Alexandria Real Estate Equities CEO Discusses Q3 2010 Results – Earnings Call Transcript

Nov. 3.10 | About: Alexandria Real (ARE)

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

Q3 2010 Earnings Conference Call

November 3, 2010 3:00 PM ET

Executives

Rhonda Chiger – IR

Joel Marcus – Chairman, CEO and President

Steve Richardson – SVP

Dean Shigenaga – CFO

Analysts

Michael Bilerman – Citi

Anthony Paolone – JPMorgan

Jamie Feldman – Bank of America/Merrill Lynch

Sheila McGrath – KBW

Suzanne Kim – Credit Suisse

John Stewart – Greenstreet Advisors

Operator

Good day and welcome everyone to the Alexandria Real Estate Equities Incorporated third quarter 2010 results conference call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Rhonda Chiger. Please go ahead.

Rhonda Chiger

Thank you, good afternoon. This conference call includes forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended and Section 21-E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include without limitation, statements regarding our 2010 earnings per share diluted attributable to Alexandria Real Estate Equities common stockholders, 2010 FFO per share diluted attributable to Alexandria Real Estate Equities common stockholders, the business plans of certain tenants and the expected impact of the retirement or conversion of our unsecured convertible notes. Our actual results may differ materially from those projected in such forward-looking statements.

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

All forward-looking statements are made as of the date of this call and we assume no obligation to update this information. For more discussion relating to risks and uncertainties that could cause actual results to differ materially from those anticipated in our forward-looking statements and risks to our business in general, please refer to our SEC filings.

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

Joel Marcus

Thank you, Rhonda and welcome everybody to the third quarter conference call. With me are Dean Shigenaga, Krupal Raval and Steve Richardson. So before we get into the quarter, I wanted to make a few macro comments that we do. One of the most possible main street versus Wall Street kinds in the history of the country is ongoing in the so called recovery which is fallen flat is continuing. I think a great example of this is if you look at Friday, October 15th Wall Street Journal by Ken Langone, former founder of Home Depot quoted, if we tried to start Home Depot today it’s a storm called certainty that it would never get off the ground.

This is an unfortunate message in today’s environment. I think the message to the yesterday’s election is simple, help businesses, hire people, cut taxes and (inaudible). In light of this continuing tough macro environment and the reality around it are Alexandria’s creation of our mission critical lab space niche in the insurance store unique strategy. Both in good times and bad, have served us well. We’ve successfully managed and consistently implemented our multitask strategy, focused heavily on a number of critical areas. Positive same property growth and positive mark-to-market on a leased roles to ensure safety and stability of cash flows.

A strong effort at positive leasing of vacant space, management of expenditures both G&A and CapEx and the discipline (inaudible) a strong focus on return on invested capital from redeveloping non-lab space and lab space. And a staying keen focus on a return – high return on invested capital from development of lab space. And on a go-forward basis, you’ll see us really with a slower throughput of redevelopment and development on a spec basis. The world has changed considerably. So still is our business plan. And then also selective acquisitions.

Pleased that our total return from IPO in May 1997 to September 30 approximates 512% and compares very favorably with other great performers such as bought some properties at 556%. We’re pleased with this long-term positive performance and confirms our disciplined risk management by focusing on high quality facilities in the best AAA adjacency locations in the best life science sub market, and also in the most favorable supply constrain locations with significant barriers to tenant exit as well.

A few words about our unique differentiated and consistently applied strategy. We have and will continue to selective acquire key assets which increase our penetration in our selected markets importantly increasing our NOI with a solid return on investment capital and with a – where appropriate a value add component. We have an highly disciplined manner really avoided lower quality assets in secondary locations. We try to avoid way above market leases with near-term lease roles, questionable tenant concentrations and purchases substantially above market or too high across per square foot. And also obviously avoiding buying any land at above market prices.

Our shift from pre-crash speculative development to a kind of post-crash build a suite with quality tenants is underway. We continued to pursue sales in non-income producing land parcels. We’ve maintained a high quality and well diversified client tenant base, in the only industry which really has a potential to managing lower overall healthcare cost and that shouldn’t be left unnoted by all of us a critical point.

Obviously, to ensure the stability and growth of our dividends and to continue to enhance our balance sheet to our access to a variety of capital sources. Two final comments. One big pharma is in fact now winning the war on drugs, aggressively bridging patent cliff and pipeline gaps, in fact R&D is beginning to turn the corner and productivity is improving, late-stage development has more than one in three chance of reaching the market versus the one in four in 2007, and a greater use of process outsourcing to triple returns on investments.

It is also important to note that therapeutic discovery tax credit of about $1 billion this year which was enacted in the Obama Healthcare law allocated $281 million to California companies in the $109 to Massachusetts companies.

So on to the third quarter operating and financial results. We really had about everything this quarter from acquisitions and developments from strong leasing, good fundamentals, continued deleveraging and sales of the important land parcel and Dean will detail a lot of this. We did report $1.11 FFO per diluted share excluding the loss on debt extinguishment.

On the balance sheet as we previously stated, the company is making good progress on its focus and delivery of debt payoff and pay down strategy and we’ll continue to operate in the future at a lower leverage level that we’ve always been pretty conservative overtime. Dean, will update you on this call on the amendment process to our line of credit. And we continue important joint venture relationship discussions that happen an additional important source of capital to deploy where our multi-faceted growth platform.

On the internal growth related metrics, we had a positive third quarter in a continuing tough environment. A 0.1% positive GAAP on same property. And again while many companies have really struggled, we’ve been fortunate enough to be able to maintain a positivity in this area.

On occupancy, relatively stable operations on the operating properties about 94%, 89.3% for all. If you look at the historical averages, operating properties, our average 10-year occupancy has been about 95.2%. So we’re below that a bit and right on the money overall at 89.3% over a 10-year period including all properties. If you move to or if we move to various markets on occupancy, let me make a couple of comments in San Diego we had a nice pickup in occupancy. And that with our stellar team lead by Dan Ryan, we’re optimistic about the long-term future in San Diego as the Dominant Life Science Landlord of Choice.

It’s also important to note the San Diego is in the major transition from a therapeutic oriented life science cluster to a device diagnostic med tech tools services, biofuels cluster with quite a number of multibillion dollar enterprises now taking the lead as the strongest and fastest growing enterprises replacing classic Ditco [ph] which was a fully integrated biotech pharmaceutical companies of the 80s and 90s. And this is I think a dramatic change, much like the Google and Facebook have emerged really to become top performers in the IT space versus kind of the historical Microsoft etcetera.

In the Bay area, Steve will talk about that, we had a strong lease in this quarter, positive pickup. Eastern Mass [ph] again positive pickup and we continue to view it as and expect continued positive forward trend could lease in this quarter. And then New York, New Jersey and Pennsylvania – suburban Pennsylvania markets, again we did have and expect continuing solid pickup as we bring online substantially all of the New York City project which will be virtually fully leased over the next couple of weeks.

In the Southeast, we lost occupancy in a market which has and continued to exhibit overall weakness. In D.C., suburban DC market, we lost some occupancy and a market exhibiting somewhat of a static situation holding that sounds that looking for a momentum post stimulus, but we do have a couple of good early government related opportunities rolling.

In Seattle, it’s remained very solid with continuing very strong occupancy. On the leasing front, we’re pleased with our teams approved leasing this quarter 640,000 square feet, really, dramatic and remarkable. Our GAAP was up over 8% and cash almost at a 1% level on renewed and re-leased space, strong from the Bay area and 300,000 square feet from development, redevelopment. And vacant space again strong in the Bay area with almost a 9-year duration which we’re very pleased about.

The remaining lease roles for this year about 428,000 about 29% have leased already. Same as second quarter. 10% are negotiated – are being negotiated and anticipated up from 5%. About 30% in the redevelopment up from 22%, 31% marketing down from 44%, we expect about 0% to 5% in GAAP rents. Next year, we’ve got about 1.4 million square feet rolling, a 11% is leased to-date up from 6% about 26% anticipated are in negotiations down from 35%. Redevelopment about 32% up from about 30%. The big one being 400 Tech Square and we already have several full building user possibilities we’re in discussions with.

And 32% marketing up from 29% with 5% plus in GAAP rental rates. On the redevelopment side, we’re pretty disciplined with our leasing progress to-date but this will be the key laser focus for the company in the fourth quarter. And as I said before in the future the company will shift its strategy and do speculative change of use redevelopment than we historically have. Our client tenant base continues to be stellar and as strong as it’s ever been, well diversified and not overly concentrated.

Moving to external growth on the development side, Steve will update you on the three San Francisco developments. We delivered more than half of the New York City project, the remaining half will be delivered shortly. The scheduled update you on the highlights and virtually all of the remaining states is in two final lease negotiations that we hope to bring to conclusion almost in the next, hopefully next few days or next week or to. We are not initiating effective a development in Maryland as may have been erroneously reported by some press, but we did initiate one new builder suite and research triangle partner with Carolina 100% leased on a 15-year lease, half funded by our (inaudible) for vaccine production and on land we own with a pretty nominal basis.

On the land side, that Steve and Dean will update you on the mission based sale. And we’re very pleased that we’re able to have that announced just this week. We think it’s an important financial and strategic accomplishment of the company in a macro environment still that’s very tough especially for land, and it was I think a great credit to Steve and the entire team. On future development opportunities, we have some great opportunities in Mission Bay and, Dean and Steve will talk about that. About 300,000 square feet approximately almost 2 million square feet in Cambridge and over 8,000 square feet in New York City.

And I think that this sale confirms that many people have really substantially undervalued our value add land holdings. On acquisitions, on the selective acquisitions front, we continue to believe the current acquisition environment is right for unique opportunities to deliver strong NOI, good return on invested capital and create a future value while same time not overpaying.

We closed on two acquisitions during the third quarter in San Diego and suburban D.C. markets, both solid off market deals. As most of you know, we reported closing on October 1 on the Noble Research Park campus which was a sale to us, chosen among the number of buyers on the basis or relationship and track record. The really a unique and best-in-class campus in one of the best submarkets in San Diego and I think this will attract a different caliber of tenancy really a big user that might be within San Diego or outside San Diego, who is looking for a unique campus environment, not the traditional mid-level kind of last space that you see more in the markets there.

We paid about 50% of replacement costs. It was I think a truly great purchase at about 300 bucks, little over $300 a square foot with about $50 foot on land and those really bare pretty strong comps to some other recent comps in the market. We understand the clock starts now as far our repositioning of this asset. It’s going to take pre minor CapEx. We have the ability to create substantial value there. We’re on a 15-month lease with Biogen Idec which announced this morning a major reorganization. They’re sitting on ton of cash. The company is very healthy and they’re focusing under their new leadership of George Scangos, really are in kind of the Boston area and their franchise in the neuroscience area.

We have several large users both inside and outside the City. And we think the allocation of capital here will result in a release – in a successful release with the yields substantially above our cost to capital. The San Diego market has been tough for pedestrian main stream mid-price range in lab space and we understand that is not this property.

And other key initiatives before I turn it over to Steve. Our signature university, not for profit development has moved sights due to the cost issues that we’d looked some previous time, but we hope it will report significant progress in 2011 and we hope to incorporate a curtail clinical trial component here which I talked about in our last call. Healthcare IT stimulus money is about $36 billion coupled with the HITECH Act of 2009 and major incentives were electronic health records in the prescriptions are going to drive some of the activity and some of our sub markets which present us with some unique opportunities as well.

And finally on the dividend, the Board is likely to consider the dividend increase for the fourth quarter in order to share the company’s increase in free cash flows with the shareholders.

Now, let me turn it over to Steve Richardson on an in-depth Bay Area report.

Steve Richardson

Hello, this is Steve, the Senior Vice President Regional Market of the San Francisco Bay Area. My comments will touch on both the life science and broader technology region. As many of you are aware that technology companies in the Greater Silicon Valley have been doing quite well in the past few quarters. Exciting companies in the technology sector now also includes San Francisco based companies such as Zynga, Twitter, and SalesForce.com.

On this note, Alexandria was pleased to announce that SalesForce.com had identified Mission Bay as a highly desirable and uniquely intellectual center, and we completed an all-cash purchase of $278 million or approximately 2 million square feet of entitlement, as well as associated parking spaces and related construction infrastructure with SalesForce.com to establish their iconic headquarters campus.

Alexandria subsequent to the sale will maintain its dominant market position in Mission Bay life science sector and currently has three facilities totaling approximately 555,000 square feet, approximately 98% leased or under negotiations. The company also retains the ability to provide nearly 300,000 square feet in Mission Bay, as Joel mentioned, the (inaudible) users as well as another 700,000 square feet of fully entitled facilities in the South San Francisco cluster.

Suffice it to say, Alexandria is well positioned to capitalize in further growth opportunity with an ample development pipeline in these two key clusters as we see expansion underway from both the biofuels and clean tech industry driving demand as well as our core life science cluster.

The core San Francisco Bay Area life science markets achieve from Mission Bay in San Francisco to Stanford University in Palo Alto area is now solidly in the single-digit vacancy range. Alexandria’s Class A facilities in this cluster have both attracted and retained industry bell weather companies as we leased or will need approximately 320,000 square feet during the quarter.

First, we’re pleased to welcome Onyx Pharmaceuticals to its new 129,500 square foot corporate headquarters we had the office facility at 249 East Grand in South San Francisco.

Onyx discovers and develops novel therapeutics based upon the genetics of human disease with an emphasis on cancer. The company has a market cap of $1.7 billion and annual revenues in excess of a $0.25 billion. The East Grand location will provide Onyx with an opportunity to consolidate its operations and also the ability to expand in a logical fashion as it might require overtime.

Second, we were also pleased to secure a significant endorsement from Theravance as they renewed their long-term relationship with Alexandria in South San Francisco in their corporate headquarters facility of a 130,000 in a two-building complex.

Theravance has a market cap of $1.5 billion and a significant ownership stake by GlaxoSmithKline. This leasing activity was supplemented by a number of other transactions across the region that enabled us to maintain an attractive occupancy rate and reduce our near and mid-term rollover.

We are also tracking solid activity both in Mission Bay and East Jamie Court project in San Francisco. Specifically 1500 Owens Street. Mission Bay is currently under negotiations with the tenant that will effectively bring it to nearly fully occupancy.

455 Mission Bay Boulevard itself is welcoming Bayer this week for the opening of their laboratory facility and additional ongoing lease activity in its project which is expected to drive occupancy above 95%.

Finally, East Jamie Court echoed disappointment (inaudible) project users stepping back from the facility is aggressively moving forward in a multi-tenant direction with activity on a number of floors.

I do want to take a moment to acknowledge the regional team in the leasing operations in construction realms has dedicated and accomplished professionals to supporting the success of our tenant clients every day. This on the ground team provides an industry-leading level of service and is an important part of what sets Alexandria apart from its competition.

In summary, the region has performed very well this past quarter in its core market and we’re pleased to extend the enthusiastic and warm welcome to SalesForce.com as the vision of Mission Bay as an unviable intellectual center is becoming fully realized. We believe it will be a benefit to all stakeholders involved and turn the international model for creating clusters spots for innovation and entrepreneurship.

With that, I’ll turn it over to Dean.

Dean Shigenaga

Thanks Steve. Let me jump right into our very recent sales of land parcels in Mission Bay and update on acquisitions, balance sheet matters, operating results, sources and leases of capital, and our 2010 guidance.

Several quarters ago we reviewed certain parcels for sale and identified a parcel adjacent to the future UCSF Hospital campus as a potential site to sale, along with a few other parcels in various markets. Our basis in this parcel is in the low $70 per square foot range, and our expectation was that the value was significant relative to our cost bases.

At price, not quite, but approaching something relatively close to two times our investment. Different parties expressed interest in land at Mission Bay, including Salesforce. Ultimately Salesforce required a large campus setting and we completed the sales of several land parcels in Mission Bay aggregating approximately 2 million square feet of develop open square feet.

The sales included land, parking spaces, and above ground parking garage and certain infrastructure. The total purchase price was approximately $278 million net proceeds that will be used in outstanding debt is approximately $262 million and we expect to recognize a gain of approximately $60 million.

The net proceeds will eventually cover certain payments to the third party over the next several years if certain development milestones are not achieved. We have not made any milestone payments to date and did not anticipate any payments in the near future. As such, our investment to date does not reflect any potential milestone payments.

We do however as a result of the sale expect certain milestone payments to be resulting in a reduction in our gains of approximately $60 million. These sales will reduce our pre-construction square footage by approximately 2 million square feet, a reduction in our aggregate cost basis on the pre-construction of approximately $161 million and a reduction in our investment in the parking garage classified in rental properties of approximately $18 million.

Additionally, capitalization of interest related to pre-construction activities for parcels sold aggregated to approximately $1.9 million on an annual basis, representing the reduction in capitalization of interest going forward. I think if you divided that by four that will get your quarterly run rate going forward.

Most importantly, the net proceeds from the sale aggregated – I’m sorry, the $1.9 million adjustment in capital interest is a quarterly adjustment for your run rate going forward from the sale of these land parcels.

Most importantly, the net proceeds from the sale aggregated $262 million and will be used to reduce outstanding debt. Our book basis for the land parcels sold range in the low $70 per square foot range to low $80 per square foot range. And our basis varies due to the different dates of acquiring each parcel over a two-year period, any difference in cost incurred related to the entitlements design site work and infrastructure.

Post sale, our cash yield and our total investment in our Mission Bay project upon stabilization is approximately 12%. This includes a build out of the remainder of the future development potential of approximately 290,000 square feet and the benefit of a $60 million reduction in our total investment related to the gain on the land sale.

The cash yield on our total investment in Mission Bay excluding any benefit from a gain on sale remains solid at approximately 10%.

In connection with these sales, we do not anticipate a special dividends to offset the taxable from this transaction. A portion of the gain will be offset by tax losses from the retirement of our unsecured notes earlier this year. We will also defer a portion of the gain through a 10/31 exchange transaction.

Let me briefly provide an update on acquisitions that were in process as of September 22nd, the date of our recent common stock offering. As a reminder, we had two properties under contract related to our purchase of certain assets from (inaudible) that are subject to loan assumptions. We expect to complete the loan assumptions shortly. The total purchase price for these properties will consist of approximately $12 million in cash plus the assumption of approximately $15 million of secured debt.

On September 22nd, we also estimated a total of a $156 million of additional acquisitions. On October 1st of 2010, we completed an all cash purchase of the West Campus project in University Towne Center, San Diego for about a $128 million. We also expect to complete a purchase of a smaller property for approximately $6 million.

Moving next to credit metrics, our net debt to gross profits was about 38% as of 9/30. Net debt to adjusted EBITDA was approximately 7.3 times as of 9/30 and approximately 6.7 times on a pro forma basis, pro forma for the acquisitions that we’ve completed and the pay down of debt related to the sale of land parcels.

Going forward, we expect to continue to improve this ratio through the growth of EBITDA and an overall reduction in total outstanding debt.

Unencumbered NOI represents a large and growing portion of our operations at about 58% of total NOI. Going forward, we expect this ratio to increase with the increase in NOI from the delivery of spaces from our development and redevelopment program.

We remain in compliance with our facility covenants, leverage is solid in the sub 40% range, the facility run rate is 65%. Secured debt percentage remains below 15%, the facility run rate is 55%, and fixed charges are solid for our business at approximately 3 times, and our facility covenant is 1.4 times.

Moving next to various balance sheet matters. During the quarter, we exercised our extension options to extend a maturity date of our unsecured line of credit from October 2010 to October 2011. We still have an option to extend the maturity date of our unsecured term loan from October of 2011 to October of 2012. And we are currently reviewing a proposal for amendment of our $1.15 billion unsecured line of credit.

Based on ongoing discussions with our important lending relationships, we have a high level of confidence that we will successfully amend our line of credit label issue and are optimistic that we will have the opportunity to renew our revolving line of credit close to or at its current size of $1.15 billion.

To lend our appetite for traditional secured loans remain solid for our assets, the quality adjacent free locations the key drivers in each of our top life sciences’ submarkets, tenancy and Alexandria sponsorship.

Our tenant receivable balance was about $4.9 million and it does slightly due to a spike in the utility expenses from the unusually warm weather in several of our markets in the third quarter. The spike in utility expenses will be recovered after yearend pursuant to each lease agreement. And until it’s build in the first quarter of 2011, these receivables will remain classified as unbilled AR.

Billed AR for monthly rent and budgeted operating expenses remain collectible and very clean as of 9/30. Our top 20 tenants were recently enhanced with the delivery of space to Eli Lily and Company in the third quarter of 2010. We’re confident that our top 20 tenants, Roster represents a (inaudible) tenants especially when you compare to other highly regarding publicly traded REITs.

Moving next to operating metrics. Our strategy includes our consistent focus on top tier life science across the destinations with our properties located adjacent to the life science entities’ revenue growth and technological advantage within each cluster. We also remain focused on solid operating metrics through our favorable lease structure. 97% of our leases are triple net, 94% provided for annual rent escalations and 92% provided for the recovery of major CapEx.

Our leasing activity approximated 1.7 million square feet year-to-date, over 2.2 million square feet on an annualized basis, representing one of our highest leasing years in the history of the company. It also highlights the strength of the demand for high-quality life science space in the best adjacency locations.

Rental rate adjustments were up by over 5% on a GAAP basis. We reduced the remaining lease expirations in 2010 by 50% down to only about a 135,000 square feet where we also took out some space in the fourth quarter related to one lease in the San Diego market, which remains in the 2010 remaining external lease category.

Our occupancy percentage remains solid at 94% as of 9/30 and over 95% on average since 1998. Again property performance was positive for the 49th consecutive quarter. Operating margins remained solid for the nine months ended September 30th at approximately 73% and down slightly to 72% for the quarter.

Over the past several years, margins have declined primarily due to the impact of certain additional ground leased assets including Technology Square in Cambridge. Please keep in mind that approximately 97% of our leases are triple net and therefore a majority of our operating expenses excluding ground rents are recoverable from our tenants.

We continue to advance important pre-construction activity from several strategic land parcels including our 1.9 million square foot life science development in East Cambridge. The diversity of high-quality life science entities in Cambridge provides a great opportunity to pre-lease future development projects.

Our land parcels are strategically located in the best adjacent free locations in each of the key life science cluster markets and these assets will be monetized through lease set to high-quality life science entities with significant revenue and cash flows with a potential for selective sales of certain crossovers over the coming quarters.

Going forward, future sales of land parcels along with other sources of capital including free cash flows will provide important capital to repay outstanding debt. We had several ongoing negotiations and plans for the sale with land parcels ranging in size from 5 million to 75 million, again each had a gain.

Moving to sources and uses, as of September 30th, we had $600 million of ability under our credit facility, but increased at $720 million of availability on a pro forma basis for the sales of land and the acquisitions that were completed in October, a $111 million of cash on hand, $80 million of annual free cash flows and most importantly increasing to approximately a $125 million in 2011.

Over the next 12 months, we expect this to our other land parcels generating proceeds of approximately a 191 [ph], still retaining strategic value-add opportunities for future development. The proceeds from future land sales will be used to reduce outstanding debt.

Turning to uses of capital, our estimate for construction spending for the remainder of 2010 is approximately $75 million. We anticipate the repayment of secured debt maturities as they can do and repayment of our 3.7% unsecured notes in early 2012. Also this – we anticipate the successful renewal of our line of credit here later on this year.

Over the next several years, our goal will be to balance key debt and balance sheet metrics from capital from debt and equity, broadly defined to be clear equity capital will include reinvestment of free cash flows, selected sales of income and non-income producing assets, opportunistic JV, capital and common equity. JV capital will continue to improve key opportunities to work closely with institutional users with strong capital positions and other partners on the development of our strategic land parcels.

We also expect to continue to improve the credit metrics over the coming quarters and into the next few years. In the near term, significant EBITDA will be generated from delivery of our development and certain redevelopment projects. Lastly, it’s important to keep in mind that sources and uses of capital may be adjusted from time to time. For example, future acquisitions are very specific and impossible forecast would certainly over a multiyear period.

Lastly, turning to our guidance, our guidance for 2010 FFO per share diluted was $3.57 and $4.40 excluding an $0.83 per share loss related to the retirement of our 8% unsecured notes. Our guidance for 2010 EPS diluted was $2.29. Again our guidance is based on various underlying assumptions and reflects our outlook for 2010.

Some of the assumptions include same property results projected to be positive, up to 2% both on a GAAP and cash basis for the fourth quarter, with stronger same property performance forecasted for 2011. Straight line rents are estimated to be in the $6 million on a quarterly basis, G&A expenses are projected to remain in the low $30 million this year.

By the end of this year, we anticipate almost all of our after development projects to be completed or leased with some space committed. This forecast also assumes that we continue to work on the lease up and delivery of our 162,000 square foot project in San Francisco.

Capitalization of interest for 2010 is expected to decline from 3Q into fourth quarter and from fourth quarter into the first quarter of ‘11, and will reflect the delivery of significant square footage from our redevelopment, development programs and the reduction of pre-construction activities from the sale of our land in Mission Bay.

Lastly, our guidance going forward, we will continue to assume that we selectively sell both non-income producing assets as well as income producing assets over the next several years. With that I’ll turn the call to Joel.

Dean Shigenaga

Thank you very much and before we go to Q&A, I just received good bit of news that our Chief Investment Officer Peter Moglia has advised that we do have a signed lease with the New York Finance (ph) Translational Research Institute for approximately 70,000 plus square feet in New York, so we’re very pleased with that.

And with that I’d like to open it up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Michael Bilerman with Citi.

Michael Bilerman – Citi

Dean, you talked a little bit about this 12% return on Mission Bay assuming you build up a 290,000 square feet and 10% pre the gain, again building up the space. If you were to look at just the return on what you’ve developed on your, I guess what you’ve invested net of the proceeds you’ve gotten from the land sale and just put the land that you have remaining, which I think probably has got a book value of $25 million to $30 million, what would that return be?

Dean Shigenaga

Michael, I didn’t run that analysis. I don’t have the answer handy but the simple answer is that it will impact the yields that I provided that you are assuming the employees (ph) NOI with the reduction of – I’m sorry, an increase in our cost basis which will impact the yield modestly, but I’d be surprised that we need more than one point in that range, high level – that’s a high level guess.

Michael Bilerman – Citi

Right. So the calculation you’re using is, you’re assuming as current NOI and then you build out this future space to probably the same number to a 12 or to a 10?

Dean Shigenaga

It assumes the buildout of the future space. So it includes assumptions to construct the remaining space. It includes lease-up assumptions for both the existing product that has – its vertical today in the development pipeline as well as leased up of the approximate 300,000 square feet of the future development potential. So it’s all in stabilized NOI over total investment every dollar we spend on Mission Bay.

Michael Bilerman – Citi

Okay and then just going…

Dean Shigenaga

No, I was going to say (inaudible) maybe today cost of construction and the rental rates in Mission Bay.

Joel Marcus

Yes I think we talked about it a number of times, I mean we’re in the low to mid 40s on rental rates and total construction cost below that $350 to 400 a foot range. So I think that’s where the 10% yield holds up.

Michael Bilerman – Citi

Just from an accounting perspective and balance sheet, how will you treat – I think Dean you said that there is potential future payments. I guess you’ll receive all the cash today. Is there going to be some sort of contingent liability on the balance sheet? How should we be thinking about that money that’s being held back?

Dean Shigenaga

You’re right, Michael. On the accounting there, we will accrue what we believe is the estimated payments that will occur over multiple years. And so the accounting as we do get the cash to pay down debt over a number of years, which we will spend (ph) a number of year as well as payments are made, cash will go out the door but it will take a number of years.

Joel Marcus

But in fact they may not be made.

Michael Bilerman – Citi

Right okay. Just on the…

Dean Shigenaga

The amount and timing is hard to predict.

Michael Bilerman – Citi

Right but then you can just offset – you’ll just have a gain but you can probably offset that at the time with other…

Dean Shigenaga

We’re getting down the road there. We put together really our best estimate of the potential payments in – it will take a number of years for clarity to come through on exactly on how much will be paid. So we won’t know for a number of years until –

Michael Bilerman – Citi

Just trying to get a sense of on the Biogen facility in San Diego. Did the $128 million, how much of that was allocated to the existing building versus the future development and how should we think about I guess the redevelopment expense and what the rents would be in that marketplace to start thinking about the return on that capital and future capital spend?

Dean Shigenaga

If you look at the overall purchase price, about maybe between $300 and $310 per square foot for the building which is – and this is a truly first class absolutely premier campus considerably below replacement cost and the land allocation with $50 or less (ph) per foot, recent comps in the market are as high as 80. So we feel very good about that allocation.

We think that we’re looking at a full campus user, not a multi-tenant environment. We think the CapEx to get there is pretty minimal to really a relatively brand new campus first in class, really just outstanding in all of its regard, and there is a possibility for builders (ph) potentially which could yield us some nice dollars as well.

Rental rates for that campus could be in the range of about $36, triple net would be kind of an average.

Operator

We’ll move next to Anthony Paolone with JPMorgan.

Anthony Paolone – JPMorgan

On the Biogen space, do you guys expect them to leave or was this something that was just probably related in your thinking?

Dean Shigenaga

Well, the lease was for 15 months so going into it, it was pretty certain that they were going to depart. The question (inaudible) we didn’t know precisely what their reorganization plan was but it was pretty clear they were undergoing reorganization and they also were hiring a new CEO, who came from a client of Exelixis. Actually I’ve known George Scangos for probably two decades. He was at Bayer in the Bay Area before he joined Exelixis, he’s quite a talented guy. And so when he came onboard, it was virtually certain that he would be making some substantial reorganization because they really want this company to grow and become a truly great biopharmaceutical company.

So our game plan all along had assumed that they would exit that campus and we would be looking for a large user, which is good in the sense that in San Diego the strength of that market is really to some extent on the small end and on the large end, it’s really the middle area that over the last couple of years that’s really suffered where we’ve struggled with a bunch of our spaces.

Anthony Paolone – JPMorgan

What kind of timeline should we think about and what kind of timeline have you thought about in terms of when they exit the space, when you may have to do some work on it and when you think a new candidate should reasonably be expected to start paying rent again?

Dean Shigenaga

I think that they’ll be there for more of less for the full 15 months would be my guesstimate. Our goal is to have a lease in place as soon as possible and I would assume that the CapEx for that new tenant would be actually pretty minimal.

Anthony Paolone – JPMorgan

Okay. On Mission Bay, we were under the impression that the lands, as you were looking at there were likely in the MOB category. So just wondering if you can give us a little background on how Salesforce.com ended up there, and did you guys have the option to be involved as a developer even if they (inaudible) or just a little bit more about the color on the transaction itself.

Dean Shigenaga

Yes I’m going to have Steve give you the details but when we started earlier in the year, we had really teed up for about 500,000, 550,000 of the south targeted MOB and hospital office for sale, but one thing led and Steve can carry the story on from there.

Steve Richardson

As we brought the MOB project to market we had been having ongoing discussions with Salesforce.com for well over a year. They intensified in the spring and into the summer. And if they came clearly (inaudible) as they saw their extension plan over the next several years and their goal of establishing really a unique campus and stabilizing occupancy cost for the long-term that they needed a larger footprint than what we had always imagined in blocks 29 through 32 of, say a 1 million and 1.2 million square feet.

So as it unfolded it initially included the MOB parcels and then ultimately included the two parcels along Third Street as well to get as up to that nearly 2 million square feet. That was really driven by their executive management team as well as their Board.

Joel Marcus

I would say that it wasn’t our intent, we as Steve said we thought they would take the eight parcels which is the million square foot campus, MOV is (inaudible) but then they kind of wanted those. We didn’t necessarily want to sell the remaining side on the north parcel but it became pretty mission critical to them and so it was folded into the transaction.

Anthony Paolone – JPMorgan

Okay.

Joel Marcus

And that they recently gave $100 million gift to UPSS [ph] hospital like there – so he is very invested in Mission Bay.

Anthony Paolone – JPMorgan

I see. And then just my last couple of questions on the redevelopment pipeline. Two things, one when I look out the remainder of 2010 and 2011, it’s about little under $600,000 square feet slated to go into redevelopment. I was wondering what portion of that is conventional office that would become some sort of life science space for the first time versus something that’s already life science related but will undergo a change just within life sciences.

Joel Marcus

Yes, well if you go to page 31 of the supplemental, the phase – the big phase for 2010 that will go in the 93,000 square feet is kind of an old industrial building in Seattle. So that is what it is. It’s just old industrial. It’s got a good location and we think that there is an opportunity to create a lab space there. If you look at 2011, where the larger amount of redevelopment is coming from really the two big ones are Eastern Mass, that made up the big 400 Tech Square which is about 178,000 square feet. You may have seen it on some of the tours.

It’s kind of a – creates a carbon copy of 200 Tech Square which we redeveloped very successfully. It’s occupied not by post research they’re moving to a new campus in the suburbs [ph]. They are solely an office tenant. That would likely be redeveloped. There is a change potentially for that to go either to lab or to across IT. I don’t know at the moment but we have some pretty intensive ongoing discussions that as I said old and then the Seattle amount almost 180,000 square feet. That’s the Gates Foundation building in Seattle on Lake Union. It’s a beautiful sites that’s right now fully, it’s a pretty amazing building but it’s fully office, there isn’t a lab space and we’re working on it, series of leases as we speak to redevelop that as the lab space. So those are the kind of a three major ones Tony.

Anthony Paolone – JPMorgan

Okay got it. And then just last question on redevelopment for Dean. There is a couple projects that look like they get put in service in 2010, where there is no leasing or negotiating going on at the moment. Did those just come in as a drag on earnings or what happens there?

Dean Shigenaga

You’re referring to page 38. Yes, top down it’s the Eastern Mass 113,000 square feet and 30,000 square feet. So you’re most of the way you’re two-thirds of the way half of the way down on page 38. Correct, I think it’s clearly that tell how successful we’ll be in actually delivering that by the end of the year. There is some chance that we actually pull in a question of this into operations by the end of the year. And depending on what we decide to do on the larger one near-term, there is also a change that that comes in as well.

They’re both suburban locations Tony, so they’re not kind of necessarily are sweet spot in Cambridge. And there is always a chance on the bigger one there may be a user sale that we might be looking to pull up there.

Anthony Paolone – JPMorgan

Okay, got you. Thank you.

Dean Shigenaga

But otherwise they would be a drag of something they get pulled in.

Anthony Paolone – JPMorgan

Okay.

Operator

We’ll move onto our next question that comes from Jamie Feldman – Bank of America/Merrill Lynch.

Jamie Feldman – Bank of America/Merrill Lynch

Thank you Joel, something you could talk a little bit about the bigger picture thought process for the land sales in Mission Bay, I mean this is a sub market where you effectively could have controlled it for a long period of time and kind of what the read through is for the opportunities that you could – that you would see in your other markets at this point?

Joel Marcus

Yes, well I think the goal is obviously to make sure after this structural collapse, a mere collapse of the financial system that we’re deploying as much of our asset base in the income producing properties as reasonably feasible and so as Steve described we are initiated as we thought it would be – nothing that are easily these days was undeveloped land but we thought this land parcels would be very attractive and will be used developers etcetera. But as he described one user emerged over a period of time that really had kind of a dominant view. We always view that each parcel which is a million square foot block on the water as really likely and I think we’ve said this many times likely a technology that’s the nation just given the nature and feel of it and so when we very, very engage results for us.

Again it was clear that they needed more than we were offering and it became one of those situations that either, you do the deal with them or they look elsewhere. There aren’t a lot of choices but there are some and we decided that the better part of decision making was to forgo the additional site on the north parcel that they really needed to scoop-up into this. We still have – we’ve got about 300,000 square foot remaining to our total footprint that will be 700,000 to 800,000 not super large but also not insignificant by any mean. But as I said before, I think we have great opportunities in the best sub market in Cambridge. It’s the tightest that’s got the highest rent. We’ve got almost 2 million square feet there and in New York it looks like as I said, although I guess we’re five years behind the (inaudible) here, five years later but hungry for step designated that I think you’ll see that sites fully leased by year-end with rents that will be approaching $80 a foot.

And I think you’ll see us work very seriously when we can secure anchor tenants for the West Tower [ph] that we look. That was got an ability to build a 100,000 square feet. So that land parcels and other value add in each of the markets. So we’re not right on that, in fact the biggest criticism from the street unless you use it. We got to match. So I think all of this things were important and clearly the continued deleveraging is very, very critical to the companies, prior to securing of additional sources of capital and that really drove this decision.

Jamie Feldman – Bank of America/Merrill Lynch

Okay, I found your commentary on the healthcare IT opportunities, interesting. Can you elaborate a little bit more about what’s really out there and then kind of what kind of returns you would think you could get?

Joel Marcus

Well and this is true on a worldwide basis, but let me focus on the US and maybe both and I could have Steve talk a little bit about San Francisco, but I think in Cambridge and surrounding areas, its clearly there is a movement and a integration of a variety of technology firms in kind of what is historically been known as the life science cluster and the combination of IT, healthcare, life science and obviously telecommunications is becoming pretty inextricably brought together because one of the critical mandates of the recent legislation in just for good medical practices and (inaudible) good medical records and immediate access to healthcare information into something treatments etcetera.

So we’ve had a number location where we have terms that are either dedicated to this area or firms that have significant divisions that are dedicated to this area, looking at kind of Class A locations and the best sales class sub markets. This would be kind of heavy offers, its offers that is fairly heavy infrastructure for what they want to be build – it is an office use and as I said 400 Tech Square, we’ve got a potential health – potential office use that could be a Health IT use or e-records use, or e-pharmaceutical use that could be very valuable to us. The returns I mean if you look at putting on redeveloping the lab, you know, you have an equation that we told you about two hundred types where we’ve shared the numbers there. I think the infrastructure would be a lot less for this view. And the returns, I think, would be pretty darn good.

So if you could put in, you know, a hundred dollars or a hundred and fifty dollars, looks like we’re going to achieve $40 triple net lab compared to maybe $60-plus on lab dates were pretty good numbers. So I don’t know if even they or new could comment on kind of the technology which have been…

Dean Shigenaga

I would not go to that. I mean, it’s just such a large vertical industry that we’ve seen a number the larger IT companies with different devices, different software, look more closely at the clusters and how they can be adjacent for their customers. So I would echo what Joel had said.

Jamie Feldman – Bank of America/Merrill Lynch

Then I guess, is there any…

Joel Marcus

That run through lab…

Jamie Feldman – Bank of America/Merrill Lynch

…synergy? I’m sorry.

Joel Marcus

Synergy? Oh, go ahead.

Jamie Feldman – Bank of America/Merrill Lynch

I mean, is there a synergy with your core business or is really then you’re just competing typical office to the office?

Joel Marcus

Well, it’s synergistic in the sense that this sensation of growth in the maintenance of medical records really are part of the integrated health care system which drugs and pharmaceuticals are a part of. It really is an extension of what we do. And we see that really big time overseas, as well.

But we think it’s a natural extension of what we do is it’s kind of unique infrastructure for a service-related business.

Jamie Feldman – Bank of America/Merrill Lynch

Okay, and then actually, my final question is just an update on international and your comments on the university development getting pushed off. I mean, has something changed in this quarter in terms of bigger picture demand?

Joel Marcus

No, we have a situation. We hope this will be kind of our case study for doing this work. It’s moved from a main campus of a major university to a corporate campus where the university won’t be a partner in there after and so that’s kind of the ongoing situation. We’ve lost a lot of time, unfortunately.

But, you know, it is what it is. It would on land owned by a, you know, a non-profit institution. And we would be, you know, the developer on that. And it would be kind of an integrated campus that would be pretty unique with a very major university component.

The recently deal on campus didn’t work is the trustees wanted a building that was according to a certain standard and given the household (ph), they didn’t make economic synergy. So we had to look for an off-site and an off-campus location. And on the international – I’m sorry?

Jamie Feldman – Bank of America/Merrill Lynch

I’m sorry.

Joel Marcus

And on the international, just a quick update. We continue to move forward our development in Northern China. We have two clients that we actually met with last week. We hope they’ll be our first tenant in our two buildings that are moving along. Really, the first person class for lease buildings for the five pharmaceutical industry in all of China.

So we feel very pleased about and hopefully, we’ll have that come to fruition in 2011.

Jamie Feldman – Bank of America/Merrill Lynch

Okay and then back on the university. Can you just remind us? Was that a fee development or you’d actually have a piece of the building?

Joel Marcus

No, we would be the owner.

Jamie Feldman – Bank of America/Merrill Lynch

You’d be the owner? Okay, thank you.

Joel Marcus

You’re welcome. Thank you.

Operator

Our next question comes from Sheila McGrath with KBW.

Sheila McGrath – KBW

All right, guys, good afternoon. Joel, you mentioned 10% returns at Mission Bay and with the land sale, about 12%. I was wondering if you could give us some insights on your returns at East River and versus your original pro forma.

Joel Marcus

Yes. Again, I think that what we’ve tried to do overtime is and I said there’s a number of times our original estimate of, we’re in fact in those six, were kind of low Cambridge Life about 45 triple net. And I think every leads we have signed has been increasingly well north of that.

Kind of the benchmark rent. It’s not a comparable place. But benchmark rents are still Cambridge and then an incubator at the Columbia. And I think what over time, we have been able to get really great rents there. I think, you know, if you look at overall hard and soft products of about $500 of lab and then you add in, you know, various, you know, tenant improvements and so forth.

I think it’s pretty fair to say that on most of the states that we’re delivering over the coming quarters, I think we’ll have a, you know, a close to a double-digit return on that. So I think we feel really, really good. We’ve obviously had to think some money into on our nickel into the buildout of the restaurant and the conference centers.

So that will lead me to the operator, you know, they could take those with the improvement. And therefore, comes to drag down the overall yield of the phase. But I think one lease is just fine which is maybe our highest rental rates to a company, you know, is close to the numbers I’ve given you.

And I think, when you look at our overall status, you know, it’s like very favorably in that about 10% range.

Sheila McGrath – KBW

Okay. And also on the land sale at Mission Bay. If we look at what you’ve entitled in Cambridge, maybe you could give us your thoughts on how you look at the land values at Mission Bay versus your Cambridge entitlement?

Joel Marcus

Well, different markets, from the standpoint of what a buildable foot in each of the markets with the price data if you were to monetize something in Cambridge today. So you’ve got a higher-run environment in Cambridge over at Mission Bay. And you have similar land constraints, I think, in both markets.

And limited opportunities which would probably attract a little bit of a premium. So I would say, to an answer to your question, that the land price in Cambridge would definitely be north of our price point in Mission Bay. Exactly what that is? I don’t know how to answer that because there hasn’t really been any comp in the market that would give you that.

But I would not be surprised to find that somewhere approaching $200 or more (ph). And our basis is well-thought about. But if you look at, you know, construction costs, maybe in the $350 range and around 50 bucks triple amount, those are pretty good economics with applications. And we feel pretty good about that.

Sheila McGrath – KBW

Okay. And last question. Dean, you mentioned a number of times unencumbered NOI. And I was just wondering if you could talk to us about your plans. Potentially, are you thinking about pursuing an investment grade rating and what you would have to do with the capital structure to achieve that at this point?

Dean Shigenaga

Yes. One thing that continues to be highlighted at least and the bond markets opened up off the bottom of the financial crisis. It’s not the bond markets have driven of the extremely efficient when wide opened as they have been from time to time of late. And the company, Alexandria, is a business getting to the side and profiled as it is, I think, having access to the bond markets is the prudent goal to pursue.

And so it’s an important objective, I think, of the company to add the bonds into our capital structure going forward. Exactly from a timing perspective, I think that’s – we’re not prepared to describe whether that’s, you know, we’d like to get to it as soon as possible but it’s going to be tomorrow versus three quarters from now or a little bit longer. That’s probably premature to speculate on I give you an estimate.

But we’ve spent a lot of time over the past quarters looking at a number of, you know, kind of the boxes you have to fit in. and so, we’ve spent a lot of times in that analysis and in that, you know, gaining some areas. We kind of know where need to be. But it’s a process. And but we expect it to be, you know, incredible.

Sheila McGrath – KBW

Okay, thank you.

Dean Shigenaga

Thanks, Sheila.

Operator

Our next question comes from Suzanne Kim with Credit Suisse.

Suzanne Kim – Credit Suisse

Hi, I also have some questions regarding Mission Bay and other questions. Were the parcels that you sold, did they have any horizontal path improvements like pay-ons or were they just completely straight land sale without you having to put any money into it.

And then secondly, do you have anything else? I heard that you are looking into some dispositions and other land potential dispositions as well. And I’m wondering if you are actively marketing anything. And if so, if you haven’t been under any alliance (ph) at this point?

Joel Marcus

Okay, well, I’ll have Dean maybe you address a little more specifically. But in some locations, we have driven files. And there was a lot of work that has been going on on-site work. There was obviously parking fills at Mission Bay infrastructure, if you could describe some of the – gradually.

Dean Shigenaga

I’ll walk you through it.

Joel Marcus

Probably land in the middle of tenants.

Dean Shigenaga

Yes, there’s a whole entitlement process in Mission Bay and the San Francisco redevelopment agency was the governing authority. So a number of the parcels had proceeded through design entitlements. Two of the parcels had proceeded through a permanent set of construction drawings. One of the parcels actually did have the entire set of production piles driven. We didn’t have any concrete slabs or any infrastructure such as that but we did have the piles in place.

So it was a continuum of different pieces that had been put in place to bring it to this point.

Dean Shigenaga

And we do have a number of parcels that we are looking at selling and we may have one or two that have some kind of a contractual document signed but I don’t want to detail where those may be.

Suzanne Kim – Credit Suisse

One last question. With the remaining parcels in the Mission Bay, do you have an opportunity to increase your FAR or is that pretty much set at this point?

Joel Marcus

Yes, it’s pretty much set at this point with the design for development guidelines that are in place.

Dean Shigenaga

So that building would be one more on the West parcel, probably at about approaching 292,000 feet.

Operator

Our next question will come from John Stewart with Greenstreet Advisors.

John Stewart – Greenstreet Advisors

Dean, if you don’t mind, wanted to kind of go back through the numbers on Mission Bay, I was a bit confused. Specifically I thought you said your basis was $70 a foot. But if you just, in round numbers, if you sold that for $280 million and back out a $60 million gain, you are at $220 million over 2 million feet, sort of a $110 a foot. So what’s the delta between that $110 and $70?

Dean Shigenaga

Yes. First off, I think, maybe to start the answer to your question, if we look at our average cost basis, it’s really – I think I gave you a $171 million coming out of pre-construction. This is just the land, there is another $18 million associated with the parking spaces that were sold, which is not comparable on our land per square foot basis, but it is part of the transaction. That piece is coming out of rental properties. But the land itself, at $171 million is about $83 a foot on average. And my commentary earlier was that the range of investment to-date per square foot by Alexandria ranges from the low $70 up to the low $80, parcel by parcel. But when you blend it altogether, you end up at $3 on an average basis.

The difference $278 million, that’s the gross purchase price, or $137 million (inaudible) square foot, and a gain of $60 million or about $30 per square foot, the biggest component is our basis at about $83, $84 a foot or $170 million. You have about $18, or $9 to $10 associated with the parking spaces and it’s a cost on that. And then you obviously have transaction costs, then commissions, transfer taxes and the payments that I described, netting out the remainder of that roughly $20 million in order to reconcile all the numbers I provided.

John Stewart – Greenstreet Advisors

Okay, that’s helpful, thank you. Can you give us a bit more color on the payment. So I guess specifically (inaudible) wasn’t aware there was third party earnout. Is that a (inaudible) legacy issue or what’s the nature of that?

Dean Shigenaga

It’s not an earnout but I can’t get into the nature of the payments. We did not expect to incur any payments at least in the near term with our plans for building out Mission Bay, but we fully anticipate that the payments will be due under the proposed schedule for buildout.

John Stewart – Greenstreet Advisors

Okay. And then, Joel, I hear you on wanting to redeploy proceeds as much as possible into income producing properties. But you have essentially taken half the proceeds from Mission Bay here and redeploying into a San Diego campus that won’t be income producing in 15 months. Can you kind of help – and I guess particularly, I am also curious –

Joel Marcus

That would not [ph] be income producing in 15 months.

John Stewart – Greenstreet Advisors

I thought you said that Biogen was moving out in 15 months?

Joel Marcus

Yes, that we fully expect to have the campus relived by then.

John Stewart – Greenstreet Advisors

But could you also just speak philosophically to the trade from the cluster or concept at Mission Bay to San Diego. And then particularly, your comments earlier about San Diego being a market that’s going through an evolution. And it sounded to me like you basically made the analogy that San Diego is the tech equivalent of a Microsoft and Cambridge is the Google, which makes you feel good about your land position in Cambridge but can you help us think through redeploying out of Mission Bay in the San Diego?

Joel Marcus

Well, I don’t think that’s what we did. So if you came to the conclusion, I think that’s a misconception. We aren’t deploying out of Mission Bay, we are using those proceeds actually to pay down debt. I think if you look at our acquisition in San Diego, it’s part of an expansion of really dominant footprint down there. This is a very highly unusual situation. We’ve never been faced with an opportunity to buy a first in class unique campus that caters to a very different kind of clientele and so that’s what attracted us together with the economics of the transaction, it’s where when you could buy a first class like buying on avenue type of building in our space at such a low percentage versus replacement cost, some 50% to 60% of replacement cost, which is really unheard of.

And I think my comment, I wouldn’t again, I think you kind of got the wrong impression. There was no impression to say that San Diego was a Microsoft and Cambridge is a Google. What I said is San Diego is going through a transition from really a FITCO (ph) biopharmaceutical market of the 80s and 90s.

Really I think to what is the future of healthcare, and that is if you look at the company as you go through the companies down there, some of the top diagnostic companies, prognostication companies, med device companies, product and service companies, it’s really moved into a much more of a tech and information related healthcare environment as opposed to classic hardcore chemistry, etcetera. And I view that as actually a positive because that workforce is very abundant in San Diego. I mean that’s why some of the great IT companies down there have been able to grow. In fact, if you look at Amilyn (ph), which is a pretty big chemic down there and a pretty big company and one that will ultimately have some pretty big market opportunity, it does already, although it had a little bit of a clinical delay, they had a hard time, I mean I knew the CEO (inaudible) for many years. They had a hard time recruiting the development expertise and the downstream process expertise in San Diego. They are just one enough of those people.

So I think San Diego is a huge opportunity really for the next generation of the kinds of companies that I mentioned integrated with the IT and telecommunications down there. And don’t forget, they still have the great anchors of the four major institutions up on Terri Pines (ph).

So I think don’t assume from what I said, this is a Google versus Microsoft, it isn’t at all.

Operator

Our final question comes from Jamie Feldman – Bank of America/Merrill Lynch.

Jamie Feldman – Bank of America/Merrill Lynch

Just a follow-up here. The Biogen Idec news out this morning, can you give us a sense of whether you see more of that to come in terms of maybe an even tighter focus on custom markets? How should we be thinking about these – because I think we expected this from pharma, but to see it from biotech at this point is a little surprising.

Joel Marcus

I think you have to go back and remember the history of this company. The history of the company was Biogen was a pretty successful biotech firm in kind of the Boston Cambridge area. Idec grew up as kind of a cancer franchise in San Diego. When the acquisition was done, most of us, I have 25 years in the biotech and pharma industry, knew many of the people in Idec well, certainly knew many of the Biogen people well, it was an odd combination. I think the Street at the time and many people who had been in the industry thought, that’s a really weird combination. Why would you go buy a company in a different therapeutic area, CNF and cancer on the other side of the country and try to manage them in a coordinated integrated fashion.

So I think the company got pretty low marks for a number of years after the acquisition and it seemed like an odd combination. It seemed to me that it – a better would have been at the time, I thought Genentech, which had the premier cancer franchise to go buy Idec because Idec, obviously they had one of Idec’s products.

But anyway, I think the announcement and George is a very smart guy, clearly saw that it’s feasible to manage operations on each coasts and one that are pretty different than the core operations of the main survivor, which is Biogen.

So I wouldn’t translate this into an industry trend. I look back and say, hey, the origin of their kind of odd combination was odd and out. This is just the end result and it’s not, frankly, it’s not surprising to me at all.

Operator

We have no further questions in the queue at this. I would like to turn the call back over to Joel Marcus for any additional or closing remarks today.

Joel Marcus

Well, thank you very much. It’s been a bit long, and we look forward to talking to you guys in early February on year-end and fourth quarter. Thank you again very much.

Operator

Ladies and gentlemen, that does conclude today’s conference. Thank you for your participation.

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