BioMed Realty Trust's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 6.13 | About: BioMed Realty (BMR)

BioMed Realty Trust, Inc. (NYSE:BMR)

Q4 2012 Earnings Call

February 6, 2013, 2:00 p.m. ET

Executives

Rick Howe - Director, Corporate Communications

Alan Gold – CEO

Kent Griffin - President and COO

Matt McDevitt - EVP, Real Estate

Greg Lubushkin – CFO

Analysts

Brendan Maiorana – Wells Fargo

Jordan Sadler - KeyBanc Capital Market

Daniel Bernstein - Stifel Nicolaus

Rich Anderson - BMO Capital Markets

Gabriel Hilmoe – UBS

Matt Rand – Goldman Sachs

Operator

Welcome to the fourth quarter, 2012, BioMed Realty Trust earnings conference call. My name is Larissa and I'll be your operator for today's call. (Operator Instructions)

I'll now turn the call over to Rick Howe. Sir, you may begin.

Rick Howe

Thank you, Larissa and welcome everyone.

Today's fourth quarter and full-year 2012 earnings call includes a slide presentation that accompanies our prepared remarks. If you're not currently viewing the slides and would like to, please go to www.biomedrealty.com and click on the investor relations tab on the left. And then click the Q4 2012 BioMed Realty Trust, Inc. earnings conference call link. We have also posted these slides on the investor relations tab of our website under the title Investor Presentation, February, 2013.

Presenting today are Alan Gold, Chief Executive Officer, Kent Griffin, President, Matt McDevitt, Executive Vice President Real Estate, and Greg Lubushkin, Chief Financial Officer.

Before we begin, I'd like to remind everyone of the Safe Harbor statement included in yesterday's [inaudible] Reform Act of 1995 provides a safe harbor for certain forward-looking statements including statements made during the course of today's conference call. These forward-looking statements are based on the company's current expectations and involve significant risks and uncertainties, some of which are beyond the control of the company and are subject to change based on various factors. Actual results may differ materially from those expressed or implied by the forward-looking statements.

For a detailed discussion of some of the risks and uncertainties of the company's business, I refer to the news release issued yesterday and filed with the SEC on form 8-K as well as the company's other SEC filings including the most recent annual report on form 10-K and the quarterly reports on form 10-Q.

The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

I will now turn the call over to Alan Gold. Alan.

Alan Gold

Thanks, Rick and welcome everyone.

BioMed Realty had another really great year in 2012 punctuated with an exceptional fourth quarter.

Now as we reflect on our results and where we stand today, I have three observations I'd like to talk about.

First, the Life Science Industry environment is doing well. Innovation is occurring at a rapid pace. And the industry is realizing important results from the efforts of researchers over the last several decades. And this is evidenced by the acceleration of FDA approvals. In 2012, the FDA approved 39 new drugs, the highest level in 16 years. And importantly, investors are taking notice providing very healthy access to capital for the industry.

Second, our operating team. With deep industry expertise and strong relationships is maximizing opportunities, executing and allowing us to make very significant market share gains headlined by our strongest leasing performance ever with 2.1 million square feet for our five-quarter plan bringing our portfolio to 92% leased, up 1,000 basis points over the last nine quarters.

And finally, our operating success is translating into increases in revenues, FFO, and AFFO per share and ultimately dividends per share, which are up 17.5% from a year ago.

Further, in looking first at the industry, FDA drug approvals. We're in the most tangible metrics for measuring innovation, have been steadily increasing over the past several years, and in fact, we've had eight drug approvals in December alone reaching 39 approvals for the year as compared to 30 for 2011 and 21 in 2010. Once again, the highest total since 1996.

This is of course great news for any of our tenants who have received these approvals, including Ironwood, Vertex, Arena, and others. And these successes are continuing. We've had a number of approvals already in 2013 including just last week when our tenant Isis Pharmaceuticals in partnership with Genzyme Sanofi, also our tenant, announced the eagerly anticipated FDA approval of Kynamro, very exciting for CEO Stanley Crook and the Isis team with this landmark achievement in cholesterol treatment.

Not surprisingly, the capital flows are following the innovation. So while the overall market was up, the S&P was up approximately 13%, the Amex Biotech index was up much more, an impressive 42% in 2012. This is again consistent with what you've heard from us over the years. Our long term view that the Life Science Industry is well positioned to grow in out outsized pace relative to the broader economy.

Capital flows into the industry exceeded $82 billion, up 18% over 2011, extending a 40 year trend of accelerating capital flows, which have now well more than doubled since 2008. And our tenants have had excellent success raising capital, including again, Ironwood, Idenix, Omeros, and many others, each of which extended or expanded their leases with us in 2012.

Further evidenced by our results for the fourth quarter and full year 2012, we have a proven business model and a great operating team that's executing that model acquiring the best assets and the best markets, delivering on our promise to create optimal environments for our tenants, supporting transformational research and groundbreaking science to create long-term value for stockholders and stakeholders.

Before we review the quarter's results, I'm very pleased to welcome Dan Bradbury to our board of directors. Many of you recall Dan spoke at our investor day back in December. Dan brings a wealth of Life Science Industry expertise and an expanded network of relationships as the former CEO of Amylin Pharmaceuticals and a current director on the boards of Geron Corporation, Corcept Therapeutics, Illumina, Inc., and Castle Biosciences.

And with that, I'm going to turn it over to Kent to further talk about the quarter's results.

Kent Griffin

Thanks, Alan.

Our primary goals for 2012 were very much focused on continued leasing success. And obviously, we are quite pleased as 2012 turned out to be our strongest leasing year ever. We saw momentum accelerate over the course of the year, including a higher volume of new leasing, which drove our positive net absorption ahead of expectations.

Now recapping, our primary mission objectives heading into the 2012 year were to make significant traction at three specific projects at 201 Elliott in Seattle, at 650 Kendall in Cambridge, and at the Pacific Research Center in San Francisco.

First at 201 Elliott, we leased about 65,000 square feet to Omeros at the beginning of the year. And actually in this fourth quarter, expanded them again up to 89,000 square feet.

At 650 Kendall, we leased 126,000 square feet to Aveo. And we feel confident we will have additional leasing success here in 2013.

And most noticeably at the Pacific Research Center where we leased nearly 300,000 square feet to Theranos, Depomed, and CellScape. And in fact in the past two and one half years, we have leased over 700,000 square feet at this campus. And last week, we tacked on another lease bringing the campus to 67% leased.

Now fueled by our sustained leasing success, total in rental revenues in 2012 hit all-time records, the primary driving force in core FFO per share rising 9.2% for the year and AFFO jumping 12% on a per share basis. This of course supported the company's recent decision to raise the dividend again. Yet still leaves us with an AFFO payout ratio of just a hair over 70%.

We supplemented our leasing success in 2012 with some very attractive new investments. In 2012 including the Rogers Street investments, which we made in December of '11, we selectively made $744 million of new investments. A majority of which, $427 million came from East Cambridge in Massachusetts. And a $196 million came in Cambridge, U.K.

Our new investments added to our leasing objectives as the Rogers Street and Cambridge place projects were collectively 77% leased at acquisition with an additional 145,000 square feet leased to Merck expected to roll and vacate. We're especially pleased today to report that these two projects are now collectively 94% leased. And that we are very close to pre-leasing the majority of the Merck space. And in fact, our 2012 acquisitions again including Rogers Street as a whole are now 96% leased.

Now capitalizing on our core competency of our investment acumen, we have been able to add high quality assets with high quality tenant roster and attractive lease terms, a further driver of our growth in FFO, AFFO, and dividends per share.

Looking forward, our focus remains leasing and maximizing cash flow from our operating portfolio. Our 1.5 million square foot leasing target for 2013 is up 25% over our 2012 target. And we're obviously off to a great start.

And with the growing tenant demand for lab and office space, we have activated our pre-development activities at several sites as we reviewed at our most recent investor day in November. And Matt is going to give you some additional color on the recent leasing activity and current trends.

Matt McDevitt

Thanks, Ken.

We entered 2012 and starting off 2013 with a very strong momentum. Our fourth quarter volume of 625,000 square feet was one of our strongest leasing quarters ever. In fact, 2012 was one of our best years yet and significantly exceeded our five quarter goal achieving a full 172% of plan. We particularly outperformed on the net absorption front where we had anticipated 400,00 square feet for the five quarter period. And actually achieved 725,000 square feet, really, really tremendous success.

Now equally exciting, market conditions have solidified with reduced concessions generally across the markets. And some pockets have actually rent growth as the markets continued to tighten. Just in the fourth quarter alone, we had new leasing transactions in Seattle, San Francisco, San Diego, Boston, New York, and Maryland, very solid tenant demand.

Now the two largest transactions garnered most of the headlines as we previously discussed, Ironwood expanding and extending in Cambridge and Regeneron again expanding in New York. These combined two transactions represents 173,000 square feet of leasing. We expanded Omeros by roughly 25,000 square feet in Seattle. At 21 Broadway, which is part of our Cambridge Place complex, we leased 13,000 square feet to Canon, a leading provider of digital medical imaging. And we extended the lease for 48,000 square feet with NuGen Technologies, a company that provides genomic sampling preparation at our Industrial Road property on the peninsula in the Bay Area. Now across the Bay, we had roughly 60,000 square feet of smaller renewals spread across a handful of tenants at both our Bridgeview and Ardenwood properties.

Now a couple of additional portfolio notes. Anlylam, which was expected to vacate about 140,000 square feet in South San Francisco in the first half of December actually held on to approximately 110,000 square feet of space at 801,000 buildings through year end and finally turned the space over at the beginning of January. Now Anlylam continues to lease the 180 and 200 buildings at Oyster Point, which aggregate over a little over 200,000 square feet. And is leased until 2019. And Vertex did not exercise their early termination provision at 40 Erie and the Sydney property in Cambridge Port. So their commitment at these locations continues to the end of 2015. Again, another reminder their commitment at 675 West Kendall, which represents the majority of the rents continues to mid-2018. And also to note, Vertex has no remaining lease terminations.

Now looking forward, we're off to a great start in 2013. We already executed a ten year extension with Momentus, which has been at our landmark campus in New York since 2003.

And finally, last week we leased another 18,000 square feet of TRC, this to Emphasis.

Now up next is Greg to review our financial results. Greg.

Greg Lubushkin

Thanks, Matt.

Turning to the financial results in the fourth quarter, on a top line, new records for total and rental revenues were again set during the fourth quarter with total revenues up 24% from the fourth quarter of 2011. Bottom line results follows suit, starting with FFO per diluted share at $0.36 in the fourth quarter, an increase of 20% year-over-year. AFFO diluted share for the quarter was $0.33 representing an 18% year-over-year improvement. And same property cash and NOI continued its strong upward trend increasing by over 6% over the fourth quarter of last year.

Similarly, full year 2012 core FFO and AFFO registered impressive increases with core FFO per diluted share of $1.31, a 9.2% increase over 2011. And an AFFO per diluted share of $1.29, or 12% above last year.

As discussed last quarter, other revenue includes the effect of Merck's $7 million termination fee at 320 Bent in Cambridge received in August of 2012, of which $2.2 million or $0.01 per share was included in other income for the fourth quarter. And approximately $5.8 million or $0.03 per share would be recognized ratably in 2013 through August of this year.

Elan's holdover provided roughly $750,000 of additional NOI in fourth quarter. It also supported stronger results with respect to same property cash NOI growth, same property lease percentage, and net absorption.

We expect 2013 same property cash NOI growth to be in the range of 3% to 5% for most of the year. This excludes the 801,000 Gateway Boulevard properties vacated by Elan, which are now part of pre-development. As I noted last quarter, if we were to leave these properties vacated in the same-store portfolio, same property cash NOI growth would be flat to nominally positive for the first half of the year. And then return to our recent 3% to 5% pace of growth.

Operating margins, G&A, and the interest expense for the quarter were consistent with expectations. Our quarterly common dividend was raised by approximately 9% to $0.235 per share or $0.94 per share annualized. The AFFO payout ratio was 71.2%.

Turning to the balance sheet, we continued to operate our business with very healthy liquidity and credit metrics with virtually every category showing improvement over the prior quarter. The charge coverage ratio ticked up to three times. Debt to percentage of total gross assets held steady at 39.9%. Debt to adjusted EBITDA ticked down to 6.1 times. Secured debt as a percentage of total gross assets declined 10.5%. And we ended 2012 with approximately $632 million of capacity and only $118 million outstanding on our unsecured line of credit leaving us with more than ample liquidity to execute on our plans for growth.

And it's important to note that our strong credit profiles have been supported not only by increasing to cash flows, but the enhanced quality of those cash flows as well. The proportion of our rents coming from our top ten tenants continues to tick down while those tenants with institutional credit, that is those that are investment grade rated or research institutions has increased from 29% of our rents a year ago to 38% today. And our tenant watch list currently comprises less than 1.5% of our annual rents, among the lowest in our history.

Looking forward, our strong leasing performance continues to provide good visibility with respect to our expectation of continued cash flow growth. Our revenue backlog of annualized rents reflecting leases that had yet to commence revenue recognition has grown to $14.8 million of annualized rents. Even better, our cash rents backlog grew from $24 million at the end of the third quarter to $28.5 million as of year-end.

The strong fourth quarter leasing and financial results enhanced our visibility into 2013. And accordingly, we raised our 2013 FFO per diluted share guidance from a range of $1.33 to $1.43 to a range of $1.36 to $1.44, increasing the midpoint $0.02 to $1.40 representing a 7% increase over our actual 2012 core FFO per diluted share of $1.31.

With that, I'm going to turn it over to Alan for final comments and your questions.

Alan Gold

Thanks Greg.

And before taking your questions, I just want to acknowledge and thank our tenants, our business partners, and all of our best-in-class employees for making 2012 a truly remarkable year at BioMed Realty. We appreciate your support and especially your hard and smart work on our behalf.

And now Operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator instructions).

Our first question comes from Brendan Maiorana from Wells Fargo.

Brendan Maiorana – Wells Fargo

Thanks. Good morning out there. So, Matt, I think you mentioned that Elan was – I forget which buildings you said they were still in. My understanding was that they were likely to completely move out of the South San Francisco region, is that correct? And are they still planning to occupy the Oyster Point buildings, or are they planning to vacate and put those out for sub-lease?

Kent Griffin – President and COO

Hey Brendan, it’s Kent. So Elan is either doing a number of buildings. The 180 and the 200 buildings, which are the majority of the rents, those leases continue for, you know, another nine, ten, twelve years. I don’t have the expiration in front of me, but it goes to 2019 I believe.

The lower campus, which is what I think Matt was mostly referring to, is – and Greg was talking about, where they mostly moved out in January, a little bit in December, but most of it they moved out ultimately in January. Their intent is to downsize and move effectively out of the campus over time, so we would expect them to pursue a sub-lease for the 180 and 200 buildings.

Brendan Maiorana – Wells Fargo

So, it they pursue a sub-lease for those buildings, how does that impact your ability with the new development that you’re planning on the Gateway buildings? If at all?

Kent Griffin – President and COO

So, Elan announced - this dates back to last summer when they announced their restructuring, and so I think it’s been expected that this will be part of the potential supplier competitive sets. So, sub-leasing space is always a part of the market and part of the competitive supply. So, it doesn’t change anything from where we were a few months ago.

Brendan Maiorana – Wells Fargo

It doesn’t change – I mean, because these are the newer buildings. I mean, they’re not obviously brand new, but they’re the newer buildings and they’d be – I mean, even though sub-let space is out in the market, I mean this is sort of directly adjacent to the new build that you guys were planning on doing. That’s not new relative to what you guys were thinking a few months ago with the potential new build that’s out there.

Alan Gold – CEO

That’s exactly right. So they announced – Elan announced their restructuring last summer, so this has been known or anticipated. This would ultimately become competitive supply.

You’re right. We do think it is – I think the 180 and 200 buildings, are the best buildings in South San Francisco. So we do think it’s high quality space that will be very attractive for those who are looking for sub-least type space.

That said, that location – the location of both the 180 and 200 buildings, as well as our development opportunities, really is the best opportunity in South San Francisco, so the new news in terms of this from last August, and in fact as you may recall, it was post last August and over the fall and over last quarter’s call where we really introduced and talked about our enthusiasm for moving forward with the development. And we’ve had a lot of preemptive enthusiasm from folks out in the market who do recognize the opportunity at this site for this development.

Brendan Maiorana – Wells Fargo

Sure. And I suspect that today’s announcement of the BioGen buying Elan or buying out at the top rate their portion of it has no impact on the long-term plans?

Alan Gold – CEO

No.

Brendan Maiorana – Wels Fargo

Okay. And then just the otherwise, I want to ask about was over, in (metro Philly and Radnor) with [inaudible] I know you guys had put some sort of discussion points around that at an Investor Day a few years ago. Is there any update to the plan there given that we’re a little over a year away from that lease expiration, and what you guys may look to do? I think it’s likely office, but I can’t recall the specifics.

Alan Gold – CEO

No real update. We do know they are going move out in 2014. You know, but we’re obviously very bullish on the location, but we’re just not real clear on, you know, what’s going to essentially happen in our process. So, we’re going through our process and that’s kind of where we are. So, I can’t really give you anymore clarity on that one.

Brendan Maiorana – Wels Fargo

Matt, is it fair to say that – I mean, if it were to be a scrape, and then you build that office, is the most likely use given the demand dynamics in that market?

Matt McDevitt – EVP, Real Estate

You know, I think in Radnor, it’s a very good office market. But you know, we’re in front in the Radnor accounts right now, and we just really don’t want to kind of get ahead of ourselves there. But, you know for (metro Philly) it’s probably the best market.

Brendan Maiorana – Wels Fargo

Okay. All right I’ll get back in. Thanks.

Operator

Next question comes from Jordan Sadler – KeyBanc.

Jordan Sadler – KeyBanc Capital Market

Thanks. Good morning out there. Wanted to just circle back to one of the early comments surrounding, you know, the pace of leasing during the year. Obviously record year with momentum building, I think you said right to the end of the year. And I’m curious – that’s obviously a stark contrast to what we hear from most of the other folks we talk to, given what was going on in the back half of last year. Did that momentum continue into this year? I know Matt, you mentioned another lease or two. But are the prospects for this year still big?

And in that same vein, are there a few projects that you guys are focused on as sort of, you know, the big goals for 2013?

Matt McDevitt – EVP, Real Estate

You know, real quick, the momentum actually has, you know, continued in the first half or the first quarter here. So we’re really pleased with that. But I think Kent will probably touch on a couple of the project.

Kent Griffin – President and COO

Yes, I think your question about where the opportunities are, we really do see them across the portfolio. I think as Matt touched on, we in the fourth quarter we had leasing in Maryland, San Francisco, Seattle really across the markets. And we are experiencing that sustained demand and activity level. It really comes back to some of the comments that Alan mentioned in terms of what we’re seeing in the marketplace.

So, not only do we think we have good business model that’s leveraging the strength of their Life Science Industry, but structurally there’s some things that I think have been strong catalyst for the activity. You know Alan mentioned the drug approvals with eight of them occurring in December alone, which really elevated that drug approval total to thirty-nine. And if you look at what’s - part of what’s behind that, you know, a number of things the FDA has done over the years to try make their process more efficient and understandable for Pharma and drug discovery and drug development companies.

And so, between PDUFA and the various revisions to PDUFA, they’ve been able to provide better clarity and with – fast track and other initiatives, able to get more products through, and give companies a clear path to what kind of response times are going to get to their NDA proposals.

And so, between that, as well as some on the regulatory side, seeing some of what’s happened with the Jobs Creation Act, and the ability to do the confidential S-1 filling process, and some of the form-10 offerings, you’re seeing companies able to go public in a more efficient way. So the increase in the number of companies going public during 2012 in the life science industry, and in fact we, you know, have a number of tenants that we know are still continuing to pursue the confidential S-1 filing process. So, it does give us confidence and enthusiasm heading into 2013.

Jordan Sadler – KeyBanc Capital Market

Okay, that’s helpful. Looking at the guidance; the construction loan on the Fan Pier what’s embedded? You may have gone through this last quarter, what’s embedded in guidance in terms of income from the construction loan, or how should be expect it to fund through the end of the year?

Greg Lubushkin - CFO

Yes, last quarter we indicated that the interest income from Fan Pier construction loan would probably contribute roughly $6.5 to $7 billion worth of income, depending upon the amounts and timing of the draws, and with regard to the timing of the draws the best estimate that I think you could utilize as you model it out, is to take a look at the total commitment, and basically straight line it over the course of the balance of 2013, and you know, probably into early 2014.

Jordan Sadler – KeyBanc Capital Market

Okay, and any thoughts on the preferred given where rates are today, you know, the preferred and/or the Center for Life Science loan. Thoughts on opportunities for refinancing and where you might price?

Greg Lubushkin - CFO

Yes. Center for Life Science is an easy one to address first, because that we really are lockout of prepaying until 90 days before the contractual maturity. I could ask Alan exactly how many days, minutes and hours we have left before we prepay that, but it’s going to be early April 2014.

You know, certainly as we look at it and refi, and you know, the unsecured markets, you know, we can go out today and get tenure money in the range of 4% or maybe just slightly inside that we can get five-year money in the mid-two’s.

With regard to the preferred, I mean, as we consistently say, I mean, we are always thinking about the preferred and, you know, the opportunities for potentially refinancing, you know, the preferred. We’re certainly aware of, you know, where the market is and we’ll continue to think about how we deal with the prefers as we move forwards.

Jordan Sadler – KeyBanc Capital Market

I guess I was thinking about maybe a bigger picture. And this is my last question; just on those two pieces. You guys have historically been pretty conservative on the balance sheet side. Are you concerned about rates, long-term rates rising, you know, over the course of this year? And would you look to kind of pre-fund or position yourselves to be well positioned for, you know, in advance of like the Center for Life Science maturity were to take out these preferred? Are you just not anticipating a [inaudible] rise in rates?

Kent Griffin – President and COO

Jordan this is Kent. I think that’s a good question, a fair question. I think we’re perpetually concerned about a rising interest rate environment. I think we’re always concerned about that. And I don’t know if we have a better crystal ball than you or others on which way rates are going to go.

We do think there’s some optionality embedded in the preferred, even though it’s mispriced today. We do see some optionality in terms of how we would address that. And as Greg mentioned, we can’t really take out the certified Science early, because we can’t prepay it for another year.

So, I do think it’s going to be a much more tactical sort of block-by-block execution decision. You know, we have fairly consistently metered out our maturities. I think we’ve done a single bond deal each year since we’ve been rated, so clearly we will regularly look at that. But we’re looking at it not just sort of on a one financing at a time, trying to balance the tactical objectives with respect to efficiently replacing individual financing, but also looking at how the maturity stack up over the, not just the next three to five years, but looking out seven and ten years to the maturities that we’ll have, you know, at that time.

So, it doesn’t give you great clarity as to how we’re going to do that I know, but the reality is it’s going to be opportunistic and case specific.

Jordan Sadler – KeyBanc Capital Market

Okay, thank you.

Alan Gold – CEO

Thanks Jordan.

Operator

Daniel Bernstein from Stifel Nicolaus is on line with a question.

Daniel Bernstein - Stifel Nicolaus

Hi, good afternoon. I have some more broad questions about the biotech industry. Just looking at our Stifel Nicolaus 2013 biotech outlook and the have indicated that you know, with the Affordable Care Act coming in you might have some more coverage in primary care physicians with patients and they’re not heavy users of biotech medicines. Do you hear anything from your tenants about long-term concerns about the needs for biotech, you know products in the industry and impact for funding in this space? Obviously, the New York Times funding is very good, but what are you hearing from your tenants about their thoughts on the impact from the Affordable Care Act if any?

Alan D. Gold.

Well, not specifically for the affordable care act, but I think that our tenants in general have the same sort of belief that we have with regards to the long-term demographic trends and dynamics of the industry driving the needs for new – new innovative products. And those new innovative products have and continue to come from the biotech industry. And so we believe, and I think they also mimic and believe the same thing, that there is a tremendous demand for their new technologies, their ne innovative products that will drive down the overall cost and allow the aging population to continue to live longer and healthier over a long period of time.

Daniel Bernstein - Stifel Nicolaus

Okay. And then, you know, you talked about [inaudible], the IPO process and – which I think favors perhaps some smaller biotech companies and the funding for those companies. Over the years you talked about also increasing – you’ve increased the number of investment grade tenants in your portfolio but are you seeing, say more demand from the smaller mid-cap biotech companies, early stage biotech companies at this point? Should we expect any change in your tenant mix in terms of size of the tenant going forward?

Alan D. Gold

I don’t – we haven’t seen any specific trends so far yet because that jobs act is fairly new. We have seen a slight uptick in IPO, in successful IPOs and – but it’s still a work in progress. If you would say for those who are trying to understand that process and get through it, and I think the regulator environment is continuing to favor that size or the smaller size and group of tenants, allowing them to go out and raise that type of capital. But more importantly, we are continuing to see a veracious demand by pharma for biotech products and a need for – to continually backfill their pipelines of drugs that – to provide revenues for these pharmaceutical companies and that is what continues to drive capital into the industry.

Daniel Bernstein - Stifel Nicolaus

Okay. And then one last question, you know, you really don’t have much in the way of medical devices or med tech tenants, you know, you’ve really focused on the biotech side of the medical business. And I was just thinking, what are the pros and cons of maybe moving more, you know, more facilities in the med tech devices sector and you know, is that something you would want to diversify into? Just trying to get your thoughts on that.

Alan D. Gold

Yeah, I mean, the med tech device companies are very unique organizations and have unique –unique real estate needs. We have had med tech tenants in our spaces but they tend to be – their spaces tend to be more industrial in focus, manufacturing a device and meeting a very – and needing a space that has a lower cost than what we provide in our core markets. And so – and their results because their operating margins are lower and smaller than the traditional drug discovery and drug – new drug deliver type companies. So while we continue to look at that and explore that and underwrite that, our focus remains in our core markets with our core product type of scientific research laboratories.

Daniel Bernstein - Stifel Nicolaus

Okay. Given the recent gains you’ve had, I can understand that. That’s all for me today. Thank you for your time.

Operator

Matt Rand from Goldman Sachs is on the line with a question.

Matt Rand – Goldman Sachs

Hi, just to go back to the [inaudible] topic for a second, given all the sublet space available in the Oyster Point market and you guys just said that you anticipated the space as recently – or as early as this summer, also Amgen, which you knew about. Do you think you’ll start the Gateway development or the [inaudible] development without a prelease?

Alan D. Gold

So thanks for the question. We are working on the predevelopment piece now and so the answer is yes to that part of it. But maybe your question is, do you expect us to go vertical on construction without preleasing and the answer is no. We would expect to have a substantial anchor or majority prelease project before we break ground.

Matt Rand – Goldman Sachs

So somebody would have to take half of the project or more?

Alan D. God

Something like that. But we’re really focused on – we’re in the design process currently.

Matt Rand – Goldman Sachs

Great. Great. And then quickly, you signed 368,000 square feet of renewals during the quarter, which is a lot, so congrats. What was the cash rent spread on those renewals versus the expiring rents?

Alan D. Gold

We were about 1% up.

Matt Rand – Goldman Sachs

Okay. Great. Thank you, that’s all for me.

Operator

Rich Anderson from BMO Capital Markets is on line.

Rich Anderson - BMO Capital Markets

Thanks. Good morning. The watch list of 1.5% of revenue, I think you said, how would that trend and what’s been the highest the watch list has been in your recollection for the company?

Kent Griffin

Yeah, I think generally in years it trended very consistently in the 3 to 4% range and I would say over the last two or three years it’s just steadily ticked down.

Rich Anderson - BMO Capital Markets

Okay, so nothing scary about the history there. The second question is on the approvals, the 39 drugs in 2012, part of me is like, that’s great but it’s sort of like, you know, just by what you said, Alan, about, you know, the forward opportunities in drug research. You kind of like the fact that 79 drugs have been approved but then all the research that it took to get to that point is, you know, basically done, how is that good for you guys? Isn’t the 39 drug approval sort of like a lagging indicator of some sort for your business?

Kent Griffin

Well, that’s a great question. It’s kind of the opposite. I mean, the drug approvals are excellent events. First of all, they’re economic strong successes for our tenants. You look at Ironwood, for example, where they got a drug approved last year and they extended and expanded with us. You look at Vertex and they got drugs approved and they expanded. So what you see is companies are pursuing a variety of technologies, a variety of opportunities and having one success allows them to continue to fund other successes. In addition, if they have an approval on a particular indication, they’re going to consistently look at – I mean, it’s a really great sign for whatever the science or technology is that they’ve done. They’re going to find other ways to apply that same technology to either other diseases or other populations and that requires further research.

So success gets more need for more research. So it’s a great event for that tenant and for the needs related to that specific tenant. But even beyond that, when one company has success, it creates the financial incentive for other public investors and other pharma companies and other private companies to invest in the next biotechnology company because they see the economic upside realized and so you have exit opportunities and you have perceived exit opportunities. It’s – it is a really – it’s a really positive thing.

Rich Anderson - BMO Capital Markets

Okay. Fair enough. I just figured I’d play devil’s advocate. Is there any change in your mind with the FDA in terms of the level of scrutiny that they apply or any kind of broader external factors that may have resulted in such an increase in drug approvals?

Kent Griffin

Well, I think this is something that the FDA has been working on for a number of years. They brought in someone specifically to champion and spearhead innovation so thinking not solely from a protective look at things in terms of things protecting the population from unsafe things. But also really taking a hard look at how do we facilitate advancements that actually help the human condition. And you know, this has been a long process and you know, I don’t know what number of PDUFA we’re on, 5 or 6, but each time they do this, they’re trying to come up with new ways to make the process more clear and less ambiguous and that, again, that also reduces risk for companies that are trying to push products through the development process. So you know, every time you can increase the upside opportunity by seeing a drug approved and the relative opportunity there, and at the same time you can reduce the risk by having better clarity on the timeline and the potential deviations from the timeline, you increase the economic opportunity and you attract new investment.

Rich Anderson - BMO Capital Markets

Okay. On Granite Park, 100% occupied, nice investment obviously for you, but I mean, on the – just to be another pessimistic end, the only place to go is down from 100% as far as I know. I’m just curious how you were able to keep tabs on that asset and those markets out there in the way you are able to here in the U.S. and you know, what are the incremental risks we should be thinking about, you know, on that issue and also what are the prospects for you to expand your footprint out in U.K.?

Kent Griffin

I appreciate the question. We do think there’s additional upside opportunity. Obviously, we’re excited about being 100% leased there but we have additional – one of the reasons we’re so attracted to that site is because it did include the additional development sites sprinkled around that campus. And one of the – we were thinking about it at the beginning of this call, if you would ask us what surprise we’ve had thus far out of our investment there, you know, we spend a lot of time, a lot of time and a lot of dollars on the [inaudible] process. So we haven’t had the got-you surprises to date, knock on wood that you might think of and in fact, the one surprise we have had is the number of conversations and the interest we’ve received from the Cambridge community on the opportunity to potentially pursue those sites. We perceived – we still try to perceive those sites as really more expansion opportunities for the existing tenants, more of a long-term growth opportunity for us, but we do have – we do have many – we’ve had many expression of interest and we do have active dialogs regarding other tenants who are interested in coming to the park.

Back to your other question about how do we keep tabs on all this, you know, fortunately we don’t have direct flights from San Diego to London, but more importantly, more importantly one of our teammates from Cambridge, Massachusetts who joined us a number of years ago has relocated and is physically officed at the park and overseas, our property management efforts there as well as really staying in touch with our tenants and leasing opportunities as well as new investment opportunities.

So that was part of our initiative was to get boots on the ground there and we’ve done that and we’re very pleased, you know, it’s early days but we’re really pleased with this first year of ownership there.

Rich Anderson - BMO Capital Markets

Well, thank God he’s from Cambridge I guess. And then the last question is big picture, probably for Alan. You guys have done a killer job, you know, no question about it in terms of your leasing and everything else is kind of stuck at 19, 20 bucks a share. You probably think you’re worth a lot more. I’m just curious what the company’s mindset is about entertaining overtures, you know, it’s a fantastic platform, probably don’t think you’re getting the value you deserve, just to comment on, you know what you and the Board think as it relates to that issue.

Alan D. Gold

Well, you know, first of all, you know cash flow ultimately is what matters. We are driving cash flow and creating tremendous opportunities within our portfolio to continue to drive cash flow and we will continue to do that. You know, we absolutely agree, you know, and I think every CEO believes that their stock is worth twice what it’s currently trading for. So you know, and I think that we have a great platform and our platform will continue to operate at a very high level.

Rich Anderson - BMO Capital Markets

So if someone came to you for 28 bucks a share, I mean, you have to consider it, right?

Alan D. Gold

Didn’t I say twice?

Rich Anderson - BMO Capital Markets

All right, 40, whatever. Okay, thanks, appreciate it.

Operator

Gabriel Hilmoe from UBS is on the line with a question.

Gabriel Hilmoe - UBS

Just looking at the leasing that you did in ’12 and now the target that you have for ’13, I guess as you look at ’13, you know, what has to happen not to hit that range that you put out there and not [inaudible] again. And beyond that, not hit the mid-point or even approach the low end of FFO guidance?

Kent Griffin

So you were breaking up a little bit, so I’m not sure we heard all of the question. I think the primary question was related to what could derail us from our plans and …

Gabriel Hilmoe - UBS

Right, how could we not hit our targets?

Kent Griffin

Well, I think, you know, as excited and as confident as we are, we have to keep in mind that 2012 was our best leasing year ever and so – and he environment is very good, but as we get more fully leased, we have less and less space available. So the incremental leasing targets will get harder and harder to hit. We do have 700,000 square feet of expirations in ’13 and we’re very focused on those, so we – we’ve got, you know, we still have our wood to chop that we need to chop.

Gabriel Hilmoe - UBS

Okay. And then just looking at the same-store NOI number for ’13, and I think you mentioned cash [inaudible] spreads were up 1% in Q4. What are kind of the expectations of renewals for the remainder of ’13?

Kent Griffin

So for ’13, obviously the largest renewal is in Cambridge where the Merck space is rolling out and that space is roughly end market. The next largest, which is really the biggest delta is in the Elan space, which as we announced when we bought the property, those rents have roughly doubled – double market. There’s a significant roll down to market, although we were – remember, we were recognizing GAAP revenues based on the calculation to bring that back to market. So no real change on a GAAP basis but from a cash basis, that space was a significant and the rest of the portfolios were in line with the market.

Gabriel Hilmoe - UBS

All right, thanks, guys.

Operator

(Operator Instructions). And Alan, we have no further questions. Do you have any closing remarks?

Alan D. Gold

Yes, thank you and I’d just like to thank everybody for joining us here today and we’re signing off. Thanks.

Operator

Thank you, ladies and gentlemen. This concludes the conference. Thank you for participating. You may now disconnect.

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