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

Q4 2013 Earnings Conference Call

February 04, 2014 3:00 PM ET

Executives

Rhonda Chiger – Investor Relations

Joel S. Marcus – Chairman, Chief Executive Officer and Founder

Peter M. Moglia – Chief Investment Officer

Stephen A. Richardson – Chief Operating Officer & Regional Market Director (San Francisco Bay Area)

Dean A. Shigenaga – Executive Vice President, Chief Financial Officer and Treasurer

Analysts

Emmanuel Korchman – Citigroup

Jamie Feldman – Bank of America Merrill Lynch

David B. Rodgers – Robert W. Baird & Company

Jeff Theiler – Green Street Advisors, Inc.

Sheila McGrath – Evercore Partners

Michael Carroll – RBC Capital Markets LLC

Steve Sakwa – ISI Group

Operator

Welcome to the Alexandria Real Estate Equities Incorporated Fourth Quarter 2013 Earnings Conference Call. My name is Vickie and I’ll 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.

And at this time I would like to 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 S. Marcus

Thanks, Rhonda, and welcome everybody. With me are Dean, Steve, Peter, Marc and Andres and wish you everybody a very Happy New Year. On the fourth quarter and year-end, I think the quote at the beginning of the press release summed up, I think the year 2013 where it really demonstrated the return in strength of the core operations, completion of significant value-add Class A development projects in our AAA locations in our urban science and technology cluster markets and really the completion of many significant and important improvements in our long-term capital structure. I think what 2013 also showed us based on fourth quarter and year leasing is that the strong demand in these key cluster markets really has returned in a rather robust way and we're very pleased about that.

Our fully integrated smart teams in each of the regions obviously have a lot to do with the delivery of these results, and as Dean will talk more about the balance sheet, balance sheet is in very good shape to support solid and stable growth with continuous on boarding of our EBITDA from the value-add pipeline.

A few macro comments for 2013, many of you know it was really a banner year for biotech and pharma after a long drought. 46 U.S. biotech companies priced IPOs the most in 13 years and about $3.5 billion was raised as new money and venture funds, which had a few years of tough flooding. And, importantly to us, pharma has continued in an inexorable fashion toward their external innovation hub model into our core cluster markets and we benefitted pretty greatly by that. And, interestingly enough, small companies invented most of the big drugs that received approval in 2013 and I'm also pleased to report that 59% of all drug approvals by the FDA in 2013 were actually Alexandria tenants. So that's a great testament to our underwriting.

Also the emergence of several, I think huge, new classes of drugs and drug targets including the immuno-oncology area, the non-alcoholic liver disease area, which has caught fever lately, and then, importantly, RNA therapeutics. If we go on to operations and internal growth, the demand for our product in our core cluster markets, and really ARE as the premier landlord, hit an all-time high. We’re pleased to report and Dean will talk about the solid same store results and we expect the same to continue in 2014.

Occupancy continues to be strong and we believe will continue to increase in 2014, and I think Steve will talk about leasing fourth quarter and 2013; an all-time high with solid spreads on those leases. Pleased to report, which is kind of interesting that Maryland actually had the highest leasing volume of all the regions in the fourth quarter with 391,000 square feet or 29% of all leases signed, a big change from the last few years. And San Francisco had the highest leasing volume for 2013 overall, almost 1 million square feet at about 27%. So that’s all really good news.

External growth, we delivered the final redevelopment to Genomatica in San Diego and also about 189,000 square feet out of our West Tower at the Alexandria Center for Life Science, our flagship campus in New York City to tenants including Roche and NYU. We’re working on new leases with a public biotech company and a private biotech company. We hope to report here in the not too distant future. And one setback we had was one set of negotiations with an existing tenant for expansion of about 30,000 square feet was deferred.

Moving on the 75/125 Binney, ARIAD has confirmed they will proceed under the lease. They may or may not choose to sublease all or part of the smaller building, but it’s pretty clear based on their own statements that the 26 Landsdowne property is functionally obsolete for their needs. In Longwood, we’ve seen slower leasing than anticipated due to institutional concerns regarding NIH funding, which we hope will be restored over the coming year. And this really impacts the top tier not so much, but certainly any institutions other than the top tier, I think have to worry a lot, but since Longwood medical is really the five great hospitals, they aren’t impacted nearly as much, but still they are concerned about the trend there.

So we’ve got a new marketing push we’re instigating this month, just a week from now and we’re also seeing demand from the institutions potentially to buy condo pieces out of their capital budgets as opposed to leasing through the operating budgets. So let’s see where it goes. Area strategic optionality for growth, we’ve got, as you know, multiple platforms, which have enabled us to be opportunistic in Cambridge and San Diego regarding acquisitions over the last 90 days and we’re pleased about that.

On the balance sheet, as many of you know, at Lehman we carried 2.5 million square feet of land at Mission Bay that’s now been fully built or monetized and about 2 million square feet in Cambridge and about half of that is underway.

We achieved our investment grade rating and our target zone of leverage thereafter and we’re pleased that we’ll continue to onboard a lot of EBITDA from those projects and we’re glad we carried those through the financial crisis, but it certainly wasn’t easy.

Probably most importantly, ARE now has the full range of capital choices available and will utilize the most capital efficient and effective tools in our arsenal as we grow our earnings going forward in 2014 and beyond. And then, likely in 2014 we’ll see land sales and land sales of joint venture that will likely involve multiple markets to take advantage of really an unusual current strong existing tenant demand coupled with the demand that’s known in the market more broadly.

And then, finally a comment on the dividend. The Board will continue its policy to share increasing cash flows with investors as we maintain a low dividend payout ratio, I think about 60% at the year end.

So I’m going to ask Peter Moglia to comment on some of the capital markets’ matters.

Peter M. Moglia

Sure. Thanks, Joel. So there were two notable trades from other investors in the third quarter and I’m going to take you through them. One Kendall Square, 670,000 square foot, nine building office lab camp, located in Kendall Square, East Cambridge was sold by Rockwood Capital to DivcoWest for $395 million or $590 per square foot. The property is anchored by Merrimack Pharmaceuticals, which occupies approximately 80% of the property, but there is very little in the way of credit tenancies there. The majority of the tenancies really early stage life science and tech companies who enjoy the retail amenities offered by the property. We estimate the cap rate to be about 5.75% and understand that the property had close to 10 bidders in the final round, including real estate, investment funds, all domestic money; institutional money with operating partners and REITs.

So Alexandria looked at this property a number of times and now we are very pleased with the location. We dropped out really when the price became out of balance with the credit profile and the duration of the tendency. We also believe there is a lot of CapEx needed to update the building’s infrastructure. So the price was just a little heavy for us.

245 First Street which is also known as Riverview and located in East Cambridge was sold by Equity Office Properties to Jamestown, which is a Core and Core Plus investor for $192.6 million or $647 per square. That property includes the Cambridge Life Science Center, which is a low-rise lab building, which is connected to an office tower that includes nine levels of above ground parking by a three-story atrium. The main tenant there is the Forsyth Institute, which is a nonprofit research organization and we estimate the cap rate on that sale to be approximately 5.9% and understand that there were three final bidders including a pension fund advisor, a public REIT and Jamestown, the ultimate buyer.

So, although this is a great location, actually very close to our 250 First Street property. We declined to pursue the opportunity because we felt the pricing expectations did not match the B quality of the profile of buildings.

So with that, I’ll pass it over to Steve.

Stephen A. Richardson

Thank you, Peter. The solid core operating performance during 2013 in our key brain trust cluster locations is continuing as we work our way through the first quarter of 2014. The trajectory of the mark-to-market metric evidenced by the gap increase of 18.2% this past quarter is very encouraging, as it highlights the increasing value and strength of the company’s core class A assets in these AAA locations. We’ve seen a clear sense of urgency to secure and lock down space returning to the market as we’re approaching high occupancy rates in each of our key clusters. This is translating directly to enhanced activity in our 2014 and 2015 roles. We have just 491,000 square feet remaining to resolve in 2014. We’re only 3.3% of our operating asset base. Nearly half of that is concentrated in Boston and San Francisco, two of the hardest markets. We’re also getting out in front of our 2015 rollovers and engaging in discussions with key clients and we’ll move on to the details and activity in these clusters.

We’ve seen the lease rates in Cambridge increasing approximately 10% year-over-year, and now range in the mid to high 50s for existing product with build-to-suit projects pricing at $70 triple net. We’re tracking approximately 640,000 square feet of known life science demand with more behind it and another 1.6 million square feet of demand from tech users. The mark-to-market for rollovers this year excluding one legacy these is 7.5% and 14.6% on a cash and GAAP basis in Cambridge.

Moving over to San Francisco, the rents in Mission Bay have increased approximately 15% during the past year. They’re now in the mid-40s triple net. We’ve also seen that South Francisco submarket experienced lease rate increases in this range during 2013 and on a mark-to-market basis still remain 20% below historic levels. The mark-to-market for rollovers, we anticipate resolving this year in the Bay area will be slightly positive cash and a very healthy 10% on a GAAP basis. Demand remains very robust with 1 million square feet of life science and 7 million square feet of tech tenant requirements in a broader San Francisco to Silicon Valley marketplace.

San Diego’s activity is highlighted by a decrease in the direct vacancy on the Torrey Pines Bluff growth of 144 basis points from 10.1% to 8.66% at a time when we have significant activity on our Class A spectrum project located on Science Park Road. Rents have increased 7% from last year to the upper 30s triple net in the submarket and we’re currently tracking 1.2 million square feet of high-quality demand across the three key clusters in San Diego.

Moving back east to Maryland, we’ve seen a steady increase from its trough. Joe had noted a key lease execution there and we anticipate mark-to-market rent with a healthy 10% increase for rollovers this year. And the regional team is tracking another 0.25 million square feet of demand with an emphasis on high-quality space.

Moving back to the northwest, the Seattle market is experiencing pent-up demand as we’re tracking and engage with tenants seeking a total set of requirements of about 280,000 feet. We’re extremely well-positioned with our development opportunities in the heart of South Lake Union, which, many know, is also experiencing a boom in demand from the tech sector.

Finally, wrapping up in the southeast, the RTP market has tightened considerably over the past year with the 190 bps decrease in vacancy to 10.6% and we’re tracking about 90,000 square feet demand in the market and do anticipate a very healthy mark-to-market GAAP rents approaching 20% increases.

With that, I’ll turn it over to Dean.

Dean A. Shigenaga

Thanks, Steve. Jumping right in, the same-property performance for 2013 was very solid, about $17.4 million or 5.4% on cash basis and up $6 million or 1.8% on a GAAP basis. Cash same-property performance for 2013 was driven primarily by our favorable lease structure, again 95% contained annual contractual steps in rent and 94% of our leases are triple net. Other drivers included lease up of temporary vacancy in the first of 2012 in Cambridge, at 790 Memorial and 300 Technology Square and rent commencement for Illumina in San Diego in October of 2012.

Briefly on value creation projects that were completed in the fourth quarter, we hit a major milestone with the completion in December and the delivery of the first portion of our second class A lab building in New York City. This delivery is about 12 months and two weeks after the delivery of a crane to the site in early December of 2012. Major construction activities and capitalization of interest is forecasted to continue through the remainder of the project. Overall yields are on track with our disclosures. In fact I think you’ll find that we’ll be well ahead, meaningful ahead when we're done with this project, but let us work through the remainder of the lease-up there.

We also completed the redevelopment of 4757 Nexus Center. 79% of the project was delivered at the end of October and the remainder of the project will be delivered over the next 18 to 24 months. I got a few comments on the balance sheet. First, the timing of closing the purchase of 150 Second Street in Cambridge resulted in debt-to-EBITDA at 6.6 times a year end. On a pro forma basis assuming a full period of EBITDA from the acquisition leverage is right on target at 6.5 times.

Timing of transactions, spending and EBITDA growth will result in some increases and decreases in leverage quarter-to-quarter. Our overall goals for debt to adjusted EBITDA and our fixed charge coverage ratio have not changed. These metrics will continue to range within reason quarter-to-quarter and year-to-year and our growth in cash flows and EBITDA will allow us to maintain solid credit metrics.

We increased our land sales target in our guidance at the midpoint by about $125 million related to the projected sale of a partial interest in certain near-term development land parcels. We also eliminated our prior guidance of $250 million of issuances of common equity through our ATM program in 2014.

The timing of the sale of an interest in certain land parcels is conservative and earlier than our previous common equity assumptions and therefore these changes resulted in no impact to our overall guidance in FFO per share. The remaining $125 million in sources of capital was an increase in debt.

On January 31 we repaid $209 million of our 5.6% secured loan related to our 1.2 million square foot campus at Alexandria Technology Square in Cambridge. Our fourth quarter annualized NOI was approximately $67 million, really double the NOI that was in place at acquisition. That really brings our cash yield on this project to 8.5% today based on our gross real estate investment to date. Our total unencumbered NOI as a result of repaying this debt will increase to 85%.

Outstanding debt under our bank facilities was reduced by over $600 million or approximately 32% since December 31, 2012. I’d like to touch briefly on our strategy for bank debt outstanding on our credit facilities. As of 12/31 we had about $1.3 billion outstanding under the three facilities, down meaningfully from this time last year. $950 million or 73% of our outstanding debt under the facilities is subject interest rate swap contracts with various swaps maturing through early 2017. We strategically maintain unhedged variable rate debt to provide flexibility to opportunistically refinance our debt.

Our interest rate swap agreements are considered from time to time and further mitigate interest rate risk of both in notional and in effect each month as well as extending swap contracts beyond 2017. We plan to repay outstanding borrowings each year under our $500 million unsecured term loan until the loan is repaid in full by its maturity in July of 2016. Repayment of this loan over the next few years will reduce our credit facilities by 16% to approximately 26% of total debt. Additionally as our capital structure grows over the next several years Bank debt will also become a smaller portion of our capital structure.

More importantly, we will continue to focus on improvement in our capital structure while we also focus on optionality that drive stable and solid growth in bottom-line per share earnings and growth and asset value. Lastly for guidance, we updated EPS diluted to a range of $1.75 to $1.95 and we reaffirmed our guidance for FFO per share as adjusted for 2014 at a range $4.60 to $4.80.

With that I’ll turn it back to Joel.

Joel S. Marcus

So operator, we’d like to go to the Q&A at this point please.

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions) And we’ll take the first question that from Emmanuel Korchman with Citi. Please go ahead.

Emmanuel Korchman – Citigroup

Good morning guys. Joel maybe if we can focus on your life science investment platform for a second. You’ve got a $140 million of investments on balance sheet I believe the majority of that’s in private companies rather than public ones. And then I’ll get mark-to-market on the balance sheet so, if were to take to the total value of sort of the investments that Alexandria has made over time. Where would that be versus that $140 million on the balance sheet?

Joel S. Marcus

Yes, that’s a good question. Thanks very much. Maybe just one step back very useful to say why we do, what we do and that is we think really a couple of reasons one is, it gives us the strategic window into really breakthrough science and product opportunities that ultimately in many cases lead to tenancies. Number 2, it gives us an unparalleled knowledge of industry trends and how we should be thinking about Banks, three, it allows us the homes are skilled based and underwriting tenants and obviously very importantly our financial returns.

I think right now is that amount is about 1.7%, 1.8% of total assets, I think we’ve got a solid ROI over the past number of years. I would say that given where the BATAC [ph] sector has gone over the past year or two. We would clearly be well above market on marking those, marking-to-market those private investments. We’re participated in some of the most important companies and we know that those companies have huge upside and huge market opportunities. So we feel very good about we’re positioned.

So I think the true impairments that we recognized shouldn’t be at all looked out as an indicator of kind of where that value is today the two impairments one related to a company that actually started a number of years ago and that has been winding down over period of time and the other was a clean tech asset if you work 60 minutes in the North coastal couple of weeks ago that market has really not down as well. So, the core therapeutic life science investments have really done well and we are very comfortable with where we are on that. So I hope that gives you some color.

Emmanuel Korchman – Citigroup

It’s worth saying, but kind of ascribing a more fair value in our NAVs, how should we think about two times that $140, three times just if we want a sort of a more, fully big number?

Joel S. Marcus

I’m going to ask the account mister.

Dean A. Shigenaga

Yes, I would say that the large majority of that investment portfolio is held at cost and you probably realize that over the years we’ve been able to end up with significant liquidity events that have realized gains and I think in the backdrop of where life science, biotech companies are valued today you are probably comfortably at true-ups on cost and this is all historical rules, early entry point, investments on these underlying life science companies. So, I think on average there and like we said we took two charges that aren’t reflective of the overall valuation.

Emmanuel Korchman – Citigroup

Thanks, Dean. And then, one other question for you maybe. What drove the decision to increase the land sales on the JV agreements rather than doing the A10 [ph] as we discussed in December?

Dean A. Shigenaga

Yes, I think part of this was now that we have gotten to a point where the balance sheet and on boarding of EBITDA will help our future, will really fuel and gives us a platform to grow now more consistently and certainly a bit likely we had for Lehman. It seemed to us after a lot of internal discussions and discussions with those outside that if we do not increase our share count this year through offerings it will, I think be a good demonstration that the company can grow nicely without relying on common equity.

And I think that was a little bit of the core of how we thought about it. I think you guys commented directly on the last call and asked that question and I think we have clearly given some very deep thoughts about and I think irrespective of whether our stock was at 60 or 61 or 70, we feel that by working with a joint venture partner who can provide us immediate capital and a flexible structure to help us monetize and ultimately on board cash from development parcels where we have the ability to tenant some of those properties today to the firm to later on doesn’t make sense. That will be other thing that really drove the extraordinary demand in the market, some of which is known and some of which isn’t. And I think those things kind of can do a confluence, but made us move in this different direction.

Emmanuel Korchman – Citigroup

Perfect. Thanks very much.

Dean A. Shigenaga

Yes. Thank you.

Operator

We’ll now go to Jamie Feldman with Bank of America.

Jamie Feldman – Bank of America Merrill Lynch

Great, thank you. I guess speaking with the JV, can you just talk a little bit more about your progress and timing and size and what we should be thinking in kind of what you're seeing at pricing as well?

Dean A. Shigenaga

Well, let me comment on maybe the targets. We have three buildings left to build in the Binney Street project, 50, 60 and 100 Binney totaling almost 1 million square feet. We know there is significant demand in the market. We also have some significant demand from tenants of ours. We’d like to move that forward. So that would certainly be higher priority, but as you know we’ve got them. We just delivered the Biogen Idec transaction at 225 Binney and we’re all underway at 75, 125 for ARIAD. So having a partner who would provide us significant amount of capital for the other Binney projects is very desirable. Similarly in Seattle where we know there is immediate demand, those would be the other locations that we’re interested in.

We have to-date, I think about eight meetings, very high quality, you might call blue-chip investors, were working on CDAs and turned the deals beyond that I don’t think I want to speculate about the nature of those discussions or the terms that are being talked about, but I would say it’s fair to say we joint ventured the Longwood project back about a year or two ago Peter led that effort with a high-quality investor in Clarion 50% of that transaction. So, I think we have knowledge and the skill base to bring on a very high quality investor that has kind of a D&A thinking about how we think and so that’s kind of where we’re headed here.

Jamie Feldman – Bank of America Merrill Lynch

Okay. And now getting back to your private investment portfolio, what would be the timing where you would set to harvest some of that value?

Joel S. Marcus

We do kind of continuously and we’ve seen a lot of, you might think about this and this goes back to the question many asked gains are conservative guide by nature. So I won’t overrule this max number, but if you think about we have quite a few private investments, some of which have gone public or in the processes of going public, so that gives us a nice opportunity, once they do, goes to market and then also obviously to think about are there times where we would access most IPOs you are generally locked up 180 days. But I think we’ve had very good results and we are very comfortable with where we are.

Dean A. Shigenaga

Yes Jamie, then I think I can add this, if you look back the last couple of years we probably averaged somewhere between gross gains, somewhere of $10 million to $15 million and sometimes larger than that. So, it’s been a pretty consistent opportunity to realize gains over time.

Joel S. Marcus

And those were tougher years because the market wasn’t nearly as buoyant as that has been over the last year or so.

Jamie Feldman – Bank of America Merrill Lynch

Okay. So did you include any of that in your guidance?

Dean A. Shigenaga

There’s always based run rate of recurring gains from the investment portfolio quarter-to-quarter so yes.

Jamie Feldman – Bank of America Merrill Lynch

Thank you.

Dean A. Shigenaga

Any large, in a case like Jamie, we hit some home run like we did in 2012 and we got that out, it was the large.

Joel S. Marcus

And we had an $8 million plus gain from Boston Biomedical. But I would say again we try to be careful and conservative on our guidance so let’s see what the rest of the year rolls out to be.

Jamie Feldman – Bank of America Merrill Lynch

Okay and then just final question sticking with the guidance. Dean, can you talk a little bit about the sensitivity I know you’ve kept the range constant from your Investor Day, what will give you some upside here, or some downside?

Dean A. Shigenaga

Well I’d say first off it’s only been a couple of months. So, although things have improved, I would say generally speaking from the demand standpoint state that’s remained healthy. I think it’s just too early to think about change in our outlook for the year and as we go through the year we’ll revisit. But everything is pretty much on track with our views that we shared with you on Investor Day.

Jamie Feldman – Bank of America Merrill Lynch

Okay thank you.

Joel S. Marcus

Yes, thanks, Jamie.

Operator

Next is Dave Rogers with Robert W. Baird.

David B. Rodgers – Robert W. Baird & Company

Maybe talking about the New York asset a little bit more, I think both in the Investor Day and maybe last quarter you talked about a better run rate there, but you mentioned Joel in your comments that you set that with an existing tenant looking to expand. But let’s talk about the backlog and demand there both domestic and internationally and kind of what you are seeing from that asset?

Joel S. Marcus

Yes it’s kind of interesting you have to remember when we delivered the West Tower Peter negotiated the lease with Eli Lilly, but they were our anchor, but essentially there is no market there to speak up. We actually have had to create the market which we feel very good about. We took a risk, the Citi took a risk on us and I think it maybe big dividends for both. So, you can’t look at market dynamics because they simply don’t exists. So every single lease and every single tenancy, we actually have to force and really work on you can’t just paying out for lease time expected to show up or market demand to go there so. It’s not easy listing and I know I remember very clearly when we delivered the East Tower and we St. Louis there was some discontent among what the Street that said well how come you even leased it up well.

We have a three year lease-up and we did it in one, so we are pretty pleased this time, we’ve got a two year lease-up and hopefully we can do it, a year from now we’ll be hopefully done. But as I said, we are in least negotiations with one private biotech company we expect to move there another public company that we expect to move their non-existing tenants we’ve got some internal demand from existing tenants we’ve obviously been talking to Roche and others about expansion.

We do have a backlog of a couple of companies we’ve got one big pharma that is they had a great year it is not now currently in New York, as far as research. But it’s really too really to tell. So, I’m not sure I can give you any more color. Over to Peter.

Peter Moglia

I could just piggyback on to the pharma discussion for life science team in New York offices, probably averaging a day with a pharma company almost every month and so there is a quite a few with I don’t Joel, if you want to comment on that.

Joel S. Marcus

Yes, I wouldn’t say anything more than that I actually have some meetings in Japan coming up in two weeks we have some real interest from Japanese pharma companies who haven’t done research, some exists client of our same size or Cambridge asset-base and we’re talking to a couple of others about potential New York research preferences but again still too early to tell.

David B. Rodgers – Robert W. Baird & Company

Okay, thanks and maybe a follow up two parts to it as if I’m trying to get it. First, any major tenant rollover this year that we should be thinking about and I guess kind of second to that would be, any plans to take any existing operating assets, either with an expiration or without and kind of put them into redevelopment this year, as the year progresses?

Joel S. Marcus

I think on the redevelopment side I think there is someone listed.

Dean A. Shigenaga

Yes, that we have it on page 17 that’s project is footnoted to on Page 17 it’s Barnes Canyon Road we acquired that in the third quarter of 2013 and 67,000 square feet it did roll in January and it will undergo convergent into hi-tech office base for redevelopment and it is a 100% pre-leased. All the remaining space that we have expiring for 2014 aggregates about 491,000 square feet this excludes anything that’s leased there or under negotiations that’s highly anticipated to result favorably.

The remaining bucket is only I think the largest leases are somewhere in the 40, high 40,000 square foot range and they’re only a couple of two or three of them at that range. So nothing significant rolling in 2014.

David B. Rodgers – Robert W. Baird & Company

I will just add to Dean and I had touched on that during my comments on a mark-to-market basis we are looking very favorable on those roles. It is pretty well distributed across the portfolio again with a concentration in Boston and San Francisco where we’re using healthy demand. So, nothing out of the ordinary there.

Joel S. Marcus

Yes, I’d say one thing that was different there was a new mill I traded with one region this morning we are starting to see interestingly enough, which we haven’t seen maybe a decade tenants coming to us and saying gee, our lease rolls in 15% or 16% or 17% and we’d like to try to tie-down space today. We haven’t really seen that for a long-time it’s actually been the opposite way, going to various tenants whose leases are coming up not this year, but over the next year or two to try to – I don't know that it's a blend and extend. Maybe a couple of years ago it's more blend and extend. Today it's just renewal, but we’re starting to see that reverse inquiry now. We just had one very large tenant ask us to consider renewing right away and that is kind of a nice thing to see. So that's a good sign in the marketplace.

David B. Rodgers – Robert W. Baird & Company

Great. Thank you.

Joel S. Marcus

Yes. Thanks.

Operator

And next up is Jeff Theiler with Green Street Advisors.

Jeff Theiler – Green Street Advisors, Inc.

Hey, good afternoon. It sounds like your best guess right now is that ARIAD comes in and subleases a portion of that space of Binney Street. Assuming that does happen, how does that impact the timing of the remainder of those Binney Street projects?

Joel S. Marcus

Yes, I won’t speak for ARIAD. They’re going to have make that decision, but we know we’ve had face-to-face discussions and they’ve indicated that they are going forward. I would say that when it comes to timing, our timing is right now delivery in the first quarter of 2015. So none of that’s changed.

Jeff Theiler – Green Street Advisors, Inc.

The remaining buildings after that, is that pushback?

Joel S. Marcus

No. Actually I think if you listen to my commentary that I just gave on 50, 60 and 100 because there is such extraordinary demand in the market today our view is by bringing on a joint venture partner we can actually accelerate the construction of those projects, one or more operating those projects. So in my view those are going to be more advanced than we would otherwise.

Jeff Theiler – Green Street Advisors, Inc.

Great, great. And then, can you talk a little bit more about the Cray Court acquisition? I guess what you saw in that and what the plan is for that building over the longer term, how long The Scripps Research Institute lease is et cetera?

Peter M. Moglia

Sure. Jeff, this is Peter Moglia. So The Scripps leases that building for, I believe, another six years and so that was one of the drivers for the acquisition, but another main driver is that there is very little to that you can obtain in Torrey Pines and we’ve really done a great job, creating a lot of value there with our Nautilus project and some of the other developments we’ve done and it’s – the rental rates have really grown up. And so, getting more products there was a priority for us and this is a very mission-critical facility for Scripps. It was designed, built for them and it has a very efficient design for NIH type of reimbursement. So it's going to be very hard for them to replicate if they were to go elsewhere. So we really think they're going to stick there for a long period time and it's also very close to their campus.

Jeff Theiler – Green Street Advisors, Inc.

Great. That's helpful. Thanks very much.

Operator

We’ll now go to Sheila McGrath with Evercore.

Sheila McGrath – Evercore Partners

Yes. Good afternoon. Joel, we’ve heard a lot about the positive rent growth in Cambridge and San Francisco. I'm just wondering if there’s any way you can give us an estimation of how Alexandria’s portfolios in place rents in those markets compared to current market, not just like what’s rolling this year.

Joel S. Marcus

Yes, I think Sheila it’s probably consistent with what we’ve talked about with the rollovers mark-to-market. So you’re probably in that 10% to 15% range in both of those markets on a GAAP basis.

Sheila McGrath – Evercore Partners

Okay. And then, Dean or Steve, on the gap increases they were so large on new leasing. Was that the six steps in the rents were larger or were the lease terms? What’s driving that unusually large increase?

Stephen A. Richardson

Yes, I’d say it was primarily – well, all the leases were extending on the terms, but I would say that you had a couple larger leases within the year and the 10 to 15 year lease terms that were extended that really drove GAAP rent increases in 2013. If you back them out you’re probably still in that 13% range on growth. So it’s still a very strong year, but a little bit inflated by two large transactions.

Sheila McGrath – Evercore Partners

Okay. And then last question. Just looking at building 2 and the remaining lease-up, I think you disclosed in the supplemental through 2015. Could you just talk about any more insight into timing on through 2014 and into 2015, when you expect that building to stabilize?

Stephen A. Richardson

Which one are we talking about?

Sheila McGrath – Evercore Partners

Building 2. I think you said in the supplement, yes, in New York.

Stephen A. Richardson

In the West Tower? Okay.

Sheila McGrath – Evercore Partners

Exactly.

Stephen A. Richardson

All right. So we are currently – to give you some perspective, we have about 11% that’s leased, but has not been delivered yet, which leases maybe 43% of the project on the second tower to resolve. And as Joel mentioned, we have some transactions that we’re working through. So I think from a timing perspective, our goal would be to resolve most of the remaining lease-up over the next, call it, four quarters. We’ll have a better sense as we make our way through the year and we’re sitting here in Q1. So I’m talking about into early 2015 we should have pretty good color on resolving the rest of the space. Now I’m not talking about necessarily delivery, but hopefully moving the remaining space through negotiation and lease over that timeframe.

Joel S. Marcus

But keep in mind, our internal model, as we said in the East Tower, Sheila, was a three-year lease up. Right now we have a two year lease up and we just delivered first space at the end of December. So we hope to beat that.

Stephen A. Richardson

Sheila, we hope that we’re conservative in our modeling as well. So I think there’s upside from our own model to the extent we get ahead of our delivery timeframe.

Sheila McGrath – Evercore Partners

And so, given that the faster lease up on Tower 2 or West Tower, could you give us an update on how you are thinking about the auction parcel?

Joel S. Marcus

Wow, that’s a good question. There is a new sheriff in town, I guess, who likes affordable housing. So I don’t know. We actually approached the city pre-year-end under the Bloomberg administration thinking maybe there was something we could do to accelerate things, but they didn’t really want to put anything into play. So we’ve kind of gone back to the game book or the play book that says we got to finish the West Tower before we then approach them on the option parcel.

It’s just hard to know, I mean honestly speaking if the city wanted to do something they could clearly designate that as residential, if they wanted to, although not sure how affordable what our views would be from that location. But we’re hoping that the long-term interest of the city are aligned with ours that said they really want to continue to build the commercial life science sector and so we hope that will happen. But I would expect now that – now Bloomberg is out, I don’t think there will be any earlier discussions with them given where we are in the West Tower.

Sheila McGrath – Evercore Partners

Got it. Thank you.

Joel S. Marcus

Yes. Thanks.

Operator

(Operator Instructions) And we’ll take the next question from Michael Carroll with RBC Capital Markets.

Michael Carroll – RBC Capital Markets LLC

Thanks. How should we think about your near-term development opportunities? How many projects could we expect to actually break around in 2014 and 2015? It sounds like you are seeing some good activity obviously in Cambridge and there is strong activity in Seattle. Are there other any other markets that you can see some near-term opportunities?

Joel S. Marcus

Yes, that’s a good question and I think Dean and his team tried to put some really color to those opportunities. So if those of you who have got the supplement if you look at Page 30, that’s the Kendall Square, Binney Street corridor assets. We’ve talked about those. The next page is the Spectrum project in Torrey Pines Peter referred to. We’re working on that. If you go by that project you’ll see still moving along. We think there are a number of tenants, both existing and non-existent tenants that would want space. So that’s clearly is moving forward. I think the Illumina campus, we certainly have discussions going on with Illumina there, continuing to grow. So I think you’ll see progress there in the very near-term, same thing on Campus Point Drive. We have demand from one or two of our current tenants and we’re underway with expanding and confirming entitlements there. So that would seem to be more of a near-term.

The next one is the 9950 Medical Center Drive in Rockville. For the first time we’ve seen that market really change and we’re getting relatively full in that market. I don’t think we would ever kick off anything without a mostly lease situation. I can’t imagine actually having building in Maryland again, but we are at a point interestingly enough where there seems to be both institutional and pharma demand. And so we’ll see what happens, not sure how near-term that may be, but if we’re moving forward with our design and confirmation of settlement.

And then Seattle Page 35, I think these are probably next behind Cambridge. There is great demand from tenants from the market including Amazon. So we’d like to have a partner to help us finance that. And then, I guess the final one is 6 Davis Drive. There was an announcement yesterday by the Research Triangle Foundation that basically indicated they have just bought a large parcel right across from our parcel or our sets of parcels including the Hamner headquarters campus, right across the side from I-40. That’s going to be an iconic headquarters of the Research Triangle Park and looks like they are going to pour a lot of money into that.

We’ve seen some substantial demand from existing tenants. We’ve got two builder suits. We’re actually looking at right now, don’t know how soon they may be, but they could go sooner rather than later. So I think you’ll see a pipeline that will start over the next set of quarters or in the next year that will develop a nice pipeline of opportunities for us to harvest in the 2016-2017 timeframe. So a lot is actually going on. We haven’t seen this much activity across all the markets in a long, long time.

Michael Carroll – RBC Capital Markets

Okay, great. And then I guess my last question is, Joel, you indicated that the ARIAD’s space or at least the old space is functionally obsolete now?

Joel S. Marcus

Those are not my words. I think those are ARIAD’s words.

Michael Carroll – RBC Capital Markets LLC

Okay. And can you give us color as is that obsolete to most life science tenants, or is that obsolete for ARIAD and now I guess that’s not your space obviously. So, can you talk more generally about the Cambridge market of how much space in the market could be obsolete or near obsolete?

Joel S. Marcus

Yes I’ve been into 26 Lands Down many times. I’m not sure that I currently have the knowledge of how the systems are functioning, ARIAD has been historically a pretty heavy chemistry user. So that’s an issue. And I think obsolete for their transition from a small company to a commercial stage company. So it may – there could be functionality in the chemistry side and there could be functionality just for the nature of the stage of the growth of the company. And so I am not the best one to ask about that, I think if you look at overall space in the market I think you have to look at really I would say space in Cambridge is the only space you could look at that could be functionally obsolete as some of the Vertex space that we heard is going to be going to office. But I think Tom Andrews could probably give us better details on a property-by-property.

But remember, our experience up in Seattle we sold the Old Fred Hutchinson Cancer Research Center we bought it as a converted hospital many years ago. Those systems actually lasted since the 1970. So, these buildings, are built if they have done right, they have a long-term, re-leasable, reusable and if they are maintained well functionality for many, many decades.

Michael Carroll – RBC Capital Markets LLC

Okay, great thanks.

Operator

We’re now going to Steve Sakwa with ISI Group.

Steve Sakwa – ISI Group

Thanks good afternoon. Joel or for maybe Peter, could you just wonder kind of circle upon kind of some of the assets sales and pricing, I guess I wanted to come back to the Kendall Square deals and the other transaction that was mentioned. And then maybe if you could touch on the Skanska deal. But if you kind of look at kind of cap rates, price per foot and you talked institutional capital partners. What do you think the unlevered IRRs or the institutional partners want and what do you think the unlevered IRRs were for the two deals that you passed on?

Peter M. Moglia

Good question Steve. I have talked to a number of institutional investors and I have read a number of surveys about what people are underwriting to and I’d say generally for core people have dipped below seven probably six to seven on an unlevered basis for core products out of the 100 basis points plus for value add. So I would guess, that I know that the one Kendall Square, sold for a price that was probably a good 20% higher than we had originally thought it might go for. And I ran some numbers on that. I would guess that that IRRs is probably vertex, but I am not sure. I mean obviously I would, I might have a more conservative deal rents than the buyer, so we’ll see. But that was obviously a very healthy trade.

The 245 First Street, that is a very good location as I mentioned, but it’s a hybrid building, it’s kind of funky if you went there you would look at it and it seems like a big brother and a little brother attached holding hands by an atrium. It’s just kind of a weird looking building and the parking goes like nine storeys above ground and if you look at it and you go while to that location, but I wouldn’t want to take an investor on a tour and show him this. So that thing traded at sub six Cap which is a good news for the market, but I do know that there was some sub few little leases in that wrap order below market. So I’m sure that the buyer there is going to get at least their seven IRR. Did I answer your question Steve or is there something I also need to touch on?

Steve Sakwa – ISI Group

No well you did for those two I was just curious as you guys looked at the Skanska Building that you recently purchased. If you could just remind me kind of on the price, the cap rate and maybe what you think the IRR is – IRR is on that purchase?

Dean A. Shigenaga

Right, I don’t comment on IRRs that we are achieving, we did give a lot of disclosure on the yield. But I believe the purchase price was $94.5 million, and then. Yes, $94.5 million, it was $767 of foot. That is fairly healthy price per pound, but considering some of the New York type of trades that you see that exceed $1,000 of foot and the high rents that you see for large space in Cambridge I think it’s an appropriate price per pound. Stabilized yield will be 7.3% and that will be achieved sometime in August of 2015 when the free ramp from the existing tenants burns off. You may not know, but foundation one of the tenants was pulled from One Kendall Square and they got a pretty big free rent package in order to come over there and so that needs to burn off. And we also have another 18,000 square feet of leasing to do. So we anticipate we’ll get that all resolved by August of 15 and will be cash flowing at 7.3% at that point.

Steve Sakwa – ISI Group

Okay, thanks for the clarity.

Operator

And there are no other questions. So I’d like to turn the conference back to Joel Marcus for any additional or closing remarks.

Joel S. Marcus

Okay, thank you operator, thank you everybody for taking time. We did it under an hour and that’s good news. And we look forward to talking to you on the first quarter call. Thanks again.

Operator

Thank you very much. That does conclude our conference for today. We’d like to thank everyone for your participation. Have a great day.

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