Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Q1 2014 Results Earnings Conference Call

May 06, 2014 03:00 PM ET

Executives

Rhonda Chiger - Investor Relations

Joel Marcus - Chairman, CEO and Founder

Dean Shigenaga - EVP, CFO and Treasurer

Peter Moglia - Chief Investment Officer

Steve Richardson - COO and Regional Market Director (San Francisco Bay Area)

Analysts

Emmanuel Korchman - Citi

Jamie Feldman - Bank of America Merrill Lynch

Sheila McGrath - Evercore

Steve Sakwa - ISI Group

Kevin Tyler- Green Street Advisors

Michael Carroll - RBC Capital Markets

Tom Catherwood - Cowen and Company

Gabe Hilmoe - UBS

Michael Bilerman - Citi

Operator

Good day everyone and welcome to the Alexandria Real Estate Equities Incorporated First Quarter 2014 Earnings Conference 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’d 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.

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

Joel Marcus

Thanks, Rhonda, and welcome everybody to the first quarter ‘14 conference call. With me today are Dean Shigenaga, Peter Moglia, Steve Richardson, Marc Binda, Andres Gavinet and Amanda Cashin.

So my take on the first quarter really echoes our theme that was presented in Investor Day December ‘13 on our return to stable growth with increasing FFO per share growth NAV per share growth really a very clean quarter, strong [core], solid operating metrics and very positive external growth. As many of you have read Michael Porter of Harvard has spoken off I mean written off on about kind of the urban clusters. And it’s useful to reflect that ARE has really chosen to focus the bulk of its efforts and the bulk of its precious capital in the leading urban innovation clusters with the focus on quality buildings locations and tenants in each of those submarkets, ultimately reaping higher value stronger and more durable rental streams in up and down cycles, deeper and more creditworthy tenant base, tenant rollovers more protective again on releasing stronger rental rates, more pricing power, lower cap rates and lesser CapEx.

We also noted in our press release that we celebrated our 20th anniversary as a company and proud of our exceptional track record starting with the mere $19 million back in 1994 and addition them today a total market cap of $39 billion and we’re probably been able to generate a return of about 579% from IPO through the end of the first quarter.

On macro comments on the FDA, they have been actually 12 FDA new drug approvals through April 24 of this year and 50% were ARE plant tenants, very proud of that. There is part of the 2012 Drug Act, the new breakthrough designation court order if you will was introduced and there have been 48 breakthrough designations through May 05, ‘14 and Alexandria client tenants have 56% of those of breakthrough designations.

And as you may know, those are promising drug candidates with clinical which remarkable -- in clinical development with remarkable clinical activity and this has really been unveil since the breakthrough designation was part of the prescription drug and user (inaudible) past in 2012 July which Alexandria actually helped grab the breakthrough designation provision, we are very proud of that.

The Affordable Care Act which has been much in the news is forecast to have $25 million new insured lives by 2023 and we feel strong demand for innovative medical products. Large pharma now has 56% of its Phase 3 pipeline from external sources up from 38% of decade ago. So I think it’s fair to say the attempt of the interaction with biotech in the heart of the urban clusters really continues unabated.

And as many of you know much in the news these day pharma M&A has been front and center. I think it's fair to also say that the most successful based on past history of those who are driving biotech are acquired in the research units continue as independent competitive unit. This was really the formula Roche used with Genentech many, many years ago. Big pharma are increasingly focused on activities which benefit from scale and subcontract out so to speak a scientific work that doesn't primarily the biotech.

If we move to operations and internal growth, Greater Boston and San Francisco primarily contributed the strong cash and GAAP rental rate increases and Steve will talk more about the detail there. First quarter leasing are 563,000 square feet, Greater Boston had 42%, San Francisco 19% and Maryland 14%. And a lot of smaller spaces were involved in these leases, so somewhat shorter duration lease terms could be or were evident.

We feel very confident by the increasing GAAP leasing spread on Dean’s adjusted guidance in that regard and occupancy across the regions continue to trend out best all time highs.

Moving to external growth quickly, acquisition activity has been fairly substantial, year-to-date approaching $150 million primarily because of the strong sector demand from our growing and expanding tenants is really driving our need to find additional facilities to retrofit for their use, as their occupancy drives to all time high in existing assets. So, we're actually running at a space for some of our tenants, so we've had to look at opportunities to acquire and this is good for them and certainly good for us.

And this is partly a consequence of accelerated FDA approvals and a heavily cash plus biotech sector. Steve will also detail the very strong large tenant demand which we're seeing in both Greater Boston and San Francisco.

On the development front, we’ve had good steady lease up progress ahead of our pro forma in New York City now approaching 70%, on 75/125 Binney. We're on target there, we have frequent dialogues and meetings with Ariad. We're making solid progress on the development of another Class A facility and this is science and technology close to market at 75/125. As all of you know Ariad has a contractual lease commitment for 99% of the project with contractual rent payments. Target rent commencement date is contractual and the [refinement] of the lease is March 22, 2015.

We have some good news in Longwood, we expect to have another fourth floor leased by around the end of this quarter and activity is picking up in that regard. And on our 50/60 Binney corridor two 250,000 square foot untitled shovel ready buildings. We will shortly commence marketing with one of the buildings of 250,000 square feet given the very large market tenant demand and we are proceeding on our joint venture as well.

In San Diego, we have very strong demand there Spectrum 1 is 40% preleased and 40% in negotiation. We are getting close singing the LOI with Alumina on their 150,000 square foot build-to-suit; same thing at campus point, a 120,000 square feet build-to-suit out of the 140 we’ll build and we're also in build-to-suit negotiations with Spectrum 2 in San Diego.

Dean will talk about the balance sheet in detail, but -- and confirm our land sales of about 145 to 245, we feel comfortable with that number. Our forward active pipeline is about 35 million and right behind that is another 95 million plus, maybe 50 on the horizon. So we’ll keep you posted as our negotiations move forward.

And we feel good about kind of where we’ve guided the street. And then finally on the dividend, the company intends to continue with policy to share increasing cash flows with shareholders as we maintain a continuing low payout ratio of about 60%. So Peter?

Peter Moglia

Thanks Joel. I'd like to run you guys through or highlight two notable life science trades that offer further proof that life science real estate in the core market is achieving cap rates at or near those of Class A office products. And in addition, I'd like to present some office trades that occurred in and around our submarket to offer additional context for your valuation of our operating portfolio.

So first, I'd like to discuss the depending sale of Vertex headquarter research building in the Seaport Fan Pier submarket of Boston. Outside of HCP’s purchase of this portfolio in 2007, this is the largest life science real estate transaction we have seen with the purchase price of $1.125 billion or a $1,022 per square foot.

Vertex occupies a 100% of the 1.08 million square feet of lab and office based. The project also contains 50,000 square feet of retail phase and 740 parking spaces. Based upon publicly disclosed information and our own estimates, we believe the cap rate of this trade was in the low sixes, likely near 6.2 upon lease up the retail space.

If the property had been located in Cambridge, we believe that cap rate would have been much lower. We know that there was at least one other bidder at that price point, but senior housing properties trust was the buyer. We had a very early look at this transaction through our relationship with the developer and the brokerage for marketing the property.

And although the real estate is Class A and Vertex is a solid tenant, we are unsure if Fan Pier will be able to compete with Cambridge for life science Tennessee over the long-term as it is lacks the ecosystem Kendall Square. That ultimately led to our exit from the bidding process of that transaction.

Outside of the cap rate compensation, we believe that this trade offers further evidence that life science real estate has become acceptable to a wider range of investors. This is [S&H's] first life science real estate investment and we know that a number of other bidders included pension fund advisors and a sovereign well fund.

This trade also illustrates that lower cap rates are driving our price per square foot statistics as we also see in Kilroy’s purchase of 401 Terry in Seattle for $106.1 million or $755 per square foot. 401 Terry is a laboratory office building located in the South Lake Union sub market that garnered considerable national attention with over 30 initial bidders. The building is relatively new and 100% leased to the institute for systems biology with moderate churn left on the lease.

The cap rate on this transaction was 6.0% in considering that the tenant is not credit and a small research non-profit we believe it could have been lower. Like [to see in fewer] transaction this trade also offers further evidence to the widing audience for life science real estate.

So before I hand it over to Steve, I wanted to briefly mention that 221 Main Street, a 379,000 square foot office building located in San Francisco South Financial District just north of Mission Bay traded at a 4.0% cap rate in April with a price per square foot of $725. Posting about the trade on the website [the registry] mentioned that many in the brokerage industry saw that cap rate is a little high for a large institutional quality building.

We believe that as Mission Bay continues to be developed into an infield location it will become more and more integrated into SoMa and the financial district. The northern edge of Mission Bay is only mile away from 333 Brand Street where Drop Box recently signed a lease with a new high end rental rates for the area. The recently announced Warrior event center which will be located on 12 acres of land adjacent to our 401 499 Illinois property and in close proximity to 455 Mission Bay Boulevard will accelerate this integration by further enhancing Mission Bay as a 24X7 live, work, play environment and an unparalleled destination to recruit the [10 top talent]. So even if you apply the discount to our Mission Bay assets that are long-term leased to credit tenants such as Baird, Pfizer, Celgene, ECSS and The VA a cap rate in the high 4s to low 5s is justified.

Lastly I’d like to note that [SO Green] is selling 673 First Avenue in New York at a 4.7% cap rate. This was actually passed on to us by one of our coverage analysts who thought it would be applicable to our New York City assets given its location of half mile the north of the Alexandria Center for Life Science, it’s [NOIE] score and medicine tenancy and that it is a leasehold interest. With our assets being long-term leased to credit tenants newly constructed fully amenitized and lacking in competitive product we’ve argued for a rate lower than this.

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

Steve Richardson

Thank you Peter and good afternoon everyone. I’d like to highlight two key points we may for Marc’s truly underlying the theme of stable growth that Joel referred to earlier as it’s well underway in our Gateway cities where we’ve concentrated our significant capital allocation in Class A urban science and technology campuses.

First we’ll discuss the truly stellar performance of our core doing great part to our best in the business fully integrated regional teams. Second the ability of our teams to capture additional growth opportunities in the best locations such as the recent 500 Townsend Street acquisition in the SoMa district in San Francisco. First the quarter is performing very well as we reported cash and GAAP increases of 10.4% and 18.2% respectively this past quarter for renewals in releasing space. The business imperative for our investment grade tenants to commit the space is clearly evidenced by the truly stellar 96.6 occupancy rate for North American operating properties, up 240 bps from Q1, 2013 and just 292,000 square feet of rollovers remained to be resolved in 2014 or just 1.9% of our operating asset base.

We are seeing tenants with 2015 rollovers also pursuing early renewals to ensure they secure a high quality space in these key clusters. Drilling down a little further in Alexandria’s key innovation clusters, we can see the broad and strong business patterns outlined by Joel manifesting themselves in these healthy real estate indicators.

In Cambridge, we are tracking demand of more than 2 million square feet in the market from both life science and tech users. We expect our mark-to-market on rollovers for the balance of the year to be in the 9% range on GAAP basis as [the switch are] concentrated in Cambridge where we think continue to drive rents in the high 50s to low 60s triple net for existing product.

As we discussed earlier The Binney Street marketing and prospect discussions are continuing and we continue to see rents in the low 70s triple net for ground up project. Direct vacancy rates remained very healthy at 10.2% contributing to the overall sense of urgency in the market.

Moving out to the West Coast, The San Francisco Bay area continues to experience exceptional demand as we have hit an all time high of 99.8% occupancy in the operating and development portfolio. We are tracking approximately 1 million square feet of life science demand and another 6.5 million square feet of tech demand and know two recent very substantial leases, hind in San Francisco with salesforce taking down 700,000 square feet and linked in another 400,000 square feet driving lease rates for new products in the mid 50s triple net.

Mark-to-market for our Bay area 2014 rollovers is anticipated to be in the high teen with lease rates in the high 40s in Mission Bay to mid 30s in South San Francisco and low to mid 40s in the Stanford cluster. And market continues to tighten as vacancy rates drop to 100 basis points in Mission Bay and SoMa to a tenth of a percent of 6.4% respectively and 40 bps to 6.4% in South San Francisco.

Moving to South, San Diego is also in a strong demand cycle with 800,000 square feet of requirements in the market and rents on Torrey Pines pushing through the $40 triple net mark for high-quality product an increase of nearly 10% from last year. UTC submarket has a direct vacancy rate of 6.4% and Torrey Pines vacancy rates of 10% will be dropping into the single-digit during the next quarter. We expect the mark-to-market on the modest rollover remaining in 2014 to also contribute to core growth.

Seattle, Maryland and RTP will also provide mark-to-market gains in the range of 5.9% to flat to 20% respectively for 2014. Vacancy rates are tight in these markets as well with Seattle, South Lake Union at 4.9%, Rockville at 10%, excluding the HTS big block, Gaithersburg at 5.6% and RTP at 10%. Demand is very healthy again with almost 900,000 square feet in the Seattle science and tech sector; 220,000 square feet in Maryland; and another 125,000 square feet in RTP.

Second is the 500 pounds industry parcel acquisition and strategic plan to perfect entitlement design and construct nearly 300,000 square feet of Class A science and tech space, is really a testament to each of the regional team’s ability to execute on meaningful and compelling new growth opportunities. This location at the geographic intersection of Mission Bay and SOMA mirrors the deep industry intersection and really trend of collaboration and overlap in the science and technology innovation grounds. SoMa's extraordinarily demand cycle of 4.5 million square feet of absorption during the past three years is continuing as it added another 1.1 million square feet with the leases noted above.

500 Townsend with its best-in-class development team, this is a team that has decades of experience in wide ranging expertise delivering Class A high-quality projects in the city of San Francisco including driving the occupancy rate to 99.8% for its 1 million square foot Mission Bay cluster, is on track to create an iconic and state-of-the-art facility that captures the architecturally historic term that SoMa District at the absolute Gateway entry to San Francisco.

With that, I'll turn it over to Dean.

Dean Shigenaga

Thanks Steve, Dean Shigenaga here. Good afternoon, everybody. I’ve got three important topics to cover. First, I want to provide an update on our balance sheet which has positioned us to support stable per share earnings growth. Second, I want to provide key updates on important strategic capital related events for 2014. And lastly, I'll provide a summary of key drivers of our $0.05 growth and guidance for 2014 FFO per share and continued confidence in our ability to deliver solid growth and cash flows, net asset value and per share earnings in 2014 and beyond.

Starting with the balance sheet update, we continue to focus on a strong and flexible balance sheet which will allow us to execute on our business strategy. We have almost $9 billion in gross assets, up 32% since we received our initial investment grade rating in 2011. We have over $1.3 billion in liquidity. We have only $20 million and $61 million of debt maturing in the remainder of 2014 and in 2015 respectively. We anticipate continued improvement overtime in net debt to adjusted EBITDA on a trailing 12 month basis driven by growth in EBITDA and near-term projected land sales.

Our fixed charge coverage ratio continues to improve as our business benefits from the continued migration of high quality tenants into Class A collaborative science and technology campuses in urban innovation clusters. Our fixed charge coverage ratio has improved significantly to 3.3 times or up about 50% since our initial credit rating assessment.

Our unhedged variable rate debt of 26% is currently at a level to support an opportunistic bond offering in 2014 without having to terminate swap contract as we use the proceeds from the offering to reduce outstanding variable rate bank debt. We expect unhedged variable rate debt to be approximately 11% as at year-end.

Moving onto an important capital update for events for 2014; first with our bond offering, we remain focused on our strategy to maintain strong a flexible balance sheet, specifically our bond offering will focus on extending our maturity profile appropriately lettering maturities and refinancing outstanding bank debt. We have increased our targeted size of our bond offering by $150 million to a midpoint of $550 million and anticipate executing this offering in the near-term. The proceeds of this bond offering will be used to reduce $100 million our 2016 term loan with the remaining proceeds to reduce outstanding borrowings under our line of credit.

We will continue to focus on execution of our strategy including further reductions in our 2016 term loan in 2015 and ‘16 issuing long-term bonds for growth capital and driving steady growth and FFO per share quarter-to-quarter and solid growth year-over-year.

Briefly on land sales, our guidance for land sales in 2014 will focus on generating important capital from non-income producing assets for investment into high value development projects. Our land sales will also include the first part of important capital from a pragmatic JV partner with the sale of an interest in our near-term development opportunity in 50, 60 and 100 Binney located in Cambridge, Massachusetts.

We are comfortable with the range of guidance for land sales of $145 million to $245 million or midpoint of $195 million for 2014 and anticipate providing more details over the next quarter or so.

Lastly on guidance I want to touch on two important topics, leasing activity expectations for the remainder of the year and key drivers of the solid $0.05 increase in FFO per share guidance for 2014.

We reported strong rental rate growth on lease renewals and releasing space for the first quarter of 18.2% and 10.4% on a cash basis. These stats were solid with 53% of the renewals and releasing of space related to leasing in Cambridge, Massachusetts with rental rate increases of over 18% and 12% on a cash basis.

We remain on track to achieve solid rental rate growth on leasing activity for 2014 and remain optimistic that we’ll hit the upper-end of the ranges for guidance for rental rate growth. We are pleased to announce a solid $0.05 increase at the midpoint of our FFO per share guidance for 2014 to a range of $4.70 to $4.80, the new midpoint of our guidance of $4.75 represents solid growth of approximately 8% over 2013.

The increase in guidance reflects the continued execution of our business strategy to deliver solid and stable earnings growth and consisted of the following key drivers. The $0.02 increase from core operations driven by solid early renewals including a 130 square foot lease in Cambridge, a $0.01 increase from a value creation projects including lease up of an additional 25,000 square feet at 499 Illinois and Mission Bay now 98% leased and the renewal of the lease in the potential area of the San Francisco Bay market. A $0.01 increase from acquisitions and a $0.01 increase from various other items including updated assumptions for our bond offering in 2014.

The delivery of certain pre-leased value creation projects in 2014 is anticipated to be primarily in mid to late 3Q. Our expectation for FFO per share through 2014 is in line with our goal and is expected to show steady growth of a penny per share each quarter going forward.

In closing of my comments, we’re pleased to be in a solid position with our balance sheet with continuing solid core operations and demand from high quality science and technology companies to drive stable growth in FFO per share and net asset value in 2014 and beyond.

With that I’ll turn it back to Joel Marcus.

Joel Marcus

So operator if we could open it up for Q&A please.

Question-and-Answer Session

Operator

Yes. Thank you. (Operator Instructions). And we will take our first quarter today from Emmanuel Korchman with Citi. Please go ahead.

Emmanuel Korchman - Citi

Hey guys, thanks for taking questions. Dean I will start with you, looking in your sub, you have a comment on the marketable securities balance underlying gains going up pretty significantly but it didn’t look like the biotech index sort of went up same amount. Could you talk about what might be happening there is just sort of a single need and that’s really outperforming or something else?

Dean Shigenaga

Well, I think in the follow on to our comment Manny, last quarter we had touch briefly on the upside and the value of our investments been easily two times cost and most of those investments are healthy cost. So you did have couple of securities that driven primarily by one that have a significant increasing value during the quarter and that’s reflected through equity, so just for everybody’s note here that is not part of our P&L or income statement.

But I think they’re going to find us from time-to-time. You will see some pretty meaningful growth in the value that will reflect in our investment holdings on the balance sheet, primarily as privately held or private investments and private companies transferred into a public security and that really occurs into. One as the company is for public or two the required by a public filtrated company and we end up with a unrealized increased in valuation and that will allow us to have liquidity events overtime as we been fit providing a little bit of weather income from time-to-time.

Emmanuel Korchman - Citi

Thanks guys for the explanation. Your exposure [India] went up in the quarter, previously had spoken about decreasing our exposure (inaudible) sort of idea?

Joel Marcus

That’s all FX.

Emmanuel Korchman - Citi

But it looks like your number of assets went up unless I’m mistaken?

Joel Marcus

We brought one asset from redevelopment into operating that was fully vacant.

Emmanuel Korchman - Citi

Got it. And then my final question, you guys have increased your debt issuance guidance within the notes, but you haven't increase any of your sort of sales guidance. And given the environment that Peter spoke about what assets trading at, pretty low cap rate. Have you thought about selling more stabilized properties and kind of rolling those into other lands and so other sort of the nominal properties, rather than selling out to the bonds markets?

Joel Marcus

As you know, we did that in a couple of submarket during later part of 12 and early part of 13. And so that program is done and we're really focused more on the land sale opportunities we have to use together obviously with bonds to invest in both redevelopment and development projects.

Emmanuel Korchman - Citi

Thanks Joel.

Joel Marcus

Yes. Thank you.

Operator

And we'll now go to Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Jamie Feldman - Bank of America Merrill Lynch

Great, thank you. I know you guys touched on, in a couple of different ways on your JV prospects, I think you mentioned something like contributing land. Can you just clearly say, actually how we should be thinking about the JV going forward? And when we might see some activity and how?

Joel Marcus

Well, I think if I said a quarter or two ago, we would hope to have a JV in place, where we would be a majority partner, hopefully sometime late second or early third quarter and it would be focused on 50, 60 Binney properties on potentially on a 100 Binney.

And because the opportunity is there on leasing or pretty sizable the dollar amount of building that project out approach $750 million so it's ideal for a JV opportunity where we can also earn fees and promote et cetera. So, that's haven't changed from the discussion we have maybe at Investor Day or thereafter.

Jamie Feldman - Bank of America Merrill Lynch

Okay. And then reading the press release, if I read it correctly, so you talked about it potentially taking about Executive Chairman role in several years, can you talk more about what that means and if that means maintaining the CEO spot or not?

Joel Marcus

Well, I think it’s -- probably the easiest way to think about it is that under the new contract, I’ll continue to as CEO of the company through December 31, 2016, beyond that the contract will be what it is, or it may change, I don’t know. But I’m focused on this quarter.

Jamie Feldman - Bank of America Merrill Lynch

Okay. I mean I guess, if you are Executive Chairman, would you stay as CEO, those are distinct roles, you can’t keep both?

Joel Marcus

I think they’d two distinct roles.

Jamie Feldman - Bank of America Merrill Lynch

Okay.

Joel Marcus

Yes.

Jamie Feldman - Bank of America Merrill Lynch

And then finally, when you guys were quoting rents you talked a lot about tech rents and life science rents, so you -- as you think about your major markets; are you tempted to go more down the tech route at this point than life science and how are you thinking about that decision?

Joel Marcus

Well, I think if you focus on kind of what we’ve said and how the supplement is presented and the press release, we haven’t changed our focus from these critical core urban science and technology clusters. I mean, if you walk into Mission Bay in our lobby, you’ve been there many times, you will see I think the moniker is Alexandria Science and Technology Mission Bay Campus. And so we have focused primarily on the life science industry, but as Steve said, it’s clear that the integration of information technology, engineering and other disciplines with life science continues unabated especially as we get into the digital healthcare age. And so these markets tend to melt together.

So I think our focus won’t change, we’ll continue to focus on class A buildings, AAA locations urban campuses, innovation clusters.

Jamie Feldman - Bank of America Merrill Lynch

But as you think about the rent growth, you're seeing in the market, is it rising faster for a traditional tech space or should I say tradition for modern tech space than it is for life science space?

Peter Moglia

Yes, I think the rate of increase is probably a bit higher in the technology sector than it is the life science sector. Having said that as we've seen healthy rental rate increases in Mission Bay and Cambridge and Seattle and San Diego as well, so they’re all very healthy.

Jamie Feldman - Bank of America Merrill Lynch

Okay, alright. Thank you.

Joel Marcus

Yes, thanks Jamie.

Operator

And we'll now go to Sheila McGrath with Evercore.

Sheila McGrath - Evercore

Yes, good afternoon. Joel, I was wondering if you could talk a little bit more about the land acquisition in SoMa, how long you think it will take to entitle the pricing? And also you mentioned in your prepared comments that your recent acquisitions were tenant driven. I was just wondering if you're already in discussions with tenants at that site.

Joel Marcus

Yes, I’ll let Steve comment on that and then I’ll come back to some other items on the acquisitions.

Steve Richardson

Yes. Hi Sheila, it's Steve. On 500 towns and the entitlement process, we’ve actually submitted to the city as of last Friday. So the development team is very experienced team. We were able to go ahead and execute on that quickly. We expect that to take anywhere from 12 to 18 months. And we are on that full time. And as far as the pricing, I think, as you think about the pricing and they were two other bidders as well who were essentially at that price point. Relative to the rental rate increases, it's very consistent with the pricing that we've seen in the past for other high profile parcels like this one.

Joel Marcus

And our internal team and our external team have ongoing discussions with potential tenants. So that actually even to some extent began in a shadow fashion before we closed on the transaction. I think if you look at the acquisitions, both in San Diego and in Greater Boston, those have primarily been driven by either existing tenants or new tenants who have come to us needing real estate solutions where we couldn’t accommodate them with existing assets. So that as I said in my prepared remarks has driven some of the acquisition activity. And again it’s driven a lot by FDA approvals and the biotech sector being among many of the companies being pretty plush with cash and ready to do expansion, undertake expansion.

Sheila McGrath - Evercore

Okay. And Dean, a couple of quick questions, if you were in the bond market today 10 year debt, where do you think you could execute roughly?

Joel Marcus

Yes. Let me say while Dean is giving some thought to that. If you look at our last two bond deals, both were 10 year. If entire likely we wouldn’t do a 10 year bond deal; we would look to latter maturities and we might have them maybe somewhat shorter and somewhat longer duration bonds as we are thinking about this.

Sheila McGrath - Evercore

Okay.

Dean Shigenaga

Yes, I’d have to say probably somewhere depending on treasuries and treasuries have been moving around quite a bit but call it somewhere in the low 4% range on 10 year line.

Sheila McGrath - Evercore

Okay. And then Dean any comments on other income? It was a little bit higher than we had forecasted in the quarter. What was that? And if the quarter if you think you had any weather impact in the quarter?

Dean Shigenaga

Two questions, Sheila; the first one regarding other income. I’d say nothing really unusual in other income in the first quarter. I would say if you’re thinking about a run rate, you should think about roughly $3 million a quarter or $12 million of other income for the year. And then as far as weather because it’s been a key topic for earnings for REIT this quarter, we’re no different in the sense that our portfolio was exposed to the weather conditions in the quarter across the country. But the benefit we have is we do have a tripe-net lease portfolio, so the tenants to bear across cold weather or heavy snow, as well as heating and cooling costs depending on hot or cold weather. So the true difference here is we had limited P&L exposure as a result of our tripe net portfolio.

Sheila McGrath - Evercore

Okay, great. Thank you.

Joel Marcus

Yes, thanks Sheila.

Operator

Next is Steve Sakwa with ISI Group.

Steve Sakwa - ISI Group

Thanks, good afternoon. I just wanted to I guess go back to the JV and just make sure Dean in the supplemental where you’ve got the guidance staged, and you talked about the land and sales (inaudible) strategically venture your capital, just kind of roughly 150 to 250. Are basically all the sales actually tied up in this Binney project and if not, are there other assets that you’ve got currently on the market today for sale?

Joel Marcus

Yes, let me say before Dean takes you through that. No, they aren’t all Binney. We’ve got about $35 million having nothing to do with Binney that’s in the forward part of the pipeline. And then Dean can give you some of the Binney stats.

Dean Shigenaga

Yes, I think the way Steve to think about Binney is if you turn to the supplemental near the very back in our feature and near term projects, on page 31 of the supplemental, our book value on 50/60 and 100 Binney is roughly $286 million. So, our goal would be to bring in and still maintain a majority position, but sell an interest in the land for development there. And you can apply a factor, if you want to assume something just sort of something in the 45% range for a partner for the sake of doing some math. And we expect to be north of book as we sell an interest in that opportunity there.

So Binney is an important component but nowhere near. We still have a number of transactions that Joel mentioned that are smaller that are moving through and we think we are going to close the gap here on the remaining that has not been discussed somewhere in the $60 million to $65 million range. And we will provide more details probably over the next quarter.

Joel Marcus

Yes, so that means about 35 near term, you got another chunk for Binney and then a chunk that Dan just described that could in the [$50] million to $65 million range that’s kind of behind Binney. So we hope to accomplish those during 2014.

Steve Sakwa - ISI Group

And Joel, I can appreciate you’re not giving too many details on the joint ventures negotiated, but are there -- I mean do you have kind of one partner that you are kind of actively going through right now or are you still kind of reporting partners or are there kind of issues that have come up in the discussions?

Joel Marcus

No, we are negotiating with one partner.

Steve Sakwa - ISI Group

Okay. And then I guess just on the bond deals, what -- I guess is there anything that kind of triggered sort of pushing this off? I know back at the Analyst Day you talked about setting conservative guidance having to deal effectively beginning of the year. And I can appreciate this deal might happen in the second quarter, but basically, it got pushed off six months. Is there anything specific that kind of pushed that back obviously with your benefit to weighted -- I'm sure you wouldn't have forecasted the [rates] going down per se. So, is there something that kind of drove that decision?

Joel Marcus

Yes, I noted in your note that you had indicated that we said it would be early in the year. I don't know that we said that precisely, I think what we said is we had modeled that as if it would be earlier in the year, which would be the most conservative approach to it. But we have always thought about opportunistically taking advantage of that. We wanted to see -- we wanted to get through the tax square payoff, we've looked at the secured debt market, because we now have a huge amount of unencumbered NOI over 80%. So, we've been busy looking at that market as well. And I think we still see an opportunistic chance to do what we want to do that maybe outside the 10 -- within the 10 and outside the 10.

So, I think that comment was we modeled it early, but we never committed to do it day 1 of 2014. I don't think that was ever on our mind.

Steve Sakwa - ISI Group

Okay. And then I guess just lastly, Dean in terms of land sale gains, maybe I missed this in your comments. But would the land sale gains I guess to be related to the Binney sale or would they be separate sale.

Dean Shigenaga

Well, we haven't given guidance on gains for land sales and any gains would be excluded from our core FFO numbers. But we do expect the assets that are currently under advanced negotiations would be sold at a modest gain or a small gain.

Steve Sakwa - ISI Group

Okay, thanks. That's it.

Joel Marcus

Yes, thanks Steve.

Operator

And we’ll now go to Jeff Theiler with Green Street Advisors

Kevin Tyler- Green Street Advisors

Hi, it's Kevin Tyler here with Jeff. I had a question. There was an article about a potential Alexandria partnership with Rice University's BioScience Research Collaborative. I know you guys have had success with deals like this and recently with the NYU deal in New York at the Alexandria Center for Life Science but do you feel it's in a bit on your current appetite for University related transactions and more broadly for a larger footprint in Houston?

Joel Marcus

Yes. I don’t want to comment on future market but I would say that our focus is not so much on University related transaction. We don’t think that’s where we want to keep our focus, I think, one, because the NIH budget is muted. That our experience along clearly would indicate that those budgets are more difficult to take operating monies for rental payments and we've never historically tried to tie our business to that factor. I think our focus has always been on the science and technology, urban cluster, innovation, locations and we want those to be near major urban centers, multiple centers, with [spawn] technology, which provides clinical trial opportunities, etcetera. I mean, New York is the paradigm example; Longwood is another great example; obviously UCSF. But we wouldn't just go to some random city and do a one-off deal with the University. That's not what we do. It would be an integrated campus made up of quite a number of participants in the ecosystem and that’s how we think about it. So if we do something in another location, it would be according to our strategic plan, not like a one-off deal.

Kevin Tyler- Green Street Advisors

That’s helpful. Thanks very much. I think the rest of our questions have been answered.

Joel Marcus

Thank you.

Operator

And we'll now go to Michael Carroll with RBC Capital Markets.

Michael Carroll - RBC Capital Markets

Yes, thanks. I'm not sure if you guys talked about this yet or not. But can you give us an update on the Ariad situation? I know the tenant has had some positive announcements, have there been any update about the amount of sub-lease space they want to do at 75, 125 if any?

Joel Marcus

Yes. I think I specifically indicated in my comments Mike that we have frequent dialogues and meetings with Ariad obviously because they are the tenant in our development project at 75, 125. I don't have any news or update on their sub-leasing activities, as they say it’s the last [offer] they were interested in sub-leasing all over a portion of the smaller building and that’s as far as we know that they have had discussions with a number of parties on that. But there is no update that I have specifically.

Michael Carroll - RBC Capital Markets

Okay. And then the increase at the bottom end of your guidance, was that largely due to the, I guess pushing back the bond offering in your model or pushing back in the year?

Joel Marcus

No, I think Dean went through the couple of items. He will just recap it for you quickly.

Dean Shigenaga

Yes, Mike not at all. The $0.05 growth as I stated earlier, I will rattle through quickly or $0.02 of that came from core related to early renewals. Primarily a large lease in Cambridge for 130,000 square feet $0.01 from value creation projects from lease up of additional space but we plan to deliver this year at 499 Illinois, $0.01 from acquisitions. And then $0.01 from various items included in that were updated assumptions for bond offering in 2014.

Michael Carroll - RBC Capital Markets

Okay, great. Thank you, guys.

Joel Marcus

Yes. Thank you.

Operator

And next is Tom Catherwood with Cowen and Company.

Tom Catherwood - Cowen and Company

Yes thank you. Dean we look at this quarter pretty strong internal growth obviously, from a GAAP standpoint you are up 3.8% and your leasing spreads were strong as well. As we think about it though given the guidance raise and the strong performance we were somewhat surprised that you didn’t raised the same store guidance for the full year. And we are wondering as we think through the rest of the year is growth going to moderate somewhat internally or is there something else kind of driving leaving the guide where it is?

Dean Shigenaga

No I think we are doing very well relative to our guidance on same store, both the traditional GAAP view as well as the cash view. I think our cash tax as an example of 43 for the quarter if you just compare it the midpoint, the midpoint of 46 for cash basis NOI growth still puts us tracking for a 5%. So I think that you are going to see collectively as we proceed through the year, same store performance move closer to the midpoint and I think there is room to be on the upper end relative to those midpoints both on GAAP and cash.

Tom Catherwood - Cowen and Company

Got you. And then Peter appreciate the outlook on some other recent sales. It looks like cap rates are coming down on some transactions, but when I look at you guys I mean you are trading at roughly at 6.4% implied cap rate and there seems to be some sort of a split between how public markets are viewing these and what they are going for in private transactions. I want to know your sense of kind of what’s driving that split and if you still see cap rates compression to the rest of this year.

Peter Moglia

Well, I guess Tom what I could tell you is that any time that we enter into a transaction the core markets we’re just seeing more and more people involved and that’s just driving the pricing further and further. And then after something trades I get an email or a call from somebody looking to find out why did it trade so well and we talk it through and then it turns out to be a good on transaction and a good comp and we talked about here on the earnings call. I think this is the third quarter in a row I’ve gone through some pretty good comps that would give people an idea of what makes you trade for it doesn’t seem to translate when we look at our implied cap rate.

So I can’t be answer why there is a gap, I don’t quite understand it. But I will, I certainly think that we’re going to continue to see more and more investment in this sector and pricing will continue to be strong.

Tom Catherwood - Cowen and Company

Got you. And then kind of building off of that, obviously a lot of interests in the sector not only assets, but in the kind of business itself; we’ve seen the entrance of senior housing obviously with the Vertex deal into the now life science real-estate sector which Kilroy has purchased in Seattle as they’re entering the sector as well. And obviously given the growth that you guys are seeing the value creation potential you’re seeing it’s kind of obvious that you would see more competition. But do you see some potential for that competition to even to some of your main areas or no someway affects your business strategy?

Joel Marcus

Well, I think it’s -- you have to distinguish between somebody owning a building or two or three or whatever even a big building like the Vertex building at Seaport Center versus somebody who has fully integrated teams in the ground who’ve operated for 15 to 20 years and who have a kind of base second to none.

So, I don’t think we get much worried about the competition. As Peter said, we think it is absolutely fine the cap rates are being driven lower because that gives us a chance to create value whether I think say Peter likes to say rather than buying somebody else’s value and that just happened, impacted us. We have great opportunities for growth, I mean we can literally double the size of the company on a square footage basis on the land we own we hope to monetize a lot of that in the near-term has been said and on board EBITDA, but it haven’t stopped our growth in the core urban innovation centers. So I think just a acquisition or purchase doesn’t make a life science real estate company that really can expand multiple markets.

Tom Catherwood - Cowen and Company

Got you. Thanks. I appreciate it.

Joel Marcus

Yes, my pleasure. Thank you.

Operator

And we will go to Gabe Hilmoe with UBS.

Gabe Hilmoe - UBS

Thanks. Joel, just on the redevelopment property as 225 second, I am just trying to get a sense of what the opportunity is there, is that a version play from office (inaudible) and I guess what type of use it can be?

Joel Marcus

Yes, it’s an existing tenant that house outgrown their space and asked us to find a specific solution for them. And so yes, it’s a retrofit.

Gabe Hilmoe - UBS

Okay. And then I guess on the move out, I mean I guess for you, I think (inaudible) to support is that a asset that something we can get put into, I guess for sell bucket or is that plan to redevelop that as well?

Joel Marcus

Yes. We’re actually already are in discussions with potential tenant to take that building, so we are advancing that more than likely going to be a retrofit into a lot building from currently a specialized use.

Gabe Hilmoe - UBS

Okay. And then, I guess last from me, just going back to 500 pounds, any interest there or opportunity you bring in a capital partner or will that be all Alexandria 100%?

Joel Marcus

Yes, it would be Alexandria 100%.

Gabe Hilmoe - UBS

Okay, great. Thank you.

Joel Marcus

Yes, thank you.

Operator

And at this time, there is one name remaining on the roster. (Operator Instructions) And we'll now take a follow-up question from Emmanuel Korchman from Citi. Please go ahead.

Michael Bilerman - Citi

Yes, it's Michael Bilerman with Manny. Good afternoon.

Joel Marcus

Hi there.

Michael Bilerman - Citi

Dean this 130,000 square foot large renewal, when did that become effective?

Dean Shigenaga

All right, effective in the first week.

Michael Bilerman - Citi

Right…

Dean Shigenaga

Right. It was an original lease; there was a lease with an original lease end day in 2016. So, we have an opportunity to do an early renewal that started in the first quarter.

Michael Bilerman - Citi

And just doing the math $0.02 is a $1.4 million. So, that's $11 a foot greater than what you would have expected, or what that's currently paying today In terms of a mark-up?

Dean Shigenaga

There was a very healthy mark-up on this space on a cash basis. And because it's, it's got a good term on it, as we get a GAAP benefit increases well with the annual steps.

Joel Marcus

So yes Michael, very solid step on rents.

Michael Bilerman - Citi

Yes, it's a big building and it's a triple A location in the heart of Cambridge.

Dean Shigenaga

Hopefully it doesn't surprise you because BHP had massive steps in their Bakken holdings as well this quarter. So,

Michael Bilerman - Citi

No, I just, I thought it was relative to renewal that was schedule to expire not forgetting that was 16 that you brought forward because I was just thinking about the delta from what was already in guidance, but this is effectively a new lease that you have brought forward or renewal that you brought forward, we are able capture a significant amount of markup, but I was just trying to make sure that I understood the dynamics of what was in guidance versus now. Now I understood it.

Joel Marcus

Yes. And the reason that happened actually is this was a tenant that’s had some pretty great success recently. And they are nervous about the opportunities to expand in Cambridge or even maintain themselves and so they emerged and came to us to try to put this field together. So that’s the market dynamic there Michael but as you know from the tour you guys took in January.

Michael Bilerman - Citi

Yes, is there other opportunities like that where you can bring and I know you are always aggressively leasing space, but is there other role that you can pull forward from future years that can help growth in the near term?

Joel Marcus

The answer is yes.

Michael Bilerman - Citi

And do you a number, I mean is there a certain size that you are working with right now in terms of transactions and leasing? I know the leasing volume at least in the quarter was lighter than what the history has been.

Joel Marcus

Yes, Jeff, because we have, so this is one of the smallest yearly rollovers I think in the history of company. The answer is yes, but I don’t think we want to re-revise guidance here on this call, so we just stay tuned.

Michael Bilerman - Citi

And then just last question, just as you think about sources and uses this year, you’ve made the decision to fund the extra $100 million of your effective -- use of capital through acquisitions and development spend all with debt. And so I’m just curious in your mind, you worked so hard to get the balance sheet in the position, at what point do we start thinking leverage neutral? Because as it stands right now and you think about sources and uses in the guidance, the extra 100 million completely get funded. So what point did you trigger?

Joel Marcus

Yes, I think that's not an accurate for trail. So maybe Dean, you want to comment on that.

Dean Shigenaga

Michael, it’s Dean here. I would say in my comments, what I would like everybody to remember is that we have tremendous EBITDA growth occurring in ‘14 and continuing into '15. And if you recall my prepared comments touching on the fact that trailing 12 net debt to adjusted EBITDA will continue over time to migrate lower at a lower leverage point over time. And this is going to be driven primarily by EBITDA growth. But in this year, we do have some projected land sales, which we feel very comfortable with and that will help as well. But the EBITDA growth continues beyond ‘14 and that's your primary driver of balance in it. And on a trailing 12 basis, you're going to see continued improvement in debt-to-EBITDA. So, we did have a spike on a current quarter annualize, but that has more to do with funding and relative timing.

Michael Bilerman - Citi

Right. No, I -- and I understand that. But all that is to create EBITDA growth that you're pushing in selling the land and not [introducing] assets, all of that was known, right? What I'm just trying to think about is this quarter you've added a $100 million to your uses of capital. You're finding that 100 million irrespective of the EBITDA growth, irrespective of the land sales all of which was fully discussed at the Investor Day. Your funding the extra $100 million of capital spend with debt and all I was trying to think about is knowing the future uses of capital that will be on the [common], think about the San Francisco land use just bought, you’ll have a development. At what point in your mind has it triggered the need for either to sell more assets given how robust the market is; Peter has talked a lot about that on the call or the need to raise common equity which I know you have talked about not wanting to do? And so that’s and I am just trying to balance out a little bit.

Joel Marcus

Yes, I think you will see Michael and it’s a really good question and we have to think about this everyday obviously because our target debt to EBITDA as we said, we want to migrate not only from broadly the [6.5] but hopefully over coming years lower. We clearly we will see we hope a larger amount of land sales this year than even the guidance has provided and we clearly would look at low yielding assets as a possibility for asset sales. And so, we have said we aren’t going to raise common equity this year. So, I think that we expect the land sales to make up the majority of what we need to make sure we are in the target debt to EBITDA ranges.

Michael Bilerman - Citi

Okay. So I guess any incremental potential new use you would have need to actually raise the asset sale guidance if next quarter we come around and you have another $15 million of opportunity at that point, we would actually see an increase?

Joel Marcus

Yes. And I don’t want to -- I want to be really careful because this is a public call but I think you will see over the coming quarter, the $15 million that we spent on the tons of acquisitions will be fully covered as an example by a sale of an asset that we haven’t commented about we are still negotiating but we believe we’ve got a good probability of success. So I think in a sense it’s a little bit of match funding.

Michael Bilerman - Citi

Okay, thank you.

Joel Marcus

Yes. Thank you for the great question.

Operator

And there are no other questions. At this time, I’d like to turn the call back to Joel Marcus for any additional or closing remarks.

Joel Marcus

Thank you very much. We managed to keep it within the hour. And I appreciate and look forward to talking to you on the second quarter call. Thanks everybody.

Operator

And thank you very much. That does conclude our conference for today. I’d like to thank everyone for your participation. And have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Alexandria Real Estate Equities' (ARE) CEO Joel Marcus on Q1 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts