction to additional paid-in capital.

Unsecured Senior Notes

The following table summarizes the balance and significant terms of the registered unsecured senior notes issued by the Operating Partnership as of December 31, 2012 and 2011:



	4.800% Unsecured Senior Notes						6.625% Unsecured Senior Notes						5.000% Unsecured Senior Notes
	December 31, 2012			December 31, 2011			December 31, 2012			December 31, 2011			December 31, 2012			December 31, 2011
	(in thousands)
Principal amount	$	325,000		$	325,000		$	250,000		$	250,000		$	325,000		$	325,000
Unamortized discount	(413		)	(486		)	(1,580		)	(1,793		)	(112		)	(152		)
Net carrying amount	$	324,587		$	324,514		$	248,420		$	248,207		$	324,888		$	324,848
Issuance date	July 2011						May 2010						November 2010
Maturity date	July 2018						June 2020						November 2015
Stated coupon rate ^(1)(2)(3)	4.800%						6.625%						5.000%
Effective interest rate⁽⁴⁾	4.827%						6.743%						5.014%

________________________


(1)	Interest on the 4.800% unsecured senior notes is payable semi-annually in arrears on January 15th and July 15th of each year.


(2)	Interest on the 6.625% unsecured senior notes is payable semi-annually in arrears on June 1st and December 1st of each year.


(3)	Interest on the 5.000% unsecured senior notes is payable semi-annually in arrears on May 3rd and November 3rd of each year.


(4)	This represents the rate at which interest expense is recorded for financial reporting purposes, which reflects the amortization of initial issuance discounts, excluding debt issuance costs.

In 2011, we used a portion of the net proceeds from the 4.800% unsecured senior note offering for general corporate purposes, including the repayment of borrowings under our revolving credit facility and to fund operating property acquisitions. In 2010, we used the net proceeds from the 6.625% and 5.000% unsecured senior note offerings to fund operating property acquisitions and to repurchase $150.0 million in aggregate principal balance of the 3.25% Exchangeable Notes.

In addition to the registered unsecured senior note issuances listed above, we also had outstanding Series B unsecured senior notes with an aggregate principal balance of $83.0 million and effective interest rate of 6.45% as of December 31, 2012 and 2011, that mature in August 2014. The Series B notes require semi-annual interest payment each February and August based on a fixed annual interest rate of 6.45%.

Term Loan Facility

In March 2012, the Operating Partnership entered into a $150.0 million term loan facility, which is included in unsecured debt, net on our consolidated balance sheets. The term loan facility bears interest at an annual rate of LIBOR plus 1.750%, which can vary depending on the Operating Partnership's credit rating, and is scheduled to mature on March 29, 2016. Under the terms of the term loan facility, we may exercise an option to extend the maturity date by one year. We may elect to borrow up to an additional $100.0 million under an accordion option, subject to bank approval. We used the borrowings under the term loan facility to repay the 3.25% Exchangeable Notes in April 2012 upon maturity.

Unsecured Revolving Credit Facility

In August 2010 we entered into our current $500.0 million revolving credit facility and used the borrowings under the revolving credit facility to repay and then terminate our prior $550.0 million unsecured revolving credit facility. In March 2012, we amended the revolving credit facility to reduce the FMV Cap Rate (as defined in the revolving credit facility agreement), which is used to calculate the fair value of our assets for certain covenants under the revolving credit facility, from 7.50% to 6.75%. There were no other changes to the terms of the revolving credit facility in connection with this amendment. In November 2012 and June 2011, we amended and restated our revolving credit facility to extend the maturity date and reduce the interest rate and facility fee. The following table summarizes the terms of our revolving credit facility as of December 31, 2012 and December 31, 2011:



	December 31, 2012			December 31, 2011
	(in thousands)
Outstanding borrowings	$	185,000		$	182,000
Remaining borrowing capacity	315,000			318,000
Total borrowing capacity ⁽¹⁾	$	500,000		$	500,000
Interest rate ⁽²⁾	1.66		%	2.05		%
Facility fee-annual rate ⁽³⁾	0.300		%	0.350		%
Maturity date ⁽⁴⁾	April 2017			August 2015

_______________________

(1) We may elect to borrow, subject to bank approval, up to an additional $200.0 million under an accordion feature under the terms of the revolving credit facility.


(2)	The revolving credit facility interest rate was calculated based on an annual rate of LIBOR plus 1.450% and 1.750% as of December 31, 2012 and December 31, 2011, 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 revolving credit facility in 2010, an additional $3.3 million when we amended the terms of the revolving credit facility in June 2011 and an additional $1.9 million when we amended the terms of the revolving credit facility in November 2012. The unamortized balance of these costs are amortized through the extended maturity date of the revolving credit facility.


(4)	Under the original and all amended terms of the revolving credit facility, we may exercise an option to extend the maturity date by one year.

The Company intends to borrow amounts under the revolving 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 revolving credit facility, the unsecured senior notes, the term loan facility, 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 December 31, 2012 and 2011.

Debt Maturities

The following table summarizes the stated debt maturities and scheduled amortization payments, excluding debt discounts and premiums, as of December 31, 2012:



Year Ending	(in thousands)
2013	$	90,881
2014	263,913
2015	393,711
2016	247,822
2017	255,036
Thereafter	793,056
Total	$	2,044,419	⁽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 reported in continuing operations, including debt discount/premium and loan cost amortization, net of capitalized interest, for the years ended December 31, 2012, 2011 and 2010. The interest expense capitalized was recorded as a cost of development and redevelopment, and increased the carrying value of undeveloped land and construction in progress. (See Note 17 for interest expense reported in discontinued operations).



	Year Ended December 31,
	2012			2011			2010 ⁽¹⁾
	(in thousands)
Gross interest expense	$	98,906		$	94,915		$	69,661
Capitalized interest	(19,792		)	(9,130		)	(10,015		)
Interest expense	$	79,114		$	85,785		$	59,646

_______________________

(1) Interest expense for the year ended December 31, 2010 includes loss on extinguishment of debt.