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Alexandria Real Estate Equities, Inc. (NYSE:ARE)

Q4 2012 Earnings Call

February 7, 2013 3:00 PM ET

Executives

Rhonda Chiger – IR

Joel Marcus – Chairman, President and CEO

Steve Richardson – COO and Regional Market Director

Dean Shigenaga – CFO, SVP and Treasurer

Peter Moglia – Chief Investment Officer

Analysts

Jamie Feldman – Bank of America

Quentin Velleley – Citi

Sheila McGrath – Evercore

George Auerbach – ISI Group

Dave Rodgers – Robert Baird

Jeff Theiler – Green Street Advisors

Michael Bilerman – Citi

Operator

Hello, and welcome to the Alexandria Real Estate Equities, Inc. Fourth Quarter and Full Year 2012 Earning Conference Call. My name is Myesha and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Rhonda Chiger. Please go ahead.

Rhonda Chiger

Thank you and good afternoon. This conference call contains forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company’s Form 10-K Annual Report and other periodic reports filed with the Securities and Exchange Commission.

Now, I would like to turn the call over to Mr. Joel Marcus. Please go ahead.

Joel Marcus

Thanks, Rhonda, and welcome, everybody, to the Fourth Quarter and Year End Earnings Call, and Happy New Year to everybody. Sorry for the late notice, we were going to release next week, but I’ve got to fly to Basel to meet with Roche’s CEO and so we needed to kind of accelerate our earnings release, so apologize for the inconvenience.

ARE’s solid progress in both the fourth quarter and in 2012, I think positions us well for 2013. It reminds me of Lou Holtz’s quote, of football fame: Ability is what you’re capable of doing; Motivation determines what you do; But attitude determines how well you do it.

And I think it’s fair to say in each and every one of our key CBD cluster markets, we are the landlord of the choice and most admired life science real estate company because of our unparalleled knowledge, expertise and experience and really a can-do attitude for our clients and world-class network.

And, really, it’s a great credit to this first-in-class team and want to thank them for all they do during this past year. We’re also very proud of our accounting and financial groups, best-in-class disclosure supplement introduced about a year ago and continually enhanced and we hope that you appreciate the work that’s gone into that.

What I want to do is really look forward to 2013. I think 2013 will be a breakout year for Alexandria. We certainly intend to increase per share value demonstrably and as a leader of life science, both on a branding and quality leadership standpoint, we expect to continue to get wider access to lower cost capital, growing that per share earnings, solid recycling of assets, positive internal growth and increasing dividend.

We expect that solid revenue growth from development and redevelopment will continue we think for NOI. Dean will talk in depth about same-store, but we expect that growth to be driven increasingly or by increasing occupancy and strong leasing, and believe for 2013 we’re already nicely outpacing our internal model for leasing projections.

We expect to achieve our debt to adjusted EBITDA target of about 6.5x by fourth quarter, and we expect to continue to successfully recycle assets to reinvest in high-quality CBD best-in-class assets, as well as achieve our targeted 15% to 17% non-income producing real estate as a percentage of gross asset value.

In January 2013, we began the monetization of our 75/125 Binney Street, Cambridge parcel, the second out of four key parcels in that development; the first one to Biogen Idec, which will be delivered in the fourth quarter, and they’ve had a sterling year and that, by the way, a very solid yield.

ARIAD Pharmaceutical is signed to take almost a quarter million square feet. We think it’s about 63% of the project and we think there is a very high and strong likelihood they’ll take the balance. It’s a first-in-class oncology company, which received early FDA approval for their first-in-class rationally designed small molecule unique cancer drug, ponatinib. I had the privilege of serving on ARIAD’s board for many years and it is truly a first-in-class, second cohort commercial stage biotech company.

As was noted in the Boston Properties Call, Cambridge – Boston Cambridge is undergoing really an astounding boom in lab space development and we’re a significant beneficiary thereof with two out of the seven projects.

Moving on to our project in New York, beyond Roche, we’re in LOI negotiations for seven additional floors of about 30,000 square foot – square feet each or approximately 210,000 square feet with eight different entities, we feel all lab space users. We feel that the pace of lease-up will beat our internal projections, and most of these are 10-year plus leases with strong rental rates with escalators. I’ll come back in the moment and talk about yields and costs.

Moving on to the recycling, really our sales and asset recycling program, really headed by Peter Moglia. In January, you’ll note from the Supplement we did close the 1124 Columbia Street project, a project we actually bought pre-public, together with two land parcels for about $42.6 million carry-backs on paper. This is being converted to medical office and almost all the tenants are rolling out.

The strategy was to exit the First Hill submarket; it’s no longer a lab market. It really is a hospital and medical office market, to rid vacancy coming in a non-lab market and also to recycle to core CBD assets, so that met all of our goals there.

So this month in February we closed on 25, 35 and 45 West Watkins. This was, again, a pre-IPO asset, together with 1201 Clopper, which was a build-to-suit we did a number of years ago for Digene, which has been acquired by QIAGEN. That lease rolls in a couple of years and that property will have to be multi-tenanted. And there’s quite a bit of office vacancy in the West Watkins property, together with a land parcel that’s adjacent thereto, $41.4 million.

So, again, the strategy was to lighten our exposure to the Gaithersburg submarket, as we’ve spoken about on a number of occasions, rid coming vacancy in a suburban market and recycle to core CBD, and we’re very proud of that Peter’s team for executing in a really excellent fashion.

I want to address and Steve will speak a little bit about this when it comes to San Francisco, the important issue of yields. And I think it’s – investors should really take great comfort that Alexandria is really besting most others on the yield front. And let me walk you through examples. I think if you look at others build-to-suit yields, assuming you can find them, and acquisition cap rates in this low cap rate market, it’s pretty clear that tech, either developments or acquisitions, are not beating our yields and neither our New York City or Cambridge Boston CBD office development or acquisitions, so we feel very comfortable about what we’ve been doing. In fact, our patented lab space niche, which we invented, is in fact a mainstream product now and should be viewed as such.

If you go to Page 3 of the Supplement at front end of the press release, I should say, and you look at the development and redevelopment of the 75/125 Binney street project, north of 8% yields. We feel very comfortable with those yields. And I think it’s – we’re proud to say that those probably beat most other yields in the Boston or Cambridge market that we’re aware of. We know of some assets that may be coming to market at either 6% or sub-6% cap rates. And so we feel we’re doing much better than that. I’ll come back to New York in a moment.

On the Longwood asset, again, a north of 8% yield, we know that there’s another commercial building in that market that was over $1,000 a foot with probably a 5% or 6% yield on it, and other developments in the Greater Boston area that certainly don’t come close to a plus 8% yield.

And then if you look at our San Diego, Seattle and a number of the other developments and redevelopments we’ve delivered, outside of one or two that have struggled along like East Jamie Court, again, we feel like we have a very strong yield production; so we feel a lot good about that. And I think few if any others are going to beat us either on an acquisition or a development with these yields.

When you look at New York, there’s some, I know, thinking about while why can’t Alexandria build to a 7% or 8% in New York. While given the cost of building in New York, certainly the carry costs during the Lehman downturn, we feel very good about a north 6.5% yield. High-quality tenants, long-term leases, good escalators. And I think it’s fair to say that those who are acquiring first-in-class CPD assets in New York don’t come close to that kind of a yield. We know buildings like the GM and other buildings, which have very little lease rollups, were acquired at substantially less than those rates, even though they’re a little bit different product type.

When it comes to cost in New York, it’s pretty clear New York is just an expensive place to do business, but if you compare it say to Boston, Longwood areas and others, I think it – it’s not unusually high, when you look at the carry through the Lehman downturn, which was longer than we expected. That certainly adds to bases quality of finishes and, obviously, building a podium platform infrastructure is very expensive in New York, but we had no systems damage during the storm, so I think our design and our enhancements made a big difference.

Moving on to the life science industry, many real estate analysts and investors still fundamentally, I think, don’t understand this industry. And I think it’s fair to say that by all accounts 2012 was, in fact, a very positive year for both the bio and pharma sectors of the industry.

According to Patel and R&D Magazine, U.S. life science real estate, and that’s just in the U.S., is expected to increase this year by 1.5% to a very healthy $82.7 billion of R&D spend. Bio and pharma had excellent 2012 capital markets performances. Pharma is continuing to be very profitable, stock prices are doing by and large reasonably well, and they’re sitting on $197 billion in cash to fund R&D, M&A and partnering to fill pipeline.

Clearly, open innovation and external research is the key to today’s focus and key CBD life science clusters, and this is really where ARE’s sweet spot is. So, the Venn diagram is substantially overlapping with where we have class A assets in Cambridge, New York City, San Francisco, and San Diego. We have the locations they want. We have the knowledge and expertise they want, and we have the innovative and collaborative environments they desperately seek.

Robust set of second cohort commercial stage biotech companies are driving demand and space needs in a number of these markets, including ones like ARIAD and Onyx that we’ve landed.

Demand for clinical development in later stage space is not a negative; it’s also a big positive, and we’ve captured key requirements from Roche in New York City and Biogen Idec in Cambridge for this type of space. This is a plus, as I said, not a negative as some have opined.

Headlines from December 10, 2012 Barron’s, their feature article on the drug industry, Looking Beyond the Patent Cliff, really, the key byline was after a decade of running a large patent cliff, Big Pharma is reaching the other side, with rich dividend yields and opportunities for growth.

In 2013 six of the top 20 selling drugs will be biologics or are biologics and that’s going to boost exclusive marketing windows for drugmakers because biologics can’t be easily copied.

Biosimilars are generic biologics. In other words, clearly, we’ll not see meaningful sales growth until 2018 to 2020 and I think that gives us great comfort.

And then, finally, on the heels of an approximately 12% dividend increase in 2012, the board’s likely to seek to continue support an increasing dividend in 2013 to share our increasing cash flows with shareholders.

So with that said, let me turn it over to Steve for some details on the lease end of things.

Steve Richardson

Thank you, Joel. I’ll go ahead and focus my comments on two key areas, the first being the Q4 and 2012 leasing results, and then we’ll look forward a little bit at the status of the 2013 roles for each region.

So the company delivered strong operating results during 2012, leasing a total of 3,281,000 square feet in 187 leases and finished with a solid Q4 2012, leasing a total of 678,000 square feet in 47 leases. I’ll provide more color on this consistent performance in each region, but will note that these statistics really highlight the company’s ability to engage its client/tenants in a way that is unique and differentiated in the real estate industry. We’re bringing to bear our entire operating platform, including our proprietary life sciences underwriting teams, to fully engage with these clients, not only on an operational level to provide class A service for mission critical facilities and enhance amenities to support an intrinsically collaborative culture, but also on a business development level to partner and leverage a best-in-class network of industry leaders.

So, as we look at Cambridge, we leased a total of 924,000 square feet during 2012, including 92,000 square feet of that executed during Q4. We had a nice occupancy increase this past year of 70 basis points from 93.9% to 94.6% and rents for Class-A product have solid support in the mid-to-high $50 triple net range and significantly higher for new build-to-suit product.

The last quarter featured a 47,000 square foot lease renewal with Novartis in Tech Square. No downtime, no tenant improvements, with a nice 3% increase. The balance of the suites leased last quarter range from 2,500 to 9,200 feet and so we’re encouraged with the early stage segment, as well as an important complement to the second cohort of homegrown companies that Joel mentioned, that are commercializing critical lifesaving products, continuing with the announcement in early 2013 of the long-term lease of 244,000 square feet to ARIAD.

The overall Cambridge market is healthy. As the vacancy rate decreased a full 670 basis points from 17% to 10.3% during this past year, as a result of the highest absorption rate since 2000. It is also important to note the expansion of really some of the key pillars of the life science industry, with significant construction activity underway. Biogen is building half a million square feet, Novartis another 570,000 square feet, The Broad Institute’s 250,000 square feet, Pfizer’s 231,000 square feet, and Mass General’s Reagan Institute 75,000 square feet are a clear indicator of the dynamic market in and around Alexandria’s core Kendall Square and Binney Street Holdings.

Moving down Maryland. Given our significant attention to this cluster with the regional team during 2012, we’re very pleased to see the market stabilize and believe the hard work is paying off with pretty significant performance during that year. We leased 547,000 square feet throughout the year and including 171,000 square feet during Q4. We did experience a bottoming out of our occupancy rate of 89.4% at the end of the third quarter and we’ve seen an improvement of 150 basis points to 90.9% at the end of the fourth quarter.

The key leases completed during Q4 include an important mission-critical facility for a local government agency, Montgomery County, leasing 73,000 square feet for nine years at a slight increase on a cash basis, no downtime, and a modest refresh improvement allowance averaging $15 per square foot. This cluster’s trending at a vacancy rate of 7% and if we experience reasonable demand again during 2013, we believe we can continue to incrementally improve our occupancy and rental metrics.

Also, it’s important to note the details of the 70,000 foot lease in this market that negatively impacted our cash results overall this quarter. This facility is ultimately a core holding and we now have a long-term lease through the end of 2021, and although it did have a cash rent roll down, it only required a very modest investment of $5 per square foot in tenant improvements. So all things considered a worthwhile trade-off as this helps stabilize the portfolio going forward.

Moving over to San Diego, the regional team leased a total of 354,933 square feet during 2012, including the lease of a little more than 76,000 square feet during Q4. When you step back and realize the operating asset base has grown significantly year-over-year from a little over 2 million square feet to 2.7 million square feet, this represents a remarkable 34% increase, nearly all of which is represented by new class A facilities with creditworthy tenants.

Occupancy is a solid 95.1% in this past quarter. We were pleased to partner with Genomatica, one of the rising stars in the industrial biotechnology industry on long-term lease of 10 years for 68,000 square feet during Q4. The majority of the tenant prospect activity continues to be in the Torrey Pines and UTC submarkets, as the flight to quality continues in this strong market.

The overall market vacancy has increased slightly by 80 basis points, from 9.3% to 10.1% compared with the prior year, largely as a result of one project that has been placed on the market by a non-life science developer. So it remains to be seen if it will represent significant competition.

Moving north to the Bay Area, we leased a total of 592,000 square feet during 2012 and 78,000 square feet of this total during Q4. Occupancy increased 110 basis points, from 96.7% to 96% – 97.8% during the year.

The Q4 leases were highlighted by a broad set of renewals in each of the three key submarkets. The Stanford cluster remains very healthy with a vacancy rate of sub 5% and lease rates in the $30 to $36 triple net range.

Alexandria also congratulates one of its key Stanford cluster anchor tenants, Map Pharmaceuticals and its recent acquisition by Allergan, a $32 billion New York Stock Exchange traded company. Map will continue operating in our facility in the Stanford cluster and Allergan presence will surely bolster the overall strength of the cluster as well.

The South San Francisco cluster is a tale of two cities, ultimately. The overall vacancy rate is certainly high at 11.9%, but as you drill down and segment the market, the vacancy rate for the moderate to small-size suites is just 2.4% and this is exactly where we focused our efforts and have been successful.

Lease rates in the South San Francisco for these suites range from the low to mid-$30s triple net. The Mission Bay cluster has no laboratory suite vacancy and has ongoing activity from the three market areas we anticipated over time: life science companies and institutions, translational and clinical operations and information technology companies.

UCSF has an RFQ/RFP on the street for a 300,000 square foot consolidation of its Laurel Heights campus and Meraki’s recent establishment of a 110,000 square foot headquarters in Mission Bay and subsequent acquisition by Cisco, clearly, validates this location as desirable for the tech sector, which continues its boom, as we’re tracking 2 million to 3 million square feet of demand.

Rental rates have risen to the mid-to-high $50s industrial gross in SoMa and Market Street corridor and higher for new build-to-suit projects. The 499 Illinois project is directly benefiting from these positive market dynamics. We are pleased that discussions are progressing in a serious manner with potential anchor tenants, ranging from 80,000 to 120,000 square feet in each of these market segments.

Specifically, we’ve had a number of tours and meetings with senior teams of a few key tenant prospects and are now progressing to test fits of interior improvements with engineering and facility teams. The response to both the testimonials from key leaders and the Mission Bay cluster in these meetings and the detailed set of cutting-edge amenities we’ve designed and plan to build featuring enhanced collaborations spaces has been very positive as well.

As Joel mentioned, let me go ahead and touch on yields in this market and others for a moment. As investors really should take comfort in the solid yields we delivered recently in Cambridge and San Diego, and the South San Francisco market, as well, notably, the East Grand facility in the 8.5% range and the anticipation of delivering within our yield range of mid-6% at the 499 facility. This is a contrast for a number of the tech sector projects in SoMa, reported to be in the 6% range as indicated by other leading REITs. So important to note, these projects are being delivered at attractive yields in today’s market and often times with longer leases and higher credit quality than the tech factor.

At North Carolina and Seattle, we leased 237,000 square feet during 2012 in North Carolina, including 19,000 feet in Q4 and 124,000 square feet during 2012 in Seattle. North Carolina’s occupancy increased 120 basis points from 94.3% to 95.5% this past year and we anticipate fresh demand in early 2013 will continue to improve those metrics. Seattle’s occupancy dipped from 96.7% to 93.9% year-over-year, substantially impacted by new vacancy in one facility where we’ve had encouraging momentum and anticipate a positive outcome over the next couple of quarters.

So, let me look forward for a bit and the status of the 2013 roles. We have approximately 1.1 million square feet or 7.9% of our operating properties slated for rollover during 2013 and consider it very manageable. 8% of that or 89,000 square feet are leased; 21% or 235,000 square feet are in active negotiations; 16% or 176,000 square feet is targeted for redevelopment. And that’s comprised entirely of a non-lab acquisition that we closed during 2012 in our San Diego market located at a AAA Torrey Pines location. And then, finally, we have 55% or 620,000 square feet in early discussions in marketing.

Let’s go ahead and review that 620,000 square feet in greater detail by each region. 105,000 square feet in the Greater Boston market has 60% of the space located in Cambridge and the adjacent urban markets. Nearly half of this square footage is rolling in November and December of 2013. The lab suites are in a very nice size range of 4,000 to 12,000 square feet, which are very desirable in today’s market. So, we’re encouraged with our prospects there for the year.

205,000 square feet is located in the San Francisco, Bay Area market. We’ve got a set of two buildings comprising 21,000 square feet in the Stanford Research Park. It’s well-positioned for a variety of life science or clean tech tenants, and another 14,000 square foot suite in the Stanford cluster is in the marketing phase.

We’re also in early discussions with the existing tenants for nearly 85% of the 100,000 square feet distributed across a set of small to moderate-sized suites located in the greater South San Francisco market. And, finally, about 60,000 square feet located in the Mission Bay cluster in a number of high-quality moderate-sized lab suites and early discussions are going well with existing tenants.

Moving south. We have 135,000 square feet in the San Diego market, primarily in the Sorrento Valley and Sorrento Mesa markets. The two largest blocks, comprising a little less than half, are about a 50,000 square foot chunk, should provide a favorable outcome with an existing tenant discussion and the remainder we’re evaluating the potential for placing about 62,000 square feet on the market for sale as leases roll during 2013.

We have 101,000 square feet in the Maryland market, distributed across each of their submarkets. We’ve ultimately sold and exited the properties that we discussed earlier that contained 47,000 square feet of these roles as part of our asset recycling plan. And we’re working with an existing tenant in the early stages for 38,000 feet, and actively we’re marketing the remainder of those suites.

Finally, 52,000 square feet in the Southeast market. We’re in early discussions with tenants to resolve all 30,000 square feet we have in North Carolina and we’re actively marketing the remaining 20,000 square feet to new prospects. And just 7,000 square feet in Seattle, with the largest suite rolling in December; so we’re in very good shape there.

So, in conclusion, the company really delivered on solid leasing results during 2012 and, although the second half of the year did not have the same volume as leasing as the first half, the overall trend is certainly positive as the operating portfolio occupancy has improved this past quarter by 40 basis points from 94.2% to 94.6%, and improved 160 basis points from 90% to 91.6% when you include the redevelopment assets.

We have a manageable set of rollovers during 2013 and are poised for meaningful progress and lease-up of properties in the redevelopment and development pipeline.

And, finally, we have continued momentum on the build to-suit front in our key markets as we’re engaged in ongoing discussions with existing tenant/clients and a new tenant product – prospect for establishing new Class-A facilities in our triple net locations.

I’ll hand it off to Dean for further commentary.

Dean Shigenaga

Okay. Thanks, Steve. We reported FFO of $1.16 per share diluted as adjusted for the fourth quarter. Our FFO per share results are in line with our range for guidance provided on Investor Day in December of 2011.

Moving on to our core operating metrics, we had significant success with the execution of the significant growth NOI from development and redevelopment deliveries. Fourth quarter, NOI from continuing operations of $107.5 million was up 6.6% over the third quarter and up 10.1% over the fourth quarter of 2011. In 2012, we completed approximately $1.1 million rentable square feet of value-added development and redevelopment projects, aggregating almost $700 million at an average GAAP yield around 8%. Approximately 60% of this was completed and delivered at the very beginning of the fourth quarter of 2012.

Same-property performance for the fourth quarter, it really was the third consecutive quarter of an upward trend in cash same-property performance. The fourth quarter of 2012 cash same-property NOI growth of 6.3%, up over the solid third quarter 2012 cash same-property NOI growth of 4.3%.

We projected the strength of our cash same-property performance continues into 2013. Our projection for 2013 cash same-property performance is up from 4% to 7% over 2012. 2012 cash same-property performance of being up 3.5%, was driven primarily by the following items: a significant increase in cash rents from the burn-off of free rent at a couple projects, in particular, the East Tower in New York City, drove about $10 million increase in cash rents, and our build-to-suit-it for Onyx at 259 East Grand in South San Francisco drove about $1 million increase.

There were some offsetting increases resulting in a decrease in some cash rents. Primarily in greater Boston, we took some temporary downtime to transition space at 300 Technology Square and 790 Memorial Drive during 2012.

These spaces were delivered a few months after rollover in the year, and will contribute to increases in cash same-property performance in 2013. Suburban, Washington D.C., we had about 100,000 square foot amount of space that rolled in the second quarter at Virginia Manor, with a drop in occupancy to about 42% as of June 30.

We have leased a portion of this space in the second half of the year and increased occupancy to approximately 56%. Same-property operating expenses for the fourth quarter were up 8% over the fourth quarter of 2011, primarily related to an aggregate increase of approximately $2.6 million in recoverable taxes and repairs and maintenance expenses. The increases in property taxes were related to recently completed construction projects.

The same-property operating expenses for the year were up about 3.9% over 2011. The increases in same-property operating expense were primarily related to an increase in recoverable repairs and maintenance by approximately $2.6 million. Excluding this $2.6 million increase in repairs and maintenance, same-property operating expenses would have been up about 1.7%, when compared to 2011.

Before we move onto balance sheet milestones and strategy, let me briefly comment on certain important preconstruction activities. During the quarter, we commenced preconstruction activities for certain land parcels in order to reduce the time to deliver product to prospective tenants. For example, we are advancing entitlement efforts at Campus Pointe for expansion capacity on the site. Additionally, at Illumina Way, we are advancing efforts to increase entitlements and adjusting the designs for both building six and building seven for the additional entitlements.

Moving onto balance sheet matters. During the year, we executed our capital strategy and proved that we have access to diverse sources of capital that we believe is strategically important to our long-term capital structure. These sources of capital included real estate asset sales, secured construction project financing, an unsecured line of credit, unsecured notes payable, joint venture capital, preferred stock, and common stock issued through our at-the-market common stock offering program.

It is also important to note that we completed approximately $577 million of construction in 2012, limited our issuance of equity capital to $98 million and ended the year relatively leverage neutral at 7.3 times on a debt to EBITDA basis.

In 2013, our balance sheet goals include execution of our capital recycling program for investment into high-value Class-A urban assets, continue to minimize the use of common equity capital and lower our debt-to-EBITDA to approximately 6.5 times.

At a very high level, let me provide an overview of our strategy for key components of our sources and uses of capital. Keep in mind that this is high-level and capital is fungible between the two buckets, I’m going to describe, but this should provide a better understanding of our capital strategy for 2013.

Let’s split the capital needs for 2013 into two buckets. One bucket will fund construction and the other bucket will focus on our goal to reduce leverage. The certain amounts I’m going to describe may represent midpoint amounts from our 2013 guidance. The first bucket represents funding for construction spending of $570 million for 2013. Sources of capital aggregating about $667 million or $97 million in excess of our construction forecast is projected to come from the following: $140 million from cash flows from operating activities after dividends; $377 million from asset sales, and this includes the $84 million of sales that we completed to-date in 2013; and, lastly, $150 million of common equity proceeds under our ATM program.

The other key bucket will focus on our goal to reduce leverage from approximately 7.3 times as of 12/31/12 to about 6.5 times by the end of 2013. The key sources that will allow us to achieve our leverage goal includes a combination of EBITDA growth and a portion of the excess capital from the first bucket, I just mentioned. The key value-added project deliveries scheduled for 2013 as shown on Page 28 of our supplemental package include the following: the ground-up development at 225 Binney Street in Cambridge, which is 100% leased to Biogen Idec; a portion of the space at 430 East 29th Street in New York City, which is the West Tower related to our lease with Roche, and keep in mind that this delivery, in particular, is very close to the end of the year; and then, lastly, almost all of our redevelopment projects and, again, these projects have significant pre-releasing.

Moving on to asset sales. A very big picture here, I think we hit our target for 2012. I think the challenge here from time-to-time is making an estimate of the timing of closing transactions is always a bit tricky to predict, but we completed $84 million of the sales in 2013, bringing our total sales since January 1, 2012 to $159 million. Our original 2013 asset sales target was $300 million and we had about $77 million rollover from December of 2012 and deferred into 2013 for an aggregate of $377 million, now targeted for 2013.

We have made progress since Investor Day in December as follows: $84 million in sales completed to-date in 2013; we have about $55 million under contract; we have about another $140 million at various stages, including letters of intent, early negotiations; and, lastly, preparation of marketing packages.

Included in this $140 million is our targeted partial sale of an interest in a land parcel related to the 50%/50% joint venture for 75/125 Binney. And, lastly, $98 million that remains, which we’ll identify in the next quarter or two.

Moving briefly on to unsecured bonds. I just want to point out that we’re unable to comment on the timing of our bond offering, since it will subject to market conditions, but let me provide some color. Given the continuing positive environment and low interest rate outlook we expect to issue unsecured notes in 2013. Our strategy remains focused on 10-year bonds, given attractive pricing for longer tenured paper and our desire to both expand and ladder our maturities. Tenured treasuries are hovering around 2% and spreads have tightened. So, 10-year bonds today for Alexandria should be inside of 4%. Again, specific pricing for Alexandria will be at market when we execute our transaction.

Lastly, on guidance. Our guidance for 2013 was increased by a couple of cents for both EPS and FFO per share diluted. Our updated guidance is as follows: EPS diluted in a range from a $1.41 to a $1.61; FFO per share diluted in a range from $4.44 to $4.64. Our guidance for 2013 was increased to reflect an improvement in our occupancy forecast for the year, as well an increased pace of leasing.

Additionally, the increase reflects important preconstruction activities related to entitlement are designed for expansion opportunities related to a few campus locations. As a reminder, our goal with these preconstruction efforts is to reduce the time to deliver ground-up development projects to prospective tenants.

Our guidance for 2013, also includes our current assumptions related to the funding for our ground-up development at 75/125 Binney as follows: construction financing, somewhere in the 60% loan-to-cost range; the transfer of a 50% interest to a JV Partner; and our capital investment in the range of $40 million to $50 million, all of which we expect to be funded in 2013.

Lastly, disclosure of detail assumptions included in our overall guidance was disclosed beginning on Page 7 of our press release.

With that, I’ll turn it back to Joel.

Joel Marcus

Okay, operator, we – we’ll take questions now, please.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question is from Jamie Feldman with Bank of America. Please go ahead with your question.

Jamie Feldman – Bank of America

Great. Thank you. So, I know you guys spent a good deal of time talking about yields and comparing yields to office on the call. I guess, where – what investors might be trying to get their head around is the portion of your total investment that goes to the lab space build-out. How to underwrite that or how you guys think about underwriting that and the return on that versus kind of your core and shell office building? Maybe if you give us a sense of how you guys – when you look at acquisitions or even development, how you think about the relative investment and those two pieces of your cost structure.

Joel Marcus

Well, if the question – Jamie, is the question presume that somehow the above-standard improvement from office somehow is not valuable for the long-term? Could you expand upon your question? Because, obviously, the return is the overall return of the project, it’s not segmented core and shell versus improvements. But if we have a build-to-suit, generally, they tend to be 10-year, 15, 20-year leases. These are yields that – and the yields that – I think it’s important to note these are initial stabilized deals, so these don’t include all the increases over time, which I think investors and analysts often overlook as well, but these are yields on the full package.

Peter Moglia

Yeah, I guess one way I could answer it, Jamie – it’s Peter Moglia – is that when we do look at pricing build-to-suits, we do have a lower expectation for return on the core and shell and the TIs that are infrastructure 40-year type of duration. And then we price the TIs that we think may not recycle as well or for as long at a higher rate to blend into a total that we believe is above what exit cap rates would be at the time.

Jamie Feldman – Bank of America

So, the parts of the piece that doesn’t recycle as long – how do you think about the duration? Or how long those last? Or do you assume that those only last as long as the lease?

Peter Moglia

Well, I would say that we would – we amortize that, the majority of that into the term of the lease. So, if it’s a 10-year lease, we’re getting that back in 10 years.

Steve Richardson

Right, and Jamie, I think it’s constructive. I mean, a couple anecdotes we mentioned Novartis renewing the lease there in Tech Square. There were no TI dollars; the one down in Maryland were $5 a foot. We had a large one in South San Francisco a year or so ago, it had been leased for 10 years. We had a 10-year renewal and I think we had a $15 to $20 a foot tenant improvement allowance there. So – in the overall cost per square foot of these facilities, it’s fairly nominal.

Jamie Feldman – Bank of America

And then can you just give us a sense of where market rents are across your major markets? And whether you’re seeing any material growth at this point?

Steve Richardson

Yeah, I think in the Cambridge market, we’ve got very solid support as we talked about in the mid-$50s, triple net for existing product. So, I think we’re doing well there.

Joel Marcus

Non-build to suit.

Steve Richardson

Right, non-build to suit, absolutely, that’s existing product and, again, as we talked about build-to-suit’s significantly higher. So there is certainly is a step function as these companies – we’ve talked about this a lot and we’ve seen improve out now, with Onyx, with ARIAD, as they’re looking to aggregate around a campus to build a company for the next 10 or 15 years, they’re really driven to this build-to-suit type of product and they’re absolutely willing to pay for that step-up in rent from the existing product that’s out there.

Moving across the markets, we think Torrey-Pines has certainly stabilized in that mid-$30s, triple net range, South San Francisco, again, segmenting the large blocks of space from the small space, similarly low to mid-$30s, triple net.

Peter Moglia

Yeah, I could just comment on Seattle. Seattle has remained a very high-rental environment, even though the activity hasn’t been strong as it was maybe two or three years ago, but their rents are between $45 and $52 for the Class-A space.

Maryland has – it experienced a drop over the last couple of years, but we’re encouraged by the fact that we’re now quoting things in the mid-to-high $20s and getting a lot of traction with that. And then in Research Triangle Park things for the first class space is also similar to Maryland in the $25 to $30 range. And then in New York, which obviously Joel commented on, is very high-cost environment, we’re able to translate that to very high rents. And without giving too much away, I would say that we are in the mid-to-high-$70s to low $80s for our projections for the West Tower.

Jamie Feldman – Bank of America

Okay. And then, finally, just any thoughts on sequestration and what do you think it might be in to your leasing? Any expected slowdown?

Joel Marcus

Yeah, I think – I mean, my own personal view is that it’s likely to happen, it may not last for a prolonged period of time. We know just through my work at the NIH and others that there’s no one on either side of the aisle, as well as the Executive branch that wants the NIH budget cut, so we think a deal will be made post-sequestration as part of another budget package.

I think the only area that we see it impacting is really the institutional side, because the institutions are the ones that get direct grants from the NIH. The pharma and bio side, zero impact to those guys, by and large. But I think a project like Longwood or projects where you’d be looking primarily at an institutional base, a 501(c)(3) through university or research, those are the ones that would be on pause until that sequestration is resolved. But my guess is, it will be resolved by June 30, if not sooner, in a positive fashion.

Jamie Feldman – Bank of America

So, when you think about your expiration schedule, is there anything there that might be slow to renew based on...

Joel Marcus

We have one roll of about 60,000 with a GSA lease in one of our markets, and we expect to renew that, and – because it’s mission critical – we’ve been told that. And as far as bigger leases, I think we’ve said before, the only lease we have that really is heavily dependent on NIH is a lease in – rolling in 2016 with the Scripps Research Institute, which is the largest non-profit in the U.S., but there’s no near-term lease exposure to that, that’s 2016. Other than that we have nothing coming up in 2013.

Jamie Feldman – Bank of America

Okay. Thank you.

Joel Marcus

Yeah. Thanks, Jamie.

Operator

Our next question is from Quentin Velleley with Citi. Please go ahead with your question.

Quentin Velleley – Citi

Hey, there. Just in terms of the income producing assets that you’ve sold recently, where your GAAP yields are sort of above 15% and I assume the cash yields are actually higher than that as well, I guess my question is how many of these properties are there in the portfolio that are in the suburban (inaudible) markets? Lab space might not be viable long-term and the rent’s very high, can you just give us sort of a sense of how many more of these assets there are?

Joel Marcus

Well, first of all, let me may be correct your view. When you sell an asset – and Peter’s the one that’s handled that and can give you chapter in verse – it’s really a mischaracterization and a misnomer to characterize this as being sold at some GAAP yields. Those were ramps that were produced in the past and in the Columbia – 1124 Columbia we had already removed one of the key anchors and move them down to South Lake Union. Another tenant, we didn’t choose to underwrite, moved to another landlord. And then another tenant chose to elect an early termination.

So, if you talk about a GAAP yield on that project of 15% or 17%, it makes no sense. It’s really on a per square foot basis and it really is on a – on the buyer looking out what you can pay for repurposing that. So that’s how you have to look at it. And Peter will talk more about – we don’t have too many of those in the portfolio on a value basis, but it is pretty different.

Same thing on West Watkins; we had almost 60,000 square feet that’s rolling this year. We have another building that the tenant is likely to exit, which is the main anchor there in a couple of years. So, again, you can’t look at it as we’re investing in it on a yield or you are selling on a yield basis. But, Peter.

Peter Moglia

Yeah, thanks, Joel, I guess, Quentin to give you an example of that 1124 Columbia building may show as a – I don’t know – 15% GAAP yield or something like that right now. But after these tenants exit, I think that would go down to a 3% and you’d be holding an asset in a market that is just not in favor with lab tenants anymore and its highest and best use is really medical office. So I think there was a really good marriage between us and the buyer where we were able to cash out of an asset. They did really well for us for a long period of time, but no longer was needed. We could take that cash and put it into higher earning investments.

Joel Marcus

Yeah, let me just say this about that asset. We bought that in 1996 with zero down, the yield on the original sale leaseback to the Fred Hutch was something in the range of 10% to 11% and that asset has cash flowed and had been very, very accretive to this portfolio. And now we’re at a position where that market, as Peter said, has gone totally MOB and hospital. So, again, look at it for what it is, not for maybe some theoretical cash flow. But do you want to talk about other exposures?

Peter Moglia

Yeah, and a little more color on the 1201 Clopper asset, as Joel alluded to, we have a tenant in a couple of years that has told us that they’re – they’ve told us that they’re moving out. They have their own campus already in another other part of the I-270 corridor there and their plan was to move. So, that building is quite big. I think it’s somewhere in the neighborhood of about 140,000 square feet and it’s also a mix of office, warehouse, and lab.

And we took a look at that strategically and said: this is Gaithersburg, it’s not Rockville, which is really the place where people want to be these days; do we really want to sink a large amount of capital into re-tenanting that building? And the answer was: no, it didn’t make sense. So, we found a buyer who was really willing to put in the work and the capital to reposition it. And, again, I think that was a good marriage between us and them, and we got a fair price for the income that’s left on it.

So, to talk about what’s remaining and we do have a few assets across the portfolio, some in San Diego that we’ve identified that have very similar attributes there. They were great performers for a while, but the market has really moved into more high-quality areas.

So, I don’t know if I want to disclose too much more than that, but suburban Pennsylvania’s another area where maybe some of the assets have longer-term leases than maybe rolling in the next two years. But down the road, we don’t really want to own those assets anymore. It’s just not a market that we want to be invested. So, we’re looking at potentially disposing of those as well.

Joel Marcus

Yeah, but as a percentage of GAV, it’s pretty minor.

Quentin Velleley – Citi

Okay. But for the non-income producing assets – sorry, for the income-producing assets that you’re looking at selling this year, should we expect to see similar yields to what you’ve done? Or a little bit lower?

Joel Marcus

Well, again....

Peter Moglia

Yeah, I mean, I guess it depends on what yield you’re looking at. I mean, we haven’t announced – we have disclosed held-for-sale in Worcester, a portfolio we have there.

Dean Shigenaga

Yeah, there’s only – the two assets we sold in 2013, one was actually the asset that was held-for-sale as of year-end. One of the assets did not meet the qualifications for held-for-sale as of year-end, so it was actually not in the discontinued operations numbers. The asset that Peter’s referring to, there is a third asset that’s in the Q to be sold in the first quarter. That asset’s also a component of the fourth quarter discontinued operation information. So whether it’s the revenue or the NOI that you see in the supplemental package you kind of could get a sense for the income estimates off of that project.

Quentin Velleley – Citi

Okay. And then just in terms of the proposed joint venture on Binney Street, if I’m reading it correctly, it looks like you’re selling it and, effectively, where your partner would get an 8% development yield. Obviously, they’re going to take some leasing risk with that, given you’re not fully leased, but is there some – can you maybe just talk about the fees? I’m not sure if there is some kind of promote or something in there?

Peter Moglia

Yeah. Quentin, this is Peter Moglia. We’re still in early discussions with a number of parties. I – it’s just not smart for us to disclose any specific details with those negotiations at this time.

Quentin Velleley – Citi

Okay. Thank you.

Joel Marcus

Yep. Thank you very much.

Operator

Next question is from Sheila McGrath with Evercore. Please go ahead.

Sheila McGrath – Evercore

Yes, Joel, I was wondering on the joint venture is that something we can extrapolate the pricing there to land value in Cambridge? Was it negotiated based on a certain land value?

Joel Marcus

Well, again, we haven’t – we haven’t had a handshake or concluded any joint venture. We’re actually aggressively pursuing the construction financing first, because that provides valuable piece of the puzzle. So I think it wouldn’t be useful for us to comment on any of the broad terms we’ve had broad discussions with. We just haven’t been that – we aren’t that far along. We’re really focused on – we’ve had discussions with a number of partners and structures and things like that, but we’re really waiting to get the construction financing in place ASAP.

Sheila McGrath – Evercore

Okay and then....

Joel Marcus

So, bear with us for a quarter or so.

Sheila McGrath – Evercore

Sure. And then, on East Jamie Court and East Grand Avenue, the yields moved higher. I was just wondering if you could walkthrough what was – what were the drivers of the revisions there?

Peter Moglia

Yeah, I think, Sheila, on East Grand, ultimately the team on the ground did a great job of buying out the project, and that combined with Onyx really wanting to occupy as soon as they possibly could, so we accelerated they’re delivery; so that helped. And then at East Jamie Court, we were just more successful than we had been projecting. Again, we talked about that smaller segment having a lower vacancy rate in the market, so we were fortunate to capture a few tenants and really beat what were conservative projections.

Sheila McGrath – Evercore

Okay. And then, Joel, you did mention in your remarks earlier that there were some assets coming for sale. I’m just wondering if you – if there’s something of interest to you? Or how you’re viewing acquisition opportunities at this point?

Joel Marcus

Yeah, we’ve modeled none, but there are in one market or another, assets we know that are being positioned for sale. We’re certainly looking at a few, as we speak. We don’t have any huge motivation one way or another, but, obviously, if something was superbly fascinating to us and one where we thought we could create value and deliver a product that fit into that submarket in a smart way, we would potentially pursue it. But I would say we’re looking more than we’re aggressively pursuing.

Sheila McGrath – Evercore

Okay. And then just on New York Tower LOIs, do you – are they like – do you consider them highly probable? Or the ones that get you to 54%?

Joel Marcus

Yeah. About half are from existing tenants and I would say those are highly probable. So out of the seven floors, let’s say more than half – four floors or more are from existing tenants. So we think those are highly probable and the others are new tenants, but we have strong relationships. And I think it’s hard to always characterize and you say something and the Street assumes you have it. So I would say 50%-50%, but my personal view is it’s higher than that.

Sheila McGrath – Evercore

Okay. Thank you.

Joel Marcus

Yeah. Thanks, Sheila.

Operator

Next question is from George Auerbach with ISI Group. Please go ahead with your question.

George Auerbach – ISI Group

Great. Thank you. Joel or Dean, have you guys touched yet on the seller financing of the assets sales, the $39 million.

Dean Shigenaga

Have we touched on it?

Joel Marcus

We just briefly mentioned it. Peter, can talk to you about it; he negotiated it.

Peter Moglia

I think $29 million of that was associated with the 1124 Columbia sale. Remember, that the – well, maybe – you may not know but the buyer is repositioning that. So, in order to maximize the value, they were looking for a loan that could bridge them through the entitlement process in the beginning of construction. So that’s a short duration loan; I think it’s a couple years where they’ll be paying us, I think they have an option to extend it for one year after that. And then there was another $9 million loan associated with the $40-something million West Watkins/Clopper deal, which was part of the negotiation to maximize our proceeds.

George Auerbach – ISI Group

I guess can you just touch on the rate on those loans? And then I guess just kind of stepping back, what is the FFO contribution of those loans? Just trying to figure – I know guidance ticked up by $0.04 – just wondering what impact the seller financing had on FFO this year?

Dean Shigenaga

Actually, the seller financing had no impact. What really drove the change in our guidance was driven twofold: one, our improved outlook on occupancy and leasing in 2013, which was driving improved NOI; and then a little bit of the entitlement efforts, which I described, to really advance opportunities for prospective tenants in certain campus locations. But going back to your rate question, George, we haven’t disclosed that publicly, but just keep in mind the low-rate environment; it’s fairly consistent with what you would expect.

George Auerbach – ISI Group

Okay. And, I guess, Dean, can you maybe talk about same-store NOI growth in the fourth quarter in 2012. It seems like the New York lease kind of, especially in the fourth quarter had a disproportionate impact? Do you have those numbers excluding New York?

Dean Shigenaga

I don’t. That was actually same-store performance for the entire year. I don’t have that breakdown, George, but I can come back to you.

George Auerbach – ISI Group

Okay. Thank you.

Operator

Next question is from Dave Rodgers with Robert Baird. Please go ahead with your question.

Dave Rodgers – Robert Baird

Joel, during your comments and Steve’s as well, I think you both talked about negotiations, leasing backlog, RFPs, RFQs that you’re seeing out in the market. Have you – I didn’t hear you present the information – but have you aggregated that total of kind of what the backlog is that you’re looking at today? If not, can you? And I guess maybe to componentize that a little bit, how much of that is related to existing assets that you think you’d have a shot at filling? Versus how much of that would be related to redevelopment or ground-up development where you’d have to spend money on?

Joel Marcus

That’s a – maybe try to restate your question in a more compartmentalized fashion, so we can try to, take it in bite size pieces, that’s a pretty broad question.

Dave Rodgers – Robert Baird

What’s the total leasing backlog that you’re looking at today?

Joel Marcus

I’m not sure what you mean by leasing backlog, but let’s put it this way, we’re seeing stronger leasing in – strangely enough – in some of the suburban markets than we’ve imagined or seen over the past year or two, which has been I’d say significantly more than we assumed.

I think we’ve got pretty conservative assumptions on some of our existing space when those things would be speculatively filled. And we’re seeing the – a more rapid conversion of requirements in the leases than we planned in our internal model. But I don’t know that – we track by market and submarket, not overall. We don’t really roll it up because it doesn’t mean anything rolled up because rents in North Carolina could be $15 a foot and rents in Boston could be $65, so it’s a little hard to say, but if you want to be market specific, we could be responsive.

Dave Rodgers – Robert Baird

Excuse me, maybe not now, but, again, the thought was just kind of getting to – it seems like a lot of your activity has been in the last couple of quarters development related, are you continuing to see that? You kind of commented on that during the commentary...

Joel Marcus

Well, I think it’s – yeah, I think it’s broader – much broader than development related...

Dave Rodgers – Robert Baird

(Inaudible).

Joel Marcus

Yeah, I think it’s much broader than development related. I mean, I can think of spaces that we’ve had – we have kind of what we call chronic leasing or chronic vacancy spaces that we’ve just seen stay vacant for periods of time. We have one space that’s been vacant for quite a while in the Greater Boston market, that’s now just been – just been leased, I think this quarter to an institutional tenant that we haven’t had activity for three or four years on it. It’s not part of Cambridge, but we’re starting to see that happen in quite a number of locations with spaces that have been hard to lease and we’re getting really good – good results. So that’s been surprising to us.

Dave Rodgers – Robert Baird

And then a second question I guess related to the joint venture you talked about with ARIAD and I realize it’s not done, you’re still negotiating it. Maybe just step back and say why did you elect to go – or why are you electing to at least pursue that type of a funding for that asset versus maybe what you might do with the Biogen development that you have ongoing as well?

Joel Marcus

Well, our preference would be do it all ourselves, but we’re mindful of – and we haven’t made final determinations – but we’re certainly moving down a road here. But our goal to meet our debt to adjusted EBITDA target of 6.5x this year. So that’s part of the overall plan and that’s been driving our thinking now.

Dave Rodgers – Robert Baird

Thank you.

Peter Moglia

Yeah, I – this is Peter. I’d just comment, too, I mean, versus the Biogen Idec campus. I mean, this is a development that still had some leasing risk associated with it, so it just makes a little bit more sense to do a JV structure where you have some more risk involved than the Biogen Idec deal.

Dean Shigenaga

Hey, Dave, before you jump into your next question, let me just get back to George’s question about fourth quarter same-property performance on a cash basis as reported was 6.3%. If we were to back out the benefit from cash rent improvements at New York City, cash same-property performance for the fourth quarter would have been 3.7%. So, it’s roughly a couple million dollar cash improvement in New York for the fourth quarter.

Joel Marcus

Dave, did we – were we responsive to your questions?

Dave Rodgers – Robert Baird

Yeah, I’m all set. Thanks, guys.

Joel Marcus

Okay. Thank you very much.

Operator

Next question is from Jeff Theiler with Green Street Advisors. Please go ahead.

Jeff Theiler – Green Street Advisors

Good afternoon. Just a quick one regarding 499 Illinois, it sounded from your commentary that – at least it sounded like interest has really turned a corner. You’re getting a lot more inquiries. Is that, in your opinion, just a function of we’re getting closer to UCSF opening? Or is there something else going on there that’s driving traffic?

Steve Richardson

I think it’s really a combination of things. I think the overall market dynamics as we’ve outlined in the second-half of 2012 have really pointed in our direction. There’s a lessening existing supply of space in SoMa for tech companies. With Meraki and Cisco coming down to Mission Bay, I think that’s clearly validated Mission Bay as a technology sector location. So, that’s certainly been positive. And then, ultimately, we had a bit of a bit of a pause in the life science activity during 2012 and historically it’s been relatively consistent.

So I think we’re just seeing that consistent demand re-emerge and it’s really from both sectors: it’s life science companies, it’s institution, it’s the translational research and clinical elements as well. So that – and that’s not only UCSF for sure, but as they continue to advance on that medical center and really the campus has nearly built out there, which is why they’ve got this RFP on the street, it’s just very clear that there is a diminishing supply of product available.

Jeff Theiler – Green Street Advisors

Yeah. And so would you expect just in regards to UCSF, would you expect that peak demand coming concurrently with the completion and the opening? Or is there a time lag that happens after that? Or do you get demand coming ahead of it? Where would you kind of put the peak?

Steve Richardson

I think it’ll be starting this year and it’ll continue through the time period that the medical center opens. There’s a clear effort to consolidate in and around Mission Bay. The Chancellor’s building is now broken ground, so that is clearly the power center for UCSF, right there at the corner of 16th Street and 3rd Street.

Jeff Theiler – Green Street Advisors

Okay. Great. Thanks very much.

Joel Marcus

Thank you.

Operator

And we have a follow up from Quentin Velleley with Citi. Please go ahead with your follow up.

Michael Bilerman – Citi

Hey, good afternoon. It’s Michael Bilerman speaking. I just wanted to come back to sort of the asset sales that are planned in July. We completely understand and appreciate that under-leased and underutilized assets and assets that go through changes in dynamics, can’t really look at them on a cap rate basis. But I think the other side of it is that income is being lost from the company, right? You take the two sales that happened the beginning of the year, the $84 million, you are losing $15 million of GAAP NOI; that’s coming out of the P&L.

Dean Shigenaga

Yeah. But some of it was coming out anyway because of either lease rolling out or termination of leases. So a chunk of it I don’t have it in front of me, but...

Michael Bilerman – Citi

No, no, no, right. We know whether it’s going to come out or not, but I think you have to appreciate from an investor and analyst perspective that we have to understand that on your NOI stream how much of that would be at risk from potential assets that, if someone was capping your NOI and capping this NOI at a cap rate, okay – so they would be putting a cap rate on that $15 million – they would have come out with a much different value than what ultimately you sold on the assets.

So maybe I can ask it in a different way. If we look at the sales of income-producing assets that are scheduled for the rest of the year, which is about just under $100 million, what is the current NOI stream for those assets? I.e., how much NOI needs to come out once we sell those assets for $100 million?

Dean Shigenaga

Give us one second.

Joel Marcus

Yeah.

Dean Shigenaga

So I’m going to see how much; I’m looking for the breakdown.

Joel Marcus

Well, about more than half of that, Michael, I think Dean had in his remarks about $50 million or $60 million are targeted for three assets in San Diego, all of which go dark and are in our lease rolls today. So that’s going away no matter what, but we can try to...

Michael Bilerman – Citi

But I assume that’s not in your same store guidance that we need to figure out some way to take that out from an NOI stream to be able to get to the numbers. So, arguably, I understand that selling these assets, they serve a different purpose and they’re great to do and it’s cleaning up the portfolio and all the other benefits that we think are good, but at the same time we have to make sure that we’re stripping out the right amount of NOI for the sales.

Joel Marcus

Yep.

Dean Shigenaga

Yeah, so, Michael, I’m sorry, I just got the schedules, as you can imagine $377 million projected, I wanted to be sure I looked carefully at the breakdown to answer your question.

Joel Marcus

But only the income-producing...

Dean Shigenaga

Yeah, so on the income-producing, the only other sale that’s been identified is the one we referenced on the call. So – so, we completed $84 million, there is roughly something in the $40 million range that’s closing here shortly in the quarter. And outside of that I think there’s another $18 million to meet our bogey. So, it’s a small number. That asset has not been identified, so I can’t give you a yield today, in the sense. So, it’s small and I don’t expect -all this information’s included in our guidance, included in same store. I don’t have that particular yield assumption in front of me at the moment, but on $18 million it’s not a big assumption.

Michael Bilerman – Citi

Right. Well, and I guess maybe the other way to look at it is there a way to sort of parcel out, if you were to sort of look at the NOI stream today, sort of calling it on an annualized basis, the $430 million, what percentage of that income do you view within this bucket of – is it $10 million, is it $20 million, where we should be really treating that on a price per pound basis, rather than a cap rate basis? Understanding that $15 million, right, was – that represented almost 3.5% of NOI, but a much, much lower percentage of NAV.

Dean Shigenaga

Yeah, and I hate to ask you to do this, Michael, I missed the first part of your question.

Michael Bilerman – Citi

Like I say, if your annualized NOI stream is $430 million, how much of that NOI stream is tied up in assets where you see this risk is there? Is it effectively done? I mean, the two assets you sold, again, produced $15 million of GAAP NOI, that’s 3.5% of the NOI stream, where the value would’ve been very different if you put a cap rate on it versus valuing it on a price per pound basis?

Dean Shigenaga

Yeah, I don’t – Michael, you’re talking about our overall asset base, and if I think through, we don’t have anything specifically identified that falls into this category that we’re looking to monetize at the moment. We have one asset in the Worcester market, out in suburbs of Boston that we’ve identified and those are in our disclosures. I think that was disclosed in the fourth quarter as a component of one of the targeted sales in December.

Michael Bilerman – Citi

Okay. All right...

Dean Shigenaga

So beyond that...

Joel Marcus

So, maybe to put book ends around that, we think that in the broad – if we looked at all the assets that we would want to dispose of today – that we could dispose of today, that we haven’t identified, but that we kind of have an idea about, that number would be somewhere in the $5 million to $7 million range of NOI...

Michael Bilerman – Citi

Great. And then just coming back to New York for the construction cost of $1,100 a foot for the second Tower...

Joel Marcus

Yep. Yep.

Michael Bilerman – Citi

Can you break that out of how much was – and understanding that I know we went through the Great Recession, you have to carry the land – well, not the land because there’s the ground lease. But you have to carry I guess the materials for a little while longer, how much of that represented – how much of the $1,100 is capitalized costs? And maybe you can break out the components because it does seem like a high number, especially, the fact that there’s no land basis?

Joel Marcus

Well, we can maybe do that off line. I don’t – we’d have to look at it. Clearly, you’ve got the superstructure, the infrastructure, which is expensive, you’ve got all the steel and curtain wall that we bought back in I think 2007 when we kicked off that building. You’ve got, obviously, the carry issue described. We’ve got, obviously, a budget for finishes, et cetera. But I think it’s wise not to get too obsessively and compulsively focused on the costs, but look at the number on the rent that Peter gave.

If you’re getting $70 or $80 triple net, 10-year, 15, 20-year leases with 3% escalations and you’re getting a yield we think will be ultimately north of 6.5% in a triple A, class-A asset in New York, I don’t know of any deal we could do in New York City today, by way of acquisition or development, that could equal those yields, Michael. So, I think put that into perspective. We’ll try offline to get you somewhat of a segmented breakdown on costs; we don’t have it with us...

Michael Bilerman – Citi

Right. I’m also just trying to reconcile a little bit. I mean, you’ve been in this project for a long time, I would think that the yields that most people and that you’ve talked about on the prior calls – we can dig up the transcripts – I’m not trying to say that 6.5%, close to 7% is not good today, it is, but the yields that have been talked about previously about this project, especially about the second phase of the project, which was supposed to benefit from a lot of the infrastructure costs being layered to the first tower, were much higher. And so, I’m just trying to understand what changed? Because the rental market’s certainly come back and the rents are there.

So, it has to have been on the cost side and I’m just trying to understand what part of the cost? Was it the capitalization piece? Because you obviously are capitalizing a lot on other projects, so I’m trying to think about whether we need to be mindful of that. And just what sort of change in the dynamics from when you first sort of thought about this project and it was going to be a high single-digit yield to where it’s ending up today?

Joel Marcus

Well, I think when we started this project in 2005, 2006 and 2007, our view of the market pre-Lehman was quite different. And, obviously, we had never built in New York. And I don’t think we ever gave – you could go check the transcripts – I don’t remember giving specific yields because we had no rental rates at that time. But I know over the last couple of quarters, I think I personally said, both in meetings and publicly, I’ve said we think it’s probably in the mid-6%s. That’s a number I’ve been using publicly for quite a number of quarters.

And, I think the numbers as they finally come out through our finance group are pretty consistent with that. So – but if you go back five or more years and our hopes on the project, I’m sure hopes were in 2006 and 2007 in the mid to high-single digits, but those were only hopes, certainly, no details behind that. So, I think that’s how we thought about it over post-Lehman.

Michael Bilerman – Citi

Okay, great. Thank you.

Joel Marcus

Yep, thank you.

Operator

We have no further questions at this time. I’d like to turn it back to Joel Marcus for closing remarks.

Joel Marcus

Again, thank you very much for your time and we’ll look forward to talking to you on the first quarter call and, again, Happy New Year to you all.

Operator

Thank you, ladies and gentlemen, this concludes today’s conference. Thank you all for participating. You may now disconnect.

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