Alexandria Real Estate Equities, Inc. Q2 2009 Earnings Call Transcript

| About: Alexandria Real (ARE)

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

Q2 2009 Earnings Call Transcript

August 6, 2009 3:00 pm ET

Executives

Rhonda Chiger – IR, Rx Communications

Joel Marcus – Chairman and CEO

Steve Richardson – SVP and Regional Market Director

Dean Shigenaga – CFO

Analysts

Will Marks – JMP Securities

Mark Biffert – Oppenheimer

Joe Dazzio [ph] -- J.P. Morgan

Michael Bilerman – Citi

Jamie Feldman – Banc of America/Merrill Lynch

David Aubuchon – Robert W. Baird

Anthony Paolone – J.P. Morgan

Operator

Good day, everyone, and welcome to the Alexandria Real Estate Equities second quarter 2009 conference call. At this time for opening remarks and introductions I would like to turn the conference over to your host, Ms. Rhonda Chiger. Please go ahead, ma'am.

Rhonda Chiger

Thank you. Good afternoon and thank you for joining us. This conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements regarding our 2009 earnings per share diluted attributable to Alexandria Real Estate Equities common stockholders, 2009 FFO per share diluted attributable to Alexandria Real Estate Equities common stockholders, and our redevelopment and development projects.

Our actual results may differ materially from those projected in such forward-looking statements. Factors that might cause such a difference include, without limitation, our failure to obtain capital or refinance debt maturities, increased interest rates and operating costs, adverse economic or real estate development in our markets, our failure to successfully complete and lease our existing space held for redevelopment and new properties acquired for that purpose and any properties undergoing development, our failure to successfully operate or lease acquired properties to increase rental rates or increase vacancy rates or failure to renew or replace expiring leases, defaults on or non-renewal of leases by tenants, general and local economic conditions, and other risks and uncertainties detailed in our filings with the Securities and Exchange Commission.

All forward-looking statements are made as of today and we assume no obligation to update this information. Now, I would like to turn the call over to Joel Marcus. Please go ahead.

Joel Marcus

Thank you Rhonda and welcome everybody. I'm here with Dean Shigenaga, Pete Nelson and Steve Richardson. We are proud that this is our 48th reporting quarter and as of the benchmark year end 12/31/08, we were the number four total return performer out of all publicly traded equity REITs.

Let us get right to the second quarter 2009 operation and financial report. At Mayor Bloomberg's press conference on July 22 with the CEO of Eli Lilly, our anchor tenant at the Alexandria Center in New York City, the mayor got into a heated discussion with several reporters about the need to invest in this downturn. We agree with the mayor and have moved along several domestic and international projects with the funding target as non diluted government infrastructure money with high-quality credit tenants. This is true in each of our worldwide markets.

We are also having a series of discussions with a number of world-class institutions regarding monetization of selected assets and you may also see the return of some fee development income to Dean and his superb team to assist analysts and investors in more clearly understanding the significant underlying value of various assets, much of which are held at very low underlying basis, which provide the, which enable future growth, essentially. And these are true both on the operating and the important value creation pipeline.

We hope also that the supplemental puts to rest any issues regarding the health, strength, and flexibility of ARE's balance sheet and its inability to earnings and dividends over the long-term. We are in excellent shape to handle all of our debt maturities through at least 2013. Looking at our world-class client tenant base led by Novartis, Glaxo and Roche, I think you'll also appreciate that we will be welcoming Pfizer an Lilly in the not-too-distant future and in the coming quarters and we clearly have one of the strongest and most creditworthy client tenant basis of any publicly traded REIT.

When you – if I go back to a comment that Mort Zuckerman likes to make, when you have the understated best regional teams, the highest quality assets, the best adjacency, location, success in leasing racing will be more achievable in varying cycles that we're witnessing with almost one million ft.² of leasing achieved in the first two quarters of 2009. We're also making great progress in bringing our redevelopment and development projects online to generate future net operating income for the company.

And again we are also pleased to report continued positive same-store property revenue, the only office REIT never to have a negative same-store quarter. Likewise continue for 2009 our unbroken streak unique among again all office REITs of year-to-year positive rental rate increases. Our margin continued strong at 74% and over 60% of our NOIs are unencumbered. We also put into discontinued operations during this quarter one asset held for sale to a user, life science user, and there may be others that will follow suit.

Let me talk a little bit about occupancy since that is a key focus during these particular times. Steve Richardson, Senior VP, who runs the San Francisco Bay region will detail San Francisco in a little more detail in a moment, but fortunately San Francisco was one of the two large anchor markets, has held pretty steady with only a very slight decline, 96.5 on occupancy. And Massachusetts, the other big anchor region has said a slight tick up to about 95.7.

Very good gains in suburban DC and Maryland on the back of substantial increased NIH funding and a large stimulus package passed by Congress in the first quarter. Unfortunate weakness has been evidenced in San Diego and we're hoping that that turns around over the coming quarters but it is a noticeable weak market for I think all of life science space in that market. We continue to see strong continued occupancy in Seattle and internationally. We are still in a very dangerous and volatile macroeconomic environment with unemployment continuing to rise and debt markets still pretty challenged in a number of sectors.

Coming back to the balance sheet for a moment, we're working to manage and contain the cost of debt, our critically important debt capital in a variety of ways, as the cost of borrowing for all borrowers is on the rise from previous levels. This will be a very key focus of the company during the coming quarters. Turning to leasing for a moment, it is pretty clear we have real high quality demand for our best in class spaces. The second quarter was a very strong leasing quarter with 473,000 ft.² leased at about a 3.3% increase in GAAP rental rates an about 936,000 for the first two quarters at about 4%. We still expect rental rate increases to be in the 5% range for 2009 and 2010 due to low expiring lease rates.

For the balance of 2009, we have got about 557,000 ft.², essentially two thirds are spoken for, and about one third still too early to call and put in the bank. We still do have lower expiring rents on this set of rules at about 28 bucks. For 2010, our roll over was about 990,000 but we're very lucky again, very low expiring average rents at about 2499. 51% we expect to get done, 13% goes into development, which is not currently life science used, and 36% still a little too early to call.

Turning to development leasing which has been a key focus for analysts and investors, I would say we're very comfortable with the great progress we have made on our development pipeline, but remember, this is deliberate steady and consistent, and it is important to keep in mind that lab space is a much more complicated product to build and deliver to a very highly sophisticated audience than traditional generic office. And as a consequence, instant gratification is not the order of the day.

We are fortunate though ARE has a premium price non commodity product which is far more steady than generic offers in these very tough macroeconomic times. When you take a group of highly talented people in a great company like ours and deliver superior results over the long-term, patience and belief and the consistency of that differentiated business model and strategy is required. The intervention of the structural economic earthquake should not shake the foundation of that belief.

If you turn to page 27 of the supplemental and the development summary, I think we are very pleased to take you through that list in a little more depth. The first one is a property that we talked about before, now fully leased and committed to UCSF and a large capitalized science company and that will start to bear net operating income in the coming quarters. The second building is the one that has received a lot of attention. It is the Mission Bay building we built, our building for Pfizer. Pfizer as you know, this is the parent Pfizer, and has a 15 year lease with and out after 10 years, and that is fully committed for that period of time. They are looking to sublease and we understand they may be very close to achieving their goal, but we still have Pfizer cash and Pfizer credit on the lease for a 10 year period.

The second building is the second half of the combination building that we were – that we were building. This will be a little bit different than the shell delivered to Pfizer, this will be a robust lab building. We are currently marketing it and we have one significant dialogue or at least proposal going on with the credit tenant. We will keep you posted on that as that works through the future quarters.

The next building is 162,000 ft.² building complex that we build and Steve will give you more color on that but we think that that is essentially done. The next building is the 130,000 ft.² building in San Francisco, leased to Exelixis, they have an option through the end of the year and will have to wait another couple of quarters to see what will come out of that. But they have done very well and run by one of the top CEOs in the industry, George Scangos.

As many of you know, obviously with our press release and the mayor's news conference on 22 July, we have signed the anchor lease that we have been working on for quite a while with Eli Lilly. This is a very sophisticated program with a very sophisticated company that completed a very sophisticated acquisition that will be centrally housing the core of their oncology practice at East River and we will be building the cluster around that. We are in lease negotiations right now on significant space with a world-class brand name food group. Also we're working with conference coordinator for the world-class conference center and core services, which will be taken up by many of the tenants in the office. We're also working on a number of pretty important additional requirements for office la space, so we feel very good about where we are on the East Tower.

In Seattle, most of you know, no change there, we will deliver in the first quarter. That building is more or less fully leased except for a little bit of additional space in a small retail to Gilead which is one of the top-tier life science companies that has done very, very well over the past few years. So I think when it comes to a snapshot on the development pipeline and looking at how we have done I think hopefully the report card this quarter will be very encouraging. But as I say, these are all take a lot of work over a long period of time.

And then finally before I turn the call over to Steve Richardson for his detailed comments on the Bay Area, I want to also acknowledge and welcome Krupal Raval who many of you know kind of an ace buy sider and sell sider will join the company after Labor Day as Vice President of Capital Markets. We think landing Krupal will be a huge addition to the company. He was much sought after by many other companies and we feel honored to have him join us. So without any further ado, let me turn the call over to Steve Richardson.

Steve Richardson

Hello everyone. My name is Steve Richardson and I have the responsibility for the San Francisco Bay Area region as Senior Vice President and Regional Market Director.

During the next few minutes, I will provide an overview of this Bay Area's life science market and how aspects of Alexandria's overall corporate strategy as outlined by Joel and Dean are being implemented on the ground in this region. First, let me set the context of the Bay Area's life science market against the broader office and R&D markets. As many of you know from senior management team earnings call such as Boston Properties and others, the office and R&D markets in the Bay Area have weakened since their peaks several quarters ago with increasing vacancies and declining rents. There are signs this weakening is at or near the bottom but I will leave those predictions to other experts in the field.

The life science market in contrast to these office and R&D markets did not experience the steepness of the significant run up in rental rates and trading values during 2006 to early 2008 nor has it experienced the severity of the decline these past few quarters similar to 1998 and the 2002 era. As an example, the vacancy rates in the region's core life science corridor which stretches from San Francisco, anchored by UCSF's Mission Bay campus to south San Francisco which is anchored by Genentech and Roche all the way down to Stanford Research Park anchored by the University, that corridor is currently at its full 20% vacancy rate.

We're now tracking demand in this corridor that should drive this vacancy rate down to approximately 8.8% by the end of 2009. this rough equilibrium in the market will help stabilize rents and enable them to return them to their historic norms during 2010 and into 2011. The East Bay life science market in stark contrast which stretches from Richmond to the north to Ardenwood and New York in the South, however has been experiencing severe vacancy rates in the range of 28% and the free rent and broker dealer giveaways have now hit high water marks.

Fortunately for Alexandria, we exited this East Bay market entirely during 2007 at a strong cap rate and high quality tenants from our core really consider a relocation to the East Bay markets except for a few in manufacturing. Alexandria's Bay Area asset base as in our other key cluster regions is characterized by the highest quality assets in the best AAA adjacency locations. These premier locations and facilities have enabled the regional team to consistently maintain high occupancy rates even during challenging market conditions.

We have also seen the life science industry's inquisitive nature directly and positively manifest itself in our asset base and provide us with high quality tenants over time. For example, our top tenants in the region now include Pfizer, Roche, Merck and Celgene, all multi-billion-dollar pharma enterprises as well as world-class institutions such as UCSF, as these entities have acquired and or displaced other life science entities.

These quality tenants represent a testament to the excellence of our team on the ground and the regional team is also making significant progress on our modest amount of vacant space. We have lease negotiations underway for 75% of the 24,000 square feet currently vacant. We also have over 60% of the 34,000 square feet in 2009 roll over in process as much as 85% of the 300,000 ft.² in the 2010 rollover is also in process. And most importantly, to echo Joel's comments, 180,000 ft.² in the development and redevelopment pipeline in South San Francisco, we are making solid progress as we speak.

Looking forward, we are poised to capture future growth in our core clusters with key substantial pre-construction activities that enable us to meet a wide range of timing needs for prospective tenants. And finally, we have also implemented the unprecedented cost control measures in the region. Now over to Dean.

Dean Shigenaga

Thank you Steve. Let me jump right into our guidance for 2009. Our guidance for the year was updated from $5.43 per share diluted to $5.63 per share diluted, really for the $7.2 million payment we received in the second quarter of 2009. This cash payment related to an asset acquired in late 2007 and effectively was a purchase price adjustment on the original purchase accounting resulting in a gain. Items like this are included in FFO pursuant to NAREIT's white paper on FFO and we have treated this nonrecurring items accordingly.

Our guidance also includes the final calculation on the gain associated with the early extinguishment of debt. In April, we repurchased 75 million dollars of par value of our 3.7 notes. We engaged a third-party firm to assist in the evaluation of the gain and recognized a gain of approximately 11.3 million. During the first quarter of 2009 earnings call, I mentioned that an estimate of the gain was included in our guidance of $5.43. Our actual gain was approximately $0.01 lower than the estimate we provided in our first quarter conference call.

Even so we made no reduction in our full year 2009 guidance for FFO per share diluted. Our press release and supplemental package includes two tables on FFO. The first table on page nine, shows the roll forward of our full year 2009 guidance as reported at various states in 2009. It highlights the key changes in our full year 2009 guidance and has been related to capital transactions and most recently a purchase price adjustment paid in cash on the asset acquired in 2007.

The second table on page 10 highlights our fourth quarter 2008 first-quarter and second-quarter 2009 FFO per share diluted to serve as reported and as adjusted for certain items. This table should help in the clarification of certain items included in our reported FFO per share diluted results this year. It also highlights the results with our nonrecurring transactions as noted in the table and takes account of the full weighting of our 8% convertible notes. The sum for our quarterly FFO per share diluted results will be higher than our full year 2009 FFO per share diluted results due to the partial weighting of our shares from the capital transactions this year.

The sum of FFO per share diluted results for the four quarters of 2009 is expected to be approximately $0.14 higher than our guidance for the full year of 2009 of $5.60. We reported $1.89 and $1.59 for the first and second quarter of 2009 respectively, leaving approximately $1.13 per share diluted for each of the last two quarters and the last half of 2009.

Let me provide additional clarity on our guidance for the full year of 2009. At this point I want to remind everyone that our guidance is based on various underlying assumptions. Some of these assumptions include the following. Same property results projected to be in the 2% range, leasing activity is projected to generate 5% steps in rental rates on new and renewals previously leased space, margins are projected to be in the 73% to 74% range, G&A expenses are projected to decline over the next two quarters, and capped interest is it projected to decline to approximately 16.5 million in the fourth quarter of 2009. Other income is projected to be approximately 1.5 million per quarter.

Next moving to our value-added investment and related activities. As of June 30, our value-added investments and related activities totaled approximately 1.4 billion and represent all of our construction in progress. This consists of approximately 150 million related to redevelopments, 410 million related to developments, 597 million related to important and significant value add reconstruction activities, primarily associated with our entitlement efforts, at Mission Bay and Cambridge, and approximately 249 million related to new markets and other projects.

Certain projects like our redevelopment and development projects are forecasted to deliver significant revenue and NOI contribution to offset the reduction in capitalized interest associated with these projects. Over the last couple of years, we have delivered redevelopment and development projects substantially stabilized and we are working diligently to deliver current projects substantially stabilized as well. Our entitlement efforts focused primary at Mission Bay and Cambridge include regulatory approval, mapping, conceptual design, schematic design, permitting, construction drawings, costing, and many other critical items.

Due to the significance of the entitlement efforts at Mission Bay and Cambridge, we expect these efforts to continue into 2010 and 2011. Additionally, we have certain construction activities ongoing in certain new markets. We also have other projects including two above ground parking structures at Mission Bay that will generate parking revenues and certain ongoing activities at the Alexander Center for Science and Technology in New York City surrounding the first building, including underground parking, site plaza (inaudible) construction activities. Certain value-added activities are scheduled for completion over the next few years. Our projections for capitalized interest as noted earlier will be approximately 16.5 million in the fourth quarter of 2009 and a quarterly average in 2010 of approximately 14 million.

Next briefly let me comment on taxable income and dividends. During the quarter, our Board of Directors authorized a reduction in our quarterly dividend to $0.35 per share. This dividend rate is projected to meet our distribution and taxable income requirements to maintain our REIT status. We are fortunate to have an asset base with significant cost basis that we can accelerate through cost segregation studies, resulting in significant additional tax reductions over the next 7 to 10 years. Consistent with historical dividend increases, our core operations will drive for growth and quarterly dividends at the appropriate time in the future and as authorized by our Board of Directors. We continue to have a low payout ratio within the real estate sector allowing us to retain and reinvest precious capital.

Next , let me cover sources and uses of capital. As you know, in 2009, we made significant progress in executing our capital plan, including deleveraging, extending or refinancing debt obligations, as well as completing new long-term debt. Our execution on our capital plan clearly highlights that it is inappropriate to assume that all debt maturities will be repaid versus extended or refinanced. A more realistic and appropriate strategy for our business capital structure assumes we continue to execute on our multiyear capital plan, including refinancing, extending and sourcing new loans over the next few years, opportunistic sales of assets, including non-income producing land parcels, primarily to users and broadly speaking equity capital as appropriate, including possible JV capital.

Our balance sheet capital capacity and forecasted sources and uses of capital assuming reasonable assumptions for the extension and refinancing and new debt will allow us to manage our balance sheet capacity through 2012 and beyond. As of June 30, we had approximately 557 million outstanding under our unsecured line of credit or almost $600 million of availability. Additionally, as noted in our supplemental package, we had approximately 100 million of cash on hand, including 29 million of restricted cash related to construction projects.

Two thirds of our secured debt is non-CMBS debt with insurance companies and banks and the remaining is traditional CMBS. We believe these are positive attributes of our maturing secured debt as CMBS loans are difficult to extend or refinances in this environment. We are projecting that we will be able to extend or refinance a significant portion of our secured debt maturities through 2013. As a reminder, since January of 2008, we have extended or refinanced quite a few loans aggregating well north of $400 million.

We are also diligently working on extending our refinancing remaining debt that is maturing in 2010 and 2011. While we will also work on several new loans, including several that may generate aggregate proceeds in excess of $200 million, this includes a loan for approximately $120 million with an insurance company with a term of approximately 10 years. We also have another loan following this in the range of $75 million to $120 million at early stages with insurance company lenders.

The key attributes of our asset base is that it consists of very high quality, very well located real estate with first in class client tenants, with north of 60% of our asset base unencumbered assets June 30th. This asset pool will provide opportunities for us to secure new financings in the future.

In summary, our sources of capital over the next several years include approximately 70 to 80 million of free cash flows, approximately 600 million of availability under our credit facility, approximately hundred million of cash on hand today, approximately 120 million related to the new secured loan from an insurance company that I just mentioned, approximately hundred million plus related to additional secured loan proceeds which again is under discussions with various insurance companies, approximately 50 million of asset sales this year. And additionally, we anticipate being successful in closing additional secured loans over the coming years as well as additional asset sales.

A reasonable and conservative estimate going forward is approximately 50 million of secured debt each year and approximately 50 million of asset sales in each of the following years. Obviously these are very conservative. Through 2013, these sources of capital aggregate up to about $1.55 billion. And most importantly one should keep in mind that this list is not exhaustive and other sources of capital may be utilized to meet their capital plan in addition to making appropriate adjustments to our capital plan from time to time as necessary.

Moving to the uses of capital over the next five years, we have approximately 177 million of committed construction costs for redevelopment and development and other projects. Approximately 125 million of secured debt obligation, this is net of approximately 255 million that we anticipate refinancing or extending. We also have assumed the successful renewal of our credit facility at approximately 2/3 to 3/4 of its current capacity. We're also assuming repayment of our 3.7% convertible notes with some repurchases being completed at a discount.

Through 2013, these uses of capital are meaningfully less than estimated source of capital as I've just highlighted. We believe there are couple of large credit facility amendments nearing completion and the general sense of these deals is that renewals/amendments will be positive signs for the borrowers, with significant increases in commitments from relationship banks. This is clearly a positive move in the right direction from banks and a positive sign for our ability to successfully amend our credit facility in the future.

Let me quickly cover credit metrics. Debt to gross assets were solid at approximately 47.5%. Fixed charges were solid at almost 3 times today based on traditional calculations used by many realistic companies. Facility covenants are very specific to each company and defending on the specific terms and definitions of each facility agreements. As such, covenant calculations and natural compliance will very company to company. As expected, we have operated over many years in compliance with our debt covenants, we believe that our credit metrics related to our facility covenants are solid for our business.

Leverage as of – the leverage for the quarter or as of quarter end was solid at the low 40% range. Our facility covenant limit is 65%. Our secured debt percentage has been below 15%. Facility limit is 55%. Fixed charges are solid for our business at approximately 2 times pursuant to the definitions under our credit facility and the facility covenant (inaudible) is 1.4 times.

Lastly let me cover our core operating results for the quarter. Our first in a class team continues to deliver across key areas of our business and has generated solid operating statistics during a very challenging macro environment. We continue to report positive same property results quarter to quarter and have reported positive leasing activity year-to-year for over ten years. Same property results were up 2.2%. As Joel had mentioned, leasing activity was very solid at 473,000 rentable square feet with GAAP increases of 3.3%. Combining these results with our leasing status for the first quarter of 463,000 ft.², our leasing for the six months into 2009 total 936,000 rentable square feet and up 4% for the year.

On an annualized basis, this is approximately 1.9 million ft.², up over the 1.7 million ft.² of average leasing activity over the last four calendar years. This is truly an amazing opportunity in this very tough macro environment. Margins were 74% for the quarter. Accounts receivable was the lowest really it has been since approximately mid-2006 at about 4.7 million with no allowance for doubtful accounts.

We're forecasting the delivery of various spacious in our redevelopment and development projects over 2009 and 2010 which will add to our revenues and cash flows from operations. Our development projects that are scheduled for delivery in 2009 and 2010 aggregate approximately 770,000 rentable square feet at approximately 92% leased or committed. Our construction in progress for value-added activities was approximately 1.4 billion, which is consistent with the balance as of March 31. However, weighted average interest rate required under GAAP increase by approximately 40 basis points resulting in an increase in the amount of capped interest for the second quarter to approximately 18.2 million after the assumed conversion of over 8% notes. We continue to forecast aggressive reduction in capped interest as we complete various construction activities, again which will generate significant revenue and NOI.

With that I'll turn it back to Joel.

Joel Marcus

Yes, operator. We could go to Q&A please.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). And we will take our first question with Will Marks [ph] from JMP Securities. Please go ahead

Will Marks – JMP Securities

Hello Joel, hello Dean.

Joel Marcus

Good afternoon.

Will Marks – JMP Securities

Good afternoon. I wanted to dig a little deeper into a couple of your markets. First your comments on San Diego, the softness there, can you talk about – my understanding is that there are considerable barriers to entry with land and just talk about potential supply there as a benefit to you? And second on the Mission Bay and South San Francisco markets, can you comment also on what Shorenstein and others have in terms of availability? I know there is not a whole lot of construction. And then lastly in South San Francisco what – if there is any action there? I know that Amgen sublease has put some pressure maybe a cap on rents there, any thoughts, is there action on that space?

Joel Marcus

Well, actually three good questions, I will take the first and ask Steve to take the two San Francisco questions. Yes, I think what we're seeing in San Diego is there is not particularly a large excess supply and there is obviously a highly constrained land situation. What I think we are seeing much more and rental rates aren't plunging, they have really kind of settled down from where they that much like what happened in San Francisco.

The land market hasn't seen the up tick steeply as office did nor has it seen the downtick as deeply as office has. But I think it is fair to say what is missing in San Diego that we see in the other clusters although they are each a little bit different is, big pharma really is not growing or focused on San Diego for the past number of years. Pfizer has slimmed down, Merck has exited that market, and a number of others who are there, J&J, Novartis, and so forth, have maintained presence, but clearly not expanding. That is substantially different than you have seen in the Bay Area or the Massachusetts area.

I think secondly the biotech side of the equation has been pretty tepid or pretty I should say pretty quiet in the San Diego area, partially due to I think the lack of robust venture capital that you see more traditionally in the Bay Area and in the Massachusetts area. And then I think finally the institutions who are actually the backbone of the market, our presence is heavily in – but the institutions have not seen a lot of expansion, you see ST, Scripps, Burnham et cetera. We did sign a big lease with Burnham in the fourth quarter about 76,000 ft.² but a number of those entities have spent a lot of growth time in Florida over the past couple of years.

There is big Orlando expansion for Burnham, a big Jupiter expansion for Scripps due to a lot of money that was given to them both by the state of Florida under Jeb Bush and then the county of Palm Beach and the local folks in Orlando. So that is really I think the San Diego side of things is really more from a demand side and then two tenants are clearly in the news a lot. They have done very well, their stocks have done well, both Amylin and Biogenetic, both tenants of ours. But again they're not in substantial expansion mode.

So that I think is the difference (inaudible) and San Diego, Steve, you want to talk about Mission Bay and South San Francisco.

Steve Richardson

Yes, well, starting with your last question first, you know as I pointed out here, I think we have got a reasonably healthy vacancy rate of 12.8%, and we're seeing legitimate activity in the market that should drive that to single digits by year-end. That is really a function of a couple of things. You do have capital continuing to flow for promising companies from a variety of sources as well as institution and big pharma just increasing their presence in both Mission Bay and in South San Francisco.

As far as your comment on Shorenstein, in South San Francisco, they have a multiyear entitlement process. So that is quite a bit further out into the future and right now that is really just industrial product that doesn't compete with us at all. And then in Mission bay, those buildings are either occupied or tied up with options that again do not present significant competitive product for us.

Will Marks – JMP Securities

On specifically Amgen, I don't know if you can make a comment, my understanding is there is still 250,000 or 300,000 ft.² available in your South San Francisco market sublease space, do you consider that competitive and any thoughts on if there is activity that?

Steve Richardson

Sure. Yes, it is most definitely directly competitive space. It is the largest block of space out there in that market and you know again there is activity I think we will be capturing our fair share if not more and ultimately they will capture a piece of the market as well. Once that happens, it will end up being in a very tight market, probably approaching 5% or so.

Joel Marcus

Yes, I guess just to keep thing in perspective here, the Amgen sublease space has been in the market for a little while now, and we did back fill the property that we rolled over in the fourth quarter with a large termination payment and leased it to the credit tenant and they took down the 155,000 ft.² building. So I think as Steve had pointed out, sublease space pop up from time to time, does become competitive product but I think we have quite a bit of advantages throughout our markets by the locations of our real estate and the demand that comes from the quality locations that we generally have in most of our markets. And as I mentioned also just in this discussion, the Pfizer space in Mission Bay that is leased, I think that will probably be of the market for at least as far as any sublease competition for us so that is good news as well.

Will Marks – JMP Securities

Great, thanks Joel. Thanks Steve.

Joel Marcus

Thank you.

Operator

And we'll take our next question with Mark Biffert with Oppenheimer. Please go ahead.

Mark Biffert – Oppenheimer

Good afternoon. I was wondering if you could quantify how much sublease space is in your portfolio of the occupancy that you have is considered sublease space?

Joel Marcus

We don't have information with us, Mark.

Mark Biffert – Oppenheimer

Okay. And then and I guess maybe you can tell me in order to be competitive in this market, what type of conceptions are you offering to attract these tenants?

Joel Marcus

I don't think there are any particular – well, where are you asking about?

Mark Biffert – Oppenheimer

Well, I mean in terms of the New York lease with Eli Lilly, maybe some of the things that you're looking to lease up in San Francisco, are you giving six months free rent, are you giving – helping with the build out?

Joel Marcus

well, the build out is an issue that we generally like to do the build out because that infrastructure obviously is a long-term high-value asset and we get a very high quality return on that. The Pfizer building, they chose not to have us do the build out so in that case they get a shell. But in many cases, we would like to try to do the build out, but again that depends on the negotiation. I wouldn't call the any kind of a concession, that is actually something we would like to get.

When you talk about broker giveaways or things like that, you have to remember, we really haven't had to do that because of the rather modest vacancy rates in most of our markets. We are not in any sub markets where vacancy rates are in the mid to high teens or in 20s like some of the East Bay markets and others that Steve alluded to and Steve can talk more about concession. I think also GAAP rates were straight-line and those are all in numbers as well. Steve, you may have a comment.

Steve Richardson

Yes. I was just going to point out that as you look at our leasing statistics on page 20, it shows the six months for 2009, and you can see that the TIs and leasing commissions per square foot really haven't varied significantly from reported amounts in prior years for the 12 month period. So and then the GAAP rents, if you asked about any significant concessions on the free rented side, that would be buried and included in the GAAP rent statistic, so to the extent you give away too much free rent, it will impact your overall GAAP rent numbers. And as you can tell, we delivered 4% rental rate changes on 600,000 ft.² year to date in 2009.

Mark Biffert – Oppenheimer

Okay, great. And then thanks for the added color on the pre-construction pipeline, I'm just curious, if you can talk a little bit more about the projects that were added, that weren't on the previous quarter. I believe the only ones that were on it before were Eastern Mass and San Francisco, what are the other projects? Is that just pure land?

Joel Marcus

They have been on – if you go back historically, they have been – we have had schedules on there historically where these have been broken down. I think we tried to put out a more detailed CIP analysis this time based on requests from investors and analysts, but I think the page 28 spreadsheet is we have kind of enhanced it, but it has – it was not there last quarter, but was there in previous quarters, because we've were trying to figure out how best to present them in a way that could be clear, but we won't – virtually all of that land for a long period of time, the big ones being, this is page 28, obviously Mission Bay. We have a large holding in the South San Francisco, I think we are the largest landholder there to be built land, and then obviously our big project in Cambridge and then the others kind of (inaudible) from there. But nothing new has been added.

Mark Biffert – Oppenheimer

Okay. And Dean, I may have missed this, what was the carry cost on those projects?

Dean Shigenaga

We did break it out. It is on page 25. So for the 5.6 million pre-construction square footage, you can see there is about 597 million of basis associated with that.

Joel Marcus

Okay. And remember to keep in mind that if you look at by and large we have a pretty low basis even compared to market comp today in each of these locations, sometimes if you go back to last sales during – before the market kind of collapsed after September, in some of the markets, we still have maybe basis that would be a third or a quarter of what the previous market value rates are. So even with a pretty big hair cut, we are still in very good shape. And then in Massachusetts, as we pointed out, in the East Cambridge aggregation which is really the last big set of puzzles that can be build on there, we have a pretty modest basis, about a hundred bucks a foot. We have got about a I think $6 million of cash flow coming from low rise buildings on some of those sites, net of that being picked up in income, but going to reduce basis. So I think for future growth and for value, people can be comforted by the fact that we have got pretty low basis here.

Mark Biffert – Oppenheimer

Okay. And then I just had one other question on the gain that you guys booked during the quarter, how did you assess that evaluation to book that gain and where was that recorded in the income statement?

Joel Marcus

This is on the…

Mark Biffert – Oppenheimer

The $7.2 million gain.

Dean Shigenaga

The 7.2 million was valued at the cash price – cash amount that was paid to us. So it was a very straightforward calculation and it shows up in other income.

Mark Biffert – Oppenheimer

Okay, thanks.

Joel Marcus

Thank you.

Operator

And we will take our next question with Anthony Paolone with J.P. Morgan.

Joe Dazzio – J.P. Morgan

Good afternoon. It is actually Joe Dazzio [ph] here.

Joel Marcus

Hi, Joe.

Dean Shigenaga

Hi, Joe.

Joe Dazzio – J.P. Morgan

A question about bad debt expense, from the 2008 K, it looks like it has been running at zero for 2007 and 2008, do you see any reason to change that at this point?

Dean Shigenaga

No. I would say – in my comments I highlighted that we don't have any allowance for doubtful accounts on our books as of June 30. So no – I don't see any surprises on that front coming down the pipe.

Joe Dazzio – J.P. Morgan

Okay. And then Joel, a question about the mark to market, I think that you said that in 2010, you are also expecting a 5% increase on the lease expirations?

Joel Marcus

That is correct.

Joe Dazzio – J.P. Morgan

If you look at the schedule, I think the 2010 expirations are maybe $3 to $4 below where they are in 2009?

Joel Marcus

That is correct.

Joe Dazzio – J.P. Morgan

And even further below kind of a low to mid 30s where you have been signing leases today, is there – is that just a matter of marketing mix or is there something else?

Joel Marcus

No. That is just historical. If you look at that, we thought that that would be helpful, it is just a matter of historical leases in place and you know we are benefited obviously by that. So that is page 21 – that is just a helpful you know factor in the marketplace which would allow us to when we resign leases. I mean if you look at the bigger ones, San Francisco at 26 bucks, that is pretty decent to be able to go into 2010 with. And then Massachusetts at 29.90, again pretty good. So we feel very good about that being able to reasonably achieve that 5% number.

Joe Dazzio – J.P. Morgan

Okay. And then a couple of questions on development, the Lilly lease at East River, you have been negotiating that for a while, did the rent change during the negotiation period at all as the market deteriorated?

Joel Marcus

No. Actually Peter Mugway [ph] who negotiated that lease is sitting right here and no. Actually it was one of the least combative and most I think most pleasant leases to negotiate but it is very, very complicated lease and a very complicated building in a market that has never had real life science users. So and also the requirements of big pharma sometimes are pretty extraordinary when you get into programming and timing and it just takes a whole lot of time.

Joe Dazzio – J.P. Morgan

Okay, and then a couple of questions…

Joel Marcus

Nothing unusual and no there was no re-trade on the economics at all. It was actually a very – I think when you deal with a lot of the companies, our experience, and we – virtually all of them are our tenants. You know Lilly comes from Indianapolis, we spend a lot of time back – we have historical relationships with Lilly in other markets and also on some strategic initiatives. And when you go back to Indianapolis, it is you know – it is kind of the salt of the earth kind of people and that is why you know Pete Manning [ph] is our home town fan. It show they are that good people and it isn't the kind of thing you sometimes see with maybe financial institutions in New York looking at the market everyday and re-trading rent every moment, it just didn't happen that way.

Joe Dazzio – J.P. Morgan

Okay, and then a couple of things on the 162,000 ft.² development, South San Francisco, is that being leased to one tenant that is probably being negotiated, or are they multi-tenants?

Joel Marcus

It is one.

Joe Dazzio – J.P. Morgan

Last quarter it was listed as 16% free leased, did that tenant just decide to take down the whole building or you have a whole new tenant?

Joel Marcus

A whole new tenant.

Joe Dazzio – J.P. Morgan

Okay. And how does the returns on those two developments in South San Francisco kind of compare to your I guess typical developments, is that about in line or a little more, a little less?

Joel Marcus

I would say a little less than our traditional 10% to 12%.

Joe Dazzio – J.P. Morgan

Okay, thank you.

Joel Marcus

You're welcome. Good questions.

Operator

We'll take our next question with Michael Bilerman with Citi. Please go ahead.

Michael Bilerman – Citi

Yes, good afternoon.

Joel Marcus

Hi, Michael.

Michael Bilerman – Citi

Just checking on the construction and progress, the 1.4 billion, do you not have any capital outside of that that is not being capitalized for land and other things?

Joel Marcus

Yes, the 1.4 billion represents our cost basis that is under construction activities and represents as of June 30 the applicable basis that will be used under FAS 34 for interest capitalization calculations.

Michael Bilerman – Citi

Right. And you look on the balance sheet, the same 1.4 billion effectively which is the properties under development and land, effectively you are capitalizing on your entire bank, right, so there is not like another hundred million or $200 million…

Joel Marcus

If you go to page 28, Michael, I think we try to, we kind of fiddled around this a little bit. We tried to kind of lay out, so if you look at the first column, you have got those that are actually in pretty substantial activity and then you have got kind of the land in – the total is almost 5 million, the 4.8 million.

Michael Bilerman – Citi

Right. In the first column it is 597 million, the second column is a 215 million, and that relates back to page 25.

Dean Shigenaga

No. Let me walk you through that Michael. The 597 million on page 25 titled pre-construction projects is associated with on page 28 the very first column under development reconstruction totaling 5.6 million. The 4.8 million right next to it, land, is not part of the 1.4 billion on page 25. That land is not undergoing any construction activities and is sitting on our balance sheet outside of the 1.4 billion.

Joel Marcus

Right. So no capitalization on that.

Michael Bilerman – Citi

Okay. So how much is that and where is that on the balance sheet on page 6?

Dean Shigenaga

It is included in rental properties.

Michael Bilerman – Citi

You're including land in the rental properties net number?

Dean Shigenaga

It is in their net – I mean short of putting a separate line somewhere in other assets or something else but that is where we are holding it.

Michael Bilerman – Citi

And how much – so how much do you have non-income-producing outside of this 1.4 billion?

Dean Shigenaga

In basis?

Michael Bilerman – Citi

Yes.

Dean Shigenaga

Yes, I don't have – I don't have that number with me, Michael.

Michael Bilerman – Citi

Okay. 100 million, 200 million, just to get a little goal post around it.

Dean Shigenaga

Yes. I don't want to guess, Michael. We will think about getting that out there in our next quarterly supplemental, so you have got that information.

Michael Bilerman – Citi

And then what does the $250 million then relate to specifically then?

Dean Shigenaga

It is a good question, Michael. And you're referring just so I can…

Michael Bilerman – Citi

On page 25, the 250 million called new markets and other projects.

Dean Shigenaga

Yes. It is highlighted. I know you probably haven't had a chance to read through the entire note here but in page – jus so you would have it for reference, on page 31, the prescription of what is included in there but basically it includes two parking lots in Mission Bay, these are above ground parking structures to support the operating assets that will be there shortly. We will generate revenue. You have got two buildings in South in China and you have a component of our New York project which is the Baza [ph], the West Tower site etc.

Michael Bilerman – Citi

Okay.

Dean Shigenaga

All these projects will be delivered over time as they get through their construction activities.

Michael Bilerman – Citi

Okay. And the additions to the supplemental work were externally helpful, so I do thank you for that. Not to look a gift horse in the mouth, but it would be great to get the CIP listed on the development page so we actually understand how much is to be spend on other redevelopment to track those returns more accurately would be helpful. Going back to East River, you know, there has been some discussion because ImClone's a New York-based tenant already that it is now short of one of the goals (inaudible) to really bring new tenants to New York. And I'm curious to how you sort of react to some of that criticism?

Joel Marcus

Well, that was actually – that was the first question asked at Mayor Bloomberg and if you were there, he would have jumped on your throat.

Michael Bilerman – Citi

Yes.

Joel Marcus

He actually – that was the very first press question and it was a pretty decent press contingent and they asked that exact question and he did jump down the guys throat. And he reminded them that number one, they are in pretty shabby quarters down on the Barrack Street [ph] which is more like a quasi-garment district area. They are going to be consolidating the oncology group of ImClone, which has a pretty robust pipeline to the that a selected group of Lilly oncology folks coming out of Indianapolis, and over time we think that will grow significantly.

An easy choice for them could have been and short of the takeover of by Lilly, ImClone was scheduled go to Branchburg, New Jersey. They have a manufacturing campus there for Erbitux and they have plenty of land on which to build. They would have build you know traditional suburban office lab buildings at a fraction of the cost of East River. That was the game plan before Carl Icahn got involved in the takeover side, and so I think it is a testament to Lilly and to ImClone.

ImClone's most of their people come from New York City. Their research staff, very few of them wanted to go to New Jersey, so in a sense, if East River did not exist, New York would have lost virtually all of these jobs. So I think the win is a absolute win. I think people coming from Indianapolis to supplement ImClone will be good and over time I would love to see Lilly Oncology headquartered there.

And I think one big footnote, that we haven't said much about, but that has been public a bit, there is going to be a rather large investment arm that Lilly is setting up that will be housed at East River and maybe a combination of both office and labs for a large investment in the tune of north of a hundred million dollars. That will be putting together pre – just very pre-IND clinical and clinical stage candidates to basically take through the clinic and that will be headquartered in New York at East River also. And that is a big win also I think for New York.

Michael Bilerman – Citi

(inaudible) with Bloomberg, so I just wanted to get your reaction.

Joel Marcus

Yes. Lucky you weren’t asking that question with him. I am much nicer. I was – actually John Lechleiter, this is kind of a funny sideline who was standing next to me, he is the CEO of Lilly when Mayor Bloomberg jump down this guy's throat. He grabbed my arm and said, gee, we don't see this in Indianapolis. So it was pretty interesting back and forth.

Michael Bilerman – Citi

Just moving over to Mission Bay for a second on the Pfizer base, I think you mentioned that they are pretty far along in getting a sublease done, how do those rents compare on the sublease basis to where your lease is and if they are closing off, is there a desire for you to sort of do a transaction where you are going to step in and just a direct lease with the tenant?

Joel Marcus

Yes, I think number one, our lease with Pfizer yields us a very handsome return on our shell cost, you know very, very strong. So we have no incentive to do that. Plus we have got a 15 year lease at least, you know in the bank for tenant if they choose to terminate at the ten-year mark. And obviously Pfizer in credit, so there is no incentive for us to do that. But Steve can comment not so much on the sublease rate, because I don't think – I'm not sure that we know – I am not sure that we could say, but just generally how that is going.

Dean Shigenaga

Again there is quite a bit of activity in both the Mission Bay market and the South San Francisco market. Pfizer has hired a broker, they have been very aggressively pursued active tenants out there in the market. We don't have any insight as to where the sublease rate might end up, but you know again they have taken the steps in a very short order right after their announcement about not occupying the space to try to back fill that. So our expectation with the real-life activity out there is that they will be successful here in the near term.

Joel Marcus

And we understand Jeff Kinny was personally involved in that effort.

Michael Bilerman – Citi

Okay. And that does not drag any competition away for your sister building?

Dean Shigenaga

No, not necessarily. I think we are chatting with a few different people now and it is going to be beneficial to us to have some smaller spaces available to accommodate tenants because there really is virtually no other laboratory space available in that kind of medium-sized increment. So I think it'll complement us very well going forward. And that space does not get delivered until well into Q1 2010.

Joel Marcus

And I was talking to the UCSFF people the other day. Pfizer has continued, they have made a large investment in an effort that UCSF is heading there. So they are not totally exiting that market, sub market, and forgetting about it. They have – at a lunch that Steve hosted with the Mayor and Jeff Kindler back, I don't know, it seems like an eon ago, but last year in the summer maybe, he committed to invest in this venture fund that UCSF has, and I just asked the question the other day at a general partner there who's running it, he said, no, they have ponied up and they are on board. So that is a good sign as well even though they physically won't have presence at Mission Bay.

Michael Bilerman – Citi

Okay. So my last question, just on the line of credit, you I think talked about being assuming two thirds to three fourths of availability and I think you talked about the stuff that your lead lenders at least expected that is where you will be able to get to, how much do the lead lenders have with the 1.9 and how confident I guess are they and at what point will you start those negotiations?

Joel Marcus

Yes, I will let may be Dean answer, let me just give you a top-level view. I think the way lending will be done in the future, there'll be fewer overall members of the bank groups. I think that is not only for us but I think for probably most of the REITs up there and I think you will see more lenders step up to bigger levels you know for the clients that they choose to want to associate with and do business with. So I think that will be a big differentiating factor and I think there is a number of pretty sizable deals on the market today that are kind of evidencing that very fact but Dean can give you some further specifics.

Dean Shigenaga

Real good question, Michael. Really what is going on in the market right now is the banks are looking to do three year on credit facilities, so the renewals can be full three years and you will see some outliers short of that obviously. If you look back over the last nine months, there have been some creative deals done on a short-term basis. But three year facilities, in other words, it is not a two plus one, it is a full three, and if you think about our timing on our maturities, that is kind of doesn't do us a whole lot of good right now to take a three-year extension, and that is three year from today, not three years from our current maturities.

What has been clear I think is that we are going to see banks step up in a big way and increase their commitments generally speaking. You will see probably new banks come in as well. I mean it is not too hard to envision. If you think about how far ahead of the game, a couple of the top tier banks have advanced their position within the investment banking community, a lot of banks got left behind in the first part of 2009 on transactions this year, and so they're very hungry and aggressive and enhancing their relationships in order to capture some of the fees that are available out there.

So I think that is really playing into the market and I think you will get a sense for it as these couple deals unfold in the near term. To give you an idea, to answer on of your first questions that led into this discussion, our top lenders typically hold a position ranging from 75 million to 100 million generally on our credit facility and as you get a sense from some of the deals that are likely to get done in the near term, I wouldn't be too surprised to hear banks putting in $200 million of commitments into facilities.

Now I don't know that that necessarily translates into the size of commitments that we need to complete from our top banks but I think that trend that we're hoping to see unfold in the near term here is significant increases from top relationship banks.

Joel Marcus

And also I would say we are highly confident that the numbers that Dean put out there are what we can achieve.

Michael Bilerman – Citi

Okay, thank you.

Joel Marcus

Yes, thank you.

Operator

(Operator instructions). We will take our next question with Jamie Feldman with Banc Of America/Merrill Lynch, please go ahead.

Jamie Feldman – Banc Of America/Merrill Lynch

Thank you very much. You know I was hoping you could talk a little bit more about the if you break out your tenant base by their sector, whether it is research institutions or big pharma or biotech, kind of what is the mood in the second quarter versus the first quarter and even as we head into the third quarter, which are kind of getting back to business, which are still on hold and kind of how do you think about whether your sector in particular is nearing a bottom?

Joel Marcus

Yes. We put out I guess if you go to the page 22 and then the pie chart on 23, which may be hyperlinked. I would say, it is a little hard to say by general category, because it is company specific, because in one case you have Roche announcing the movement of their US headquarters from Nutley to the Genentech's campus at South San Francisco. You have other companies who are expanding pretty, AstraZeneca after their acquisition of MedImmune announcing you know (inaudible) is going to be a big base for them. And then on the other hand you have got Pfizer who has decided to because of the Wyeth pipeline fill, they have exited San Diego.

I mean that was previously before, not in total, but they slimmed down there, and they clearly turned on moving to Mission Bay. So I wouldn't say it is big pharma as a category, it really is very company specific, and I think that is true throughout. But I would say in general we are seeing much more activity with big pharma in a number of markets, certainly the two big markets. We're seeing decent activity on the private high-quality site. We signed a couple of big leases over the last couple of quarters with some very well financed private life science companies, so they have garnered some pretty good money.

The public biotech companies that you see, Gilead is expanding; obviously Amgen is more on a hold, so it is very – Celgene has been expanding, and we have been expanding with them. So it is a little – again it is pretty company specific. And then I think institutionally, institutions have, they have two problems. On the one hand, they have got more money through the NIH if they are top tier group, but on the other hand they have got endowments and other pressure points that have caused them to maybe look more inward, and so that has presented a great opportunity for us really on both sides. So I would say it really is almost institutionally specific and then obviously sub market specific, if that is helpful.

Jamie Feldman – Banc Of America/Merrill Lynch

Okay. And then as you talk about the government and the NIH funding, what kind of impact do you see on your 2010 business plan from that?

Joel Marcus

Yes, I think substantial. We clearly have the benefit, direct benefit on the stimulus package and the NIH money in the Maryland market. You have seen the occupancy pickup. I think you will see more of that in the coming quarters virtually directly related to those two aspects, and certainly some in the hinterlands of the various other markets, primarily out of NIH money and then we will see I think, we are trying to access some stimulus money for projects that we're looking at up in the Bay Area, which is kind of a unique project. So stay tuned for that.

But I think you'll see more and more of that. But again the endowment side of things has been kind of the downside as you know. There has been a lot written about Harvard's taking some pretty big hits and they're stopping a very large life science development projects, some 700,000 square feet in the Austin area across from their main Cambridge campus, again because of the financial downturn and the decline in the value of their endowment. So that presents an opportunity for landlords who are leasing or want to help finance them with some creative opportunities.

Jamie Feldman – Banc Of America/Merrill Lynch

Okay. And then finally for Dean, the change in your capital interest outlook from 2009 to 2010, is any of that coming from land in process that you will no longer be capitalizing?

Dean Shigenaga

Not in any big way. As I mentioned in my call, the pre-construction activities up in Mission Bay and you can also tell by the square footage on the pre-construction table near the back of the supplemental, that there is a significant amount of square footage up in Mission Bay and Cambridge that is going to go through construction activities through 2010 and 2011. There maybe a small parcel that gets completed, but as we give you guidance as to what my outlook was on average on a quarterly basis into 2010, you could tell based on that my guess is I have not broken down the numbers but most of it is probably coming from deliveries of redevelopment and development space, and then maybe a small portion come into completion on the pre-construction activities.

Jamie Feldman – Banc Of America/Merrill Lynch

Right, thank you very much.

Joel Marcus

Thanks Jamie.

Operator

We will take our next question with David Aubuchon with Robert W. Baird. Please go ahead.

David Aubuchon – Robert W. Baird

Thank you. Sorry if I missed it, but Dean, could you talk about expected rates and loan to value on the secured loan, the two big chunks that you have right now?

Dean Shigenaga

A good question Dave. I forgot to add that into my comments but I would say that our discussions of late are very consistent with my comments in the last quarter call which I believe I may have highlighted were generally in the mid to high seven range. And you know loan to value, I will say it with caution because the value competent is buried in that term but generally speaking in the 50% to 60% range.

David Aubuchon – Robert W. Baird

Okay. And then so – I'm sorry, hundred million do you have letter of credit, is that right?

Joel Marcus

Well, 120 million deal that we are looking to close, that we have got signed a term sheet on.

David Aubuchon – Robert W. Baird

And then Dean, I think you said in your comments that there is another loan on the way or no?

Dean Shigenaga

Yes, there is another pool of assets that are in early stage, the early stage process. And the reason why I used a big range is to give you an idea of when we put together this first pool that is now sized to 20 million, we started actually below a hundred million not knowing the appetite with the lending community, and we were then asked to size it even larger. We did and as we firmed up the packets, we settled that 120. What I highlighted in my call notes was a range somewhere between I believe 75 million and maybe 120 million and it will be sized to the appetite for the specific vendor we decided to do business with.

Joel Marcus

And we are also actively looking at opportunities and we have been presented with a whole bunch of multiple opportunities on Tech Square.

David Aubuchon – Robert W. Baird

And that is outside of the two loans that you are talking about here?

Joel Marcus

Correct.

David Aubuchon – Robert W. Baird

And then just timing on these…

Joel Marcus

And we also did – we did have a meeting with TALP that was inaccurately reported and then they I guess they corrected it, but we decided that five year money just wasn't worth it. We hardly did the convert and you know people were either pleased we got the money or unpleased because of the nature of the instrument or the timing of the structure. So we clearly moved away from shorter-term kind of debt and moved to long-term debt.

David Aubuchon – Robert W. Baird

And then just timing on the term sheet you signed and then the second deal?

Joel Marcus

I would assume that would probably close this quarter. And then the other one maybe in the fourth quarter, hard to say, but that would be our general expectations.

David Aubuchon – Robert W. Baird

Okay. And then just obviously assets sales, I mean I guess pricing right now is pretty challenging for asset sales, just…

Joel Marcus

Well, at least our… yes, this – our sales are likely to be the users and the one we have that is being put into discontinued ops is really based on a cost per square foot and we will have a very nice gain on that. So it is not really so much on a cap rate basis.

David Aubuchon – Robert W. Baird

Okay. Last question is on the redevelopment pipeline, can you talk about what is actually pre-leased?

Joel Marcus

Let me go to that page. Okay. So the two smaller ones in San Diego will come out of redevelopment this year. We're working on a couple of smaller requirements, so – but nothing is leased at the moment. The larger San Diego, we're working on some pretty sizable deals there but nothing has been leased. The South San Francisco where we are converting – well actually, let me just take you through these (inaudible) the top one was a total gut of a pretty old office building, the big one in San Diego, and the other two were guts of, partial-guts of – one was a complete gut, but other one was partially gut, you know older product and single tenant use in one of them.

The San Francisco one is single tenant that we are creating multi tenant and we think we will – we're working on a lease there for at least a part of that. Tech Square which is in here I think we have one floor left that we will deliver this year. A new one in Massachusetts that we just kind of cleared out, it was office and kind of other assorted space, that is the I think the 90,000 one, that we just kicked all the tenants out, and so the balance I think pretty much we are working through guts of those. So no leasing but we're working on some things. And then the 98, let us see, the 50,000 ft.² in Maryland, we are actually working on finalizing a lease on that. So I think – I don't know if I've covered those right, but…

Dean Shigenaga

Yes, let me – the 58,000 which – let me just fill a couple of holes here. The 50,000 in suburban DC is leased, hundred percent leased and it is going to go through – it is actually a pretty interesting project. Some of the space is in pretty nice shape but they are also expanding on the building there which will take a little bit more time to complete, but that one was leased.

Joel Marcus

That is the 58?

Dean Shigenaga

That is the 58.

Joel Marcus

Right. And that is pretty substantial runaway to increase there. And the 50,000 below it is, we have essentially signed a deal and it is working through the government for on their end. So essentially it is leased. So the two suburban DC's are at least – Florida is partially leased. As I mentioned the Cambridge is pretty much done except for one floor, and then I think I have given color on the others. So hopefully that is a little better of help to give you a sense of what is out there.

David Aubuchon – Robert W. Baird

Right. Just trying to model this into numbers, it sounds like on balance, you're probably 30%, 40% pre-leased at this moment?

Joel Marcus

Yes, I would say maybe in the 40 plus range, 40 maybe even – yes, 40 plus.

David Aubuchon – Robert W. Baird

Okay. Thank you, guys.

Joel Marcus

Yes, thank you.

Operator

And we will take a follow up with Anthony Paolone with J.P. Morgan. Please go ahead.

Anthony Paolone – J.P. Morgan

Thank you. On page 25, the $177 million you note that is required to finish up all the CIT there, is that all in, or do you have to put – or is that just like hard cost and cap interest be in addition to that? It looks…

Joel Marcus

That is construction costs, so it excludes capped interest.

Anthony Paolone – J.P. Morgan

Okay. So if I look at the one, the three years, that you kind of outlined there to get it all done, this is close to $300 million in total?

Joel Marcus

No. Most of the 177 will be spent over the coming four quarters. The stuff that goes out to three years is really a small component of that 177.

Anthony Paolone – J.P. Morgan

Okay. So take about four quarters worth of capped interest plus the 177 and that is kind of the number, I guess?

Joel Marcus

Sure. That is a fair estimate, Tony.

Anthony Paolone – J.P. Morgan

Okay. And then just to clarify on the 250 million of kind of other items on that, on that sheet, on that page where you have got like parking garages, like for instance where the parking garage is, is that – when you mentioned that those produce revenues, do they actually produce revenues or just means it is part of the enhancement of the office building, it just adds to the value of that asset?

Joel Marcus

No. It does generate revenues. It does generate revenues.

Anthony Paolone -- J.P. Morgan

Okay, that is it. Thank you.

Joel Marcus

Thanks, Tony.

Operator

This does conclude our question and answer session, I would like to turn it back over to Joel Marcus for any additional or closing remarks.

Joel Marcus

Okay. Just to thank you for taking time today and we look forward to talking to you to report third quarter. Thanks, everybody.

Operator

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation.

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