BioMed Realty Trust Management Discusses Q3 2010 Results – Earnings Call Transcript

Nov. 5.10 | About: BioMed Realty (BMR)

BioMed Realty Trust, Inc. (NYSE:BMR)

Q3 2010 Earnings Call

November 4, 2010; 12:00 pm ET

Executives

Alan Gold - Chief Executive Officer

Greg Lubushkin - Chief Financial Officer

Kent Griffin - President

Matt McDevitt - Executive Vice President, Real Estate

Rick Howe - Director of Corporate Communications

Analysts

Brendan Maiorana - Wells Fargo

William Crow - Raymond James

Jordan Sadler - KeyBanc Capital Markets

John Stewart - Green Street Advisors

John Guinee - Stiefel Nicolaus

Suzanne Kim - Credit Suisse

Chris Katen - Morgan Stanley

Operator

Good day, ladies and gentlemen and welcome to the quarter three 2010 BioMed Realty Trust Incorporated earnings conference call. My name is Jennifer, and I will be your operator for today. At this time, all participants are on a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to Mr. Rick Howe, Director of Corporate Communications. Please proceed.

Rick Howe

Thank you, Jennifer, and welcome everyone. Today’s third quarter 2010 earnings call includes a slide presentation to accompany our prepared remarks. If you are not currently viewing the slides and would like to, please go to www.biomedrealty.com, click on the Investor Relations tab on the left and then click the Q2 2010 BioMed Realty Trust, Inc. earnings conference call link. We have also posted these slides included in the presentation November 2010 on the Investor Relations tab of our website.

Presenting today are Alan Gold, Chief Executive Officer; Kent Griffin, President; Matt McDevitt, Executive Vice President, Real Estate; and Greg Lubushkin, Chief Financial Officer.

Before we begin, I would like to remind everyone of the Safe Harbor statement included in yesterday’s news release. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements, including statements made during the course of today’s conference call. These forward-looking statements are based on the company’s current expectations and involve significant risks and uncertainties, some of which are beyond the control of the company and are subject to change based on various factors.

Actual results may differ materially from those expressed or implied by the forward-looking statements. For a detailed discussion of some of the ongoing risks and uncertainties of the company’s business, I refer you to the news release issued yesterday and filed with the SEC on Form 8-K as well as the company’s other SEC filings including its most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

I will now turn the call over to Alan Gold. Alan?

Alan Gold

Thank you, Rick, and welcome to BioMed’s third quarter 2010 earnings call and presentation. Yesterday, we reported yet another exceptional quarter. FFO per diluted share was inline with expectations at $0.28 it was underscored by the highest quarterly revenues in the company’s history. These results are directly attributable to our steady execution of BioMed’s robust business model combined with an opportunistic growth strategy focused on the life science industry in the United States, which continues to grow and to perform as one of the stronger economic engine domestically and globally throughout a turbulent macroeconomic environment.

Reporting the top line results for the third quarter there were many highlights, which in the aggregate demonstrate that BioMed is firing on all cylinders as we enter the fourth quarter and look forward to 2011.

First and foremost, was approximately 232,000 square feet of new and extended leases in the third quarter, our best leasing quarter of 2010. As we have now surpassed our five quarter goal of 1 million square feet of leasing with one quarter still remaining. We made selective investments aggregating 335,000 square feet of high quality, well located life science laboratory and office space during the quarter, plus an additional 684,000 square feet, which we had announced and closed since quarter end.

We entered into new relationships with important life science organizations across the spectrum, including Elan Pharmaceuticals, Amylin Pharmaceuticals, Halozyme Therapeutics, the University of California, San Diego, Bristol-Myers Squibb and Bayer CropSciences. We fortified our balance sheet and liquidity position to a follow-on common stock offerings raising $290 million in net proceeds to take advantage of current and future investment opportunities.

Our common stock dividend was increased by 13% in the third quarter, the second consecutive quarterly increase to an annualized rate of $0.68 per share. And we enhanced our senior management team with the promotion of John Bonanno to Senior Vice President Development as well as the addition of Bruce Gale as Managing Director, business development and Anne Hoffman as Senior Vice President, development.

Now, looking to the state of the industry, contrary to the soft economic results for the U.S. economy, capital raising activity in the life science industry and in particular among our tenants continues at a healthy cliff. Total financing and partnering transactions produced funding of $19.1 billion in the third quarter, up 42% over the third quarter of 2009. Even more surprising, after the first three quarters of 2010, we’re actually on pace to meet or potentially exceed the extraordinary results for 2009.

The Amex Biotech Index was up approximately 13% over the second quarter and is now up almost 23% for the year. Partnering transactions increased modestly over Q3 2009 to $9.6 million, which included a $295 million extension of our license agreement between Astellas Pharma and our tenant Regeneron through 2023.

The remainder of the capital raising materialized and financing transactions, which exceeded $9.5 billion in the third quarter, up 132% over the same period last year. This included three IPOs totaling $185 million in growth proceeds, follow-on stock offerings of $211 million. And even venture capital had some positive results with investments of over $1.3 billion, a 75% increase over the third quarter of 2009.

And before we get to your questions, we thought it would be helpful to provide a detailed review and analysis of our recent investment activity as well as our initial 2011 guidance, which we announcement in yesterday’s release. First, I’m going to start with Matt and Matt will spend a couple of minutes discussing the leasing and investment results for the quarter. Matt.

Matt McDevitt

Thanks, Alan. I’d like to start by thanking all of our hard-working leasing and acquisitions professionals on both coast for their determination and efforts in executing our leasing plan and their ability to excel as a daily blocking and tackling required to exceed our goal a full quarter ahead of schedule. The leasing team delivered the highest volume of activity for the year. The 14 transactions for approximately 232,000 square feet of space bringing our total to 1.1 million square feet, which now puts us above our original plans with one quarter to go.

The third quarter results comprised 10 new leases totaling approximately 90,000 square feet. Four lease extensions totaling approximately 141,000 square feet. Now beyond the raw numbers here, the real significance of our third quarter leasing activities is the continued success we’ve experienced across our broad portfolio. And more particularly, in some of the most challenging locations for example we signed new leases with [Inaudible] for 41,000 square feet, Genterra for approximately 25,000 square feet at our Virgin Technology Park.

Now in Q3 alone, we have generated approximately 50,000 square feet of new leases over the past two quarters. We’ve also executed lease extensions at our Bayshore property in Brisbane through new two tenants. InterMune for approximately 71,000 square feet and [Inaudible] for 66,000 square feet. In just this week, we have signed new leases aggregating 65,000 square feet at the Pacific Research Center. We’re excited about PRC and the continued level of activity there and in the broader Bay Area.

Now let’s turn our attention to our investment activities. During the third quarter, we closed on roughly $138 million of new investments. And if you’re following along in our presentation material, hopefully you will see a roadmap here, which provides to help identify each of the investments we’ve previously announced and now have closed.

Let’s review the first two investments we discussed on our last conference call. First, the 4775 and 4785 Executive Drive property, at development site in the heart of the University Towne Center sub market of San Diego.

This includes a newly constructed life science building and a land parcel with permits in place for a second building. The second Paramount Parkway in the Research Triangle, which is 100% leased to a subsidiary of Bayer AG. Now since then, we have announced approximately $133 million of additional investments in San Diego and most notably our South San Francisco Campus acquisition, which totaled approximately $298 million.

Now, I would like to turn it over to Kent for much more detailed overview.

Kent Griffin

Thanks, Matt. Collectively, our year-to-date investment activity aggregates approximately $635 million. Accordingly we’d like to spend some time reviewing the significance of these new investments and their collective impact on our portfolio as a whole. But before we go further, we believe investors should really consider each of these investments on a stand alone basis as we have based on their merits and the risks and opportunities that they provide. And how they are reflective of our overall investment strategy.

Our fundamental underwriting approach has remained consistent throughout our history and focuses first on evaluating the real estate. Our interest remains concentrated in the same seven core markets identified and targeted from our company’s inception. We look for high quality investments with the key design and construction elements that supports the critical needs of our life science tenants.

In addition, we look for properties that offer the flexibility to meet the widest range of potential users in the life science industry. Properties that are attractive not just for today’s tenants, but for future tenants as well. These elements enable us to invest in properties that attract the highest caliber tenants in the industry.

And as Matt mentioned, we discussed two transactions on our second quarter, so I won’t spend as much time on them here. But our first acquisition on Executive Drive provides us with an excellent opportunity for growth in the very important UTC sub market in San Diego where we’ve previously had no scheduled availabilities for the next 13 years. Then with the fully leased Paramount Parkway property, we were able to add a high quality property with a credit tenant at an attractive return.

Next on September 8, we announced a series of acquisitions in the San Diego market. The first, 4570 Executive Drive represents a 125,000 square feet of fully leased space, which we have acquired during the third quarter for approximately $63 million. This is one of the San Diego areas finest research facilities located at the epicenter of the UTC sub market. Again, consistent with our investment approach an A+ location, very high quality physical building and 100% leased to top tier tenants in the San Diego market including Amylin Pharmaceuticals, Bristol-Meyers Squibb and the UC, San Diego.

Our 10240 Science Center Drive property represents approximately 49,000 square feet fully leased, which we acquired during the third quarter for approximately $18 million. This property is located at the entrance Torrey Pines on Science Center Drive directly adjacent to our 10255 Science Center Drive property. This property was originally built for Pfizer and has a basic infrastructure to be a laboratory building, but was finished as office. It is 100% leased as office to eBioscience, which is also the subtenant at our property across the street.

Now a lot of this property could obviously be a laboratory conversion and the economics may very well support that. Our base plan is to continue to lease as office in concert with our neighboring property, which has a relatively heavy lab build out closer to 80%. In either scenario, we think we will generate very attractive returns based on our initial investment.

Finally, we announced the acquisition of several properties in the Sorrento Valley life science market, all of which were from a common seller. The first part of the acquisition 11388, Sorrento Valley Road closed just before quarter end. This property was acquired for $12.4 million and includes approximately 36,000 square feet, which is fully leased to Halozyme Therapeutics and Siemens Medical. We believe that this is one of the highest quality properties in the Sorrento Valley submarket.

The remainder of the Sorrento Valley acquisition included two properties, which we acquired shortly after the quarter end. First, a nine building business park comprising approximately 164,000 square feet this property was 94% leased including a two-year master lease or rent guarantee for approximately 50,000 square feet. Then a two building property at 11404 and 11408 Sorrento Valley Road, which is 100% leased primarily to Avanir Pharmaceuticals, but which is also subleased to Halozyme Therapeutics.

Collectively, these San Diego investments provide an initial cash NOI yield of approximately 7.7%, excluding the benefit of the master lease. Including the master lease, the cash NOI yield on these investments San Diego as a whole were approximately 8.7%.

But the most significant investment announcement was the recently completed $298 million acquisition of the Science Center at Oyster Point and the Gateway Business Park, two fully leased adjacent life science campuses comprising approximately 489,000 square feet in the very heart of the South San Francisco life science market. These properties represent the largest and most significant new investments by BioMed since our acquisition of the Center for Life Science in 2006.

The South San Francisco market is the largest life science submarket on the West Coast and it’s comprised of almost 8 million square feet of life science space. The market is home to some of the preeminent biotechnology companies in the world, including Elan Pharmaceuticals, Genentech and Amgen.

The Science Center at Oyster Point consists of two buildings representing approximately 205,000 square feet. We’ve just recently completed, state-of-the-art world-class laboratory and office facilities are 100% leased to Elan through 2024 and 2025 and serve as Elan’s U.S. headquarters. Elan is a global biotechnology company founded in 1969 with its headquarters in Dublin, Ireland and two marketed products here in the U.S. The Gateway Business Park consists of six separate buildings representing approximately 284,000 square feet. These properties are fully leased to Elan, Federal Express and Genentech.

In addition, the Gateway site includes a development agreement with the city of South San Francisco that will allow us to redevelop the campus to a total of approximately 1.23 million square feet of rentable space, a net increase of approximately 950,000 square feet.

The additional entitlement rights are not related to vacant parcels, but rather the right to add density by building vertically three and six story properties where they currently stand single story properties. For the current leases of the Gateway Business Park are primarily scheduled to expire in 2012 and 2014 in order to accommodate future build-to-suit development opportunities.

Effectively, these properties provide income producing inventory for future development, in a sense serving as a bit of a natural hedge. If the economic environment stays challenged and rent growth in the South San Francisco area remains muted, we will remain focused on leasing the properties as they are today, based on the current square footage.

Alternatively, if we continue to see positive net absorption in South San Francisco and the ability to drive rent growth, we would expect to be able to remove these structures and build new larger facilities for perspective built-to-suite tenants.

Operator

Thank you for your patience. Your conference call will resume shortly. Again, thank you for patience and please standby.

Kent Griffin

Hi, this is Kent Griffin. We apologize for the technical difficulties. So we’ll pick back up where I think we may have gotten cut off.

I’m going to recap, actually is going back up a little bit just to make sure. The Gateway Business Park consists of six separate buildings representing 284,000 square feet. Properties are fully leased at Elan, Genentech and Federal Express.

In addition, the Gateway site includes a development agreement with the city of South San Francisco that would allow us to redevelop the campus to a total of approximately 1.23 millions square feet of rentable space, a net increase of approximately 950,000 square feet. The additional entitlement rights are not related to vacant parcels, but rather the right density by building vertically three and six-story properties where they currently stand single story properties.

So the current leases of the Gateway Business Park are primary scheduled to expire in 2012 and 2014 in order to accommodate future build-to-suite development opportunities. Effectively, these properties provide income producing inventory for future development. In a sense serving is a bit of a natural hedge, if the economic environment says challenged and rent growth in the South San Francisco area remains muted, we will remain focused on leasing the properties as they are today based on the current square footage.

Alternatively, if we continue to see positive net absorption in South San Francisco and the ability to drive rent growth, we would expect to be able to remove these structures and build new larger facilities for perspective build-to-suite tenants. And because the Gateway Business Park encompasses six separate buildings, we will be able to phase in future developments in concert with growing tenant demand.

Based on the current leases in place, the average rents of the property are approximately $58 per square foot, among the highest rates in the peninsula partially reflective of the market conditions at the time when leases were signed, but largely a reflection of the critical importance of their location and the quality of the product. As a refresher, we estimated 2011 cash and GAAP NOI for these properties at $28.2 million and $22.7 million respectively. The GAAP adjustments reflect straight-line rent adjustments as well as the adjustments to eliminate the impact of above market rents primarily at Gateway.

We have moved forcefully to capitalize on our competitive advantage in our niche market to pursue investments that provide attractive return potential on a risk adjusted basis. And as you can see from what we’ve acquired, we have emphasized highest quality properties well located in our core markets, which attract the top tier tenants.

Our 2010 investments considered as a portfolio have a weighted average lease percentage of 95% with a GAAP NOI of approximately 7.4% and a cash NOI yield of approximately 8.4% and with the weighted average lease term of approximately seven years. Now it’s worth noting that this includes the full cost of the unleased Executive Drive property in the adjacent land. Excluding that property, our acquisitions are 100% leased with GAAP and cash yields of approximately seven and three quarters and eight and three quarters respectively.

Through these investments, we’ve significantly increased our presence in three core markets with roughly 1.5 million square feet invested in San Francisco, San Diego and Maryland. And more than one million square feet of future development potential in South San Francisco and San Diego, plus an additional 62,000 square feet of investment in university related other markets.

But digging deeper, each of the investments we have made has not just been done in the core markets, but in the key sub-markets within those core markets. Maryland, we remain committed to the Shady Grove life sciences area in San Diego, our investments were distributed between the three primary life science sub-markets Torrey Pines, UTC and Sorrento Valley and Sorrento Mesa. And in San Francisco, we’ve penetrated the South San Francisco market with a 100% lease portfolio, effectively increasing our investments on the peninsular side of the Bay area from 29% to 50% of our Bay area portfolio.

In addition, the San Francisco Bay Area as a whole is becoming our second-largest market as measured by rent and in fact our largest market overall is measured by square footage. From a long-term perspective, we are very pleased to be expanding our footprint and our platform in the Bay Area.

The quality of the tenancy in our recent investments remains consistent with our long-term focus. Roughly, 63% of the rents come from larger established public companies, like Elan Pharmaceuticals and Isis Pharmaceuticals. 21% of rents are coming from research institutions and A rated public companies including the J. Craig Venter Institute and UC San Diego Bristol-Myers Squibb and Bayer with roughly 10% coming from the mid-gauged companies and less than 2% coming from early stage start ups.

Thus on a pro forma basis we continue to receive almost 90% of our rents from research institutions and public companies. The growth in our portfolio has added to our tenant diversification and in fact our top tenant concentration, which stood at 14.5% of rents as of the beginning of the year is now down to just over 12% an enormous achievement.

Our average remaining lease term still exceeds eight years and our average explorations through 2015 remained just over 4%. In summary, our patience and discipline have been paying off, enabling us to close on these exciting investment opportunities, which we believe are quality accretive to our portfolio to our tenant roster and to our mission of being the leading provider of real estate to the life science industry.

And before I turned it over to Greg, we continue to strengthen our industry-leading team of professionals effective September 30, John Bonnano was promoted the Senior Vice President Development, John oversees our development efforts on a national basis and in addition Bruce Deal has joined us here in San Diego as Managing Director of Business Development.

Bruce was previously the Chief Executive Officer of Rincon and subsequent to the acquisition in the South San Francisco properties, Anne Hoffman has joined us as Senior Vice President Development in the bay area.

Many of you would likely know Anne as she was the President Chamberlin Associates, a private company from whom we acquired the South San Francisco properties. Thank you for your patience, I know we had a lot to review and some technical difficulties to boot, but now I like to turn back it over to Greg to review our financial and operating results and guidance for 2011.

Greg Lubushkin

Thanks, Kent. So briefly reviewing our financial and operating highlights for the third quarter. The record-breaking revenues primary the result of our ongoing leasing successes and our 2010 acquisitions translating into a 3% and 6% year-over-year growth in total and rental revenues respectively.

Same property NOI on a cash basis increases 6.1% for the quarter compared to the same period in 2009 primarily from contractual rent escalations and the increase in occupancy. FFO was $35.2 million or $0.28 per diluted share for the second consecutive quarter.

As Matt described, we closed 14 leases for the 232,000 square feet of leasing in the third quarter again our strongest quarter of the year. Although net absorption for the quarter was down 117,000 square feet is expected because of the DayStar release termination at PRC, which we announced and discussed last quarter.

G&A expenses, excluding acquisition related expenses increased slightly over the second quarter as a result of additional personnel costs. The increase was more than offset by a decline in acquisition costs as compared to the second quarter. Our acquisition costs will vary not only based on the volume of transactions, but how those transactions are sourced and where they may be located. For example, some transactions may involve brokers fees, whereas others don’t.

Interest expense decreased slightly to $21.6 million or a little over 1% from the second quarter, reflecting a slight decline in our weighted average borrowing rate. We raised our common stock dividend for the second consecutive quarter this time $0.17 per share, an increase of 13% from the second quarter dividend, and a 55% increase from the dividend a year ago. The new dividend level increases our FFO payout ratio to approximately 61% as compared to approximately 56% in the previous quarter. Our AFFO payout ratio was 68%.

Turning to the balance sheet, we completed a follow-on public offering of common stock, which raised approximately $290 million in net proceeds on the same day we announced the South San Francisco portfolio acquisition, bringing our aggregate capital raising transactions for the year to approximately $950 million.

With the offering closing just before September 30, we paid down the balance on our $720 million line to approximately $14 million, lowered our consolidated total debt to just over $1.1 billion and reduced our debt-to-total assets ratio to 31.4%, the lowest since March 31, 2005. Now on fairness, we reborrowed subsequent to quarter end to fund the South San Francisco acquisition and the remaining San Diego assets acquired in the fourth quarter, but as of today, we have approximately $370 million in capacity on our unsecured line. And overall, our credit profile remains very, very solid.

Our fixed charge ratio improved to 2.3 times on a pro forma basis. Almost 70% of our rents remain unencumbered. Our secured debt as a percentage of total assets is down to approximately 17% and we have no consolidated debt maturities in 2010 and after considering that we intend to extend the maturity of our unsecured revolving credit facility to August 2012, only nominal consolidated maturities in 2011.

Move onto FFO guidance. We issued fourth quarter 2010 guidance for FFO of $0.27 to $0.28 per diluted share, including the impact of the recent acquisitions and capital activity, as well as the impact of the assumed conversion of the company’s exchangeable senior notes due in 2030. This guidance does not include any assumptions related to any future financing or investing activities beyond our announced transactions. We also introduced FFO guidance for 2011 in yesterday’s news release with a range of $1.15 a share to $1.25 per diluted share.

At the midpoint, our 2011 FFO guidance represents a 7.1% increase over the annualized results for the third quarter of 2010. Both guidance ranges are based on weighted-average diluted common shares outstanding of approximately 144 million shares.

The 2011 guidance, reflects anticipated new and renewable leasing transaction totaling approximately 1.2 million square feet over the five quarters extending from fourth quarter 2010 through 2011. These leasing assumptions include early renewals and extensions of approximately 150,000 square feet related to leases, which are currently scheduled to expire after December 31, 2011.

Considering scheduled expirations over the five quarters extending from October 1, 2010, through year-end 2011, we expect the current operating portfolio to achieve stabilization at least 90% occupancy by the end of 2011. We’ve also factored in $150 million of unidentified acquisitions to occur ratably over the year and $108 million to $132 million of development and leasing capital expenditures. We’ve also assumed a fix rate financing of approximately $250 million in the latter half of 2011 to manage our floating rate debt exposure.

However, how these acquisitions and other capital requirements are funded will ultimately be a function of the credit and financial markets. We do expect to maintain our strategy of match funding asset growth rate with long-term capital sources, while relying on our line primarily as an interim financing source. Our SG&A, we expect it to modestly exceed $7 million quarterly. With that we’ve covered a lot of ground today and I know there are questions. So I’m going to turn it back over to Alan. Alan?

Alan Gold

Thanks, Greg. And I’m sure you can imagine all the activity and success achieved throughout the first three quarters, would not be possible without the hard, smart works, throughout BioMed, for which I may appreciative and proud. Now with that said, operator, we are now ready for questions.

Question-and-Answer Section

Operator

(Operators Instructions) Our first question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed.

Brendan Maiorana - Wells Fargo

Thanks, good morning.

Alan Gold

Good morning, Brendan.

Kent Griffith

Good morning.

Brendan Maiorana - Wells Fargo

So Greg, I just wanted to start with you a little bit and may be then we could dive into the guidance. If I look at the 1.2 million square feet of leasing that you expect to get done. Can you give us a sense of maybe how far along you are in terms of leasing progress on that 1.2 million square feet?

Kent Griffith

I think I guess it’s more of a leasing question for Matt. But I think we’re continuing to see about the same pace. So, I think we’ve talked about, for the past several quarters, leasing velocity was in that 150 to 200,000 square-foot neighborhood. We ticked over that in this most recent quarter. I don’t know that we’re anticipating a monster fourth quarter like we were able to do last year.

But, if you look at the leading indicator being the capital raising activity and if you look at how strong 2010 has turned out to be, at least knock on wood, so far year-to-date, it’s actually on pace to even maybe even exceed where it was last year, which was a phenomenal year.

So, given that backdrop, given the level of general activity that we’re seeing, given the fact that we were able to announce 55,000 square feet at PRC and we do feel like the Bay Area is generally improving. And I think we may have talked about on the last call. It’s one of the markets that had us concern going back several quarters. So, I think that gives us nominally better confidence in the slightly accelerated leasing pace over that 150 to 200 pace that we were at.

Brendan Maiorana - Wells Fargo

Yes, I cannot cut you off, but I think your leasing takes a long time. Your lease sort of the way that they materialize it takes generally a long time I think to kind of get your leases from the time you began speaking with tenants kind of sort of sign the lease?

Greg Lubushkin

What I was going to add, Brendan is, I think the point I was trying to make slightly differently is, we’ve got a pipeline of transactions that we’re working on and consider that pipeline and establishing the leasing goal that we set for 2011 guidance.

Brendan Maiorana - Wells Fargo

Okay. And then, in terms of the 600,000 of leases that mature over the next five quarters, what do you think is a likely renewal rate on the expirations that you’ve got?

Matt McDevitt

As we’ve said over and over again and as we get closer and closer to an expiration, the likelihood of a renewal is lower and lower. Keeping in mind that we have some low rent expirations coming up, which include spaces at our Forbes property in South San Francisco, which is primarily industrial space and being one of the largest expirations.

Kent Griffith

We know that that renewal is highly unlikely in that location. But we are working on renewals in our other properties and doing our best to keep the tenants that we think are appropriate to be kept and making sure that we maximize the value of each and every asset.

Brendan Maiorana - Wells Fargo

So, if I just kind of do the math of profit of absorption of 450,000 square feet that would be, call it roughly 4.5% increase on the occupancy side and your expectations are for the operating portfolio to go above 90%, which would be, call it, 150 to 200 basis points up. Is the difference that some of the occupancy might not take effect until 2012? Or is it just that you maybe get some of the occupancy gain on the lease up portfolio rather than the operating portfolio?

Greg Lubushkin

Remember our operating portfolio includes the fully stabilized, as well as the lease up. So the fully stabilized is in the high-90s already. What we mean by that is, if we’re going to have 450 basis points of improvement collectively, we’re expecting in the neighborhood of 200 basis points or more to come from the operating portfolio, which includes obviously the lease-up assets.

The variable is how much of it comes from PRC. And so if we are going to – of the 450 basis points, if we’re going to get it leased 200 from the operating portfolio, we should get 250 at PRC as well.

Brendan Maiorana - Wells Fargo

Yeah, I am sorry. The long-term lease-up portfolio is what I meant.

Greg Lubushkin

Exactly.

Brendan Maiorana - Wells Fargo

Sorry about that. Okay, and then just in terms of PRC, the 65,000 square feet of leasing that was done there. Was that lab space or was that something else?

Alan Gold

It was primarily office space, but 50,000 square feet was leased to a lab tenant. A medical imaging service provider. So we’re very excited about that and in addition to the continued acceptance of PRC and the quality of the type of tenants we’re getting there, the tenants were moving to Pacific Research Center are really enjoying the campus feel and it’s starting to pay off and I think increased leasing momentum.

Brendan Maiorana - Wells Fargo

And Alan that returns that you are getting there is that inline with kind of what we chatted about last quarter?

Alan Gold

It is in line with what we chatted about last quarter, but certainly below what we initially thought we could achieve. But as we believe the Bay area continues to improve, we think that there is going to be a greater opportunity to get better than what we are getting today.

Brendan Maiorana - Wells Fargo

Okay, and then just one last quick one if I may. Greg, on the change on the AFFO calc, what was driving the inclusion of the leasing commissions there as opposed to prior periods?

Greg Lubushkin

We took a look at kind of what that prevailing industry practice was and really looked hard at what we were trying to communicate with that AFFO number and seeing that by and large the majority of folks out there including leasing commissions in that calculation we decided to join them.

Brendan Maiorana - Wells Fargo

Sure. Okay, thank you.

Operator

Our next question comes from the line of Will Crow with Raymond James. Please proceed.

William Crow - Raymond James

Hi, good morning guys.

Alan Gold

Hey, Bill.

William Crow - Raymond James

Couple of questions here Brendan actually asked couple I wanted to touch on. But, Greg what is the assumed spread for your modeling purposes between that 250 million unsecured? And what you would pay down?

Greg Lubushkin

I’m not sure, I understand your question. We’ve gotten or continue to get indicative pricing that indicates the spread over treasuries for us would be consistent with the transaction that we did last April.

William Crow - Raymond James

But you’d be paying down your line, is that the kind of mentioned in there within the guidance?

Greg Lubushkin

Yes.

William Crow - Raymond James

Okay.

Greg Lubushkin

Yes, and right now we’re one ten plus one month LIBOR, which put us at above 40. So you can do the math depending upon the term we take on doing any sort of an unsecured deal.

William Crow - Raymond James

Right, right. And then the guidance for TI’s leasing commissions $50 million to $75 million, how much is that is 650 Kendall or is this really just concentrated within a few properties? Is that a fair thought?

Greg Lubushkin

Really across the entire portfolio as we’ve look at our leasing guidance we haven’t necessarily narrowed it down on a single property or market. Our progress in leasing over the course over the last several years has indicated that it’s difficult to predict, it’s lumpy, you’ll hit in one market for one or two quarters in a row and then the activity moves to another market., So it’s tough that to actually fix that capital to a particular property.

William Crow - Raymond James

Okay, alright. I guess that’s it. Thanks.

Alan Gold

Thanks Will.

Operator

Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed.

Jordan Sadler - KeyBanc Capital Markets

Thanks, guys. Good morning out there.

Alan Gold

Good morning.

Jordan Sadler - KeyBanc Capital Markets

This leasing disclosure and guidance is extremely helpful. So I appreciate it. I wanted to dig in a little bit more on the guidance. What portion of the $2 million will be in the JV portfolio? If you said that, I missed it.

Kent Griffith

No, I mean, we haven’t said specifically and as you guess part of that point that Greg was trying to communicate, which is, there is an aggregate leasing volume in it and we have a lot of square feet that’s available and it’s difficult to predict where that’s going to hit. I guess key observation is that the rented in the JV portfolio are fairly high. So on a square footage basis you’re somewhat indifferent between a lease there versus a lease in one of your other markets.

But generally speaking, the activity level in Cambridge is consistent – we would expect it to be consistent or perhaps may be said in other way, we would expect it to be ratable, typically ratable or theoretically ratable across all of the markets.

Jordan Sadler - KeyBanc Capital Markets

Okay. The activity is not better or worse, it’s just sort of in line with the rest of the markets?

Kent Griffith

Correct, I think, that’s correct.

Jordan Sadler - KeyBanc Capital Markets

Okay. What type of requirements are you seeing in Cambridge for Kendall Bean in particular? And what is sort of the status there?

Matt McDevitt

Hi. It’s Matt. I think the level has been kind of the same, we’ve got the bigger properties, so we’re going to see the bigger type tenants, even more big pharma, institutional type tenants. That kind of remains the same.

Jordan Sadler - KeyBanc Capital Markets

You could see a lot of that building going to a single user or?

Matt McDevitt

This theme, we would certainly love to see a single tenant take that building, sure. I mean, it can be multi-tenant, but we would love to do one deal there.

Jordan Sadler - KeyBanc Capital Markets

Okay. And any particular opportunity or anything indication of greater strength or weakness as it relates to some of your other significant economic opportunities vis-à-vis Center for Life Science or Seattle, the lease-up assets in Seattle?

Matt McDevitt

I think the comments that you are getting here is, we’re feeling that pretty good consistently in all of our markets. The Center for Life Science has seen some really consistent activity there with the institutions. As we’ve described before, those deals are, they take longer, they’re lumpier, but they are bigger. Seattle, we’ve moved to just completing a major renovation in the Seattle property.

We’re concentrating trying to break that building up and multi-tenant it. So we’re seeing a lot more activity given the fact that we’re entertaining some smaller users there. So that activity is really helping as well.

Jordan Sadler - KeyBanc Capital Markets

Okay.

Kent Griffith

I think one of the things we are sensing is that, in the past, we have three-quarters ago and four quarters ago we were concerned about some of the softer markets like the Bay Area and Pennsylvania and alike. And we’ve had a fairly steady level of interaction and tenant prospective tenant discussions in what you would think of as the stronger markets.

And what, I guess gives us the additional confidence to have a higher leasing goal that we did last year is because we have now for several quarters continue to have strength in all of our pockets that we would’ve previously thought where we could.

Jordan Sadler - KeyBanc Capital Markets

Okay. Matt, my last question here is, as it relates – again back to this leasing. On the 1.2 million square feet, because this is sort of a good feeling across the portfolio, would it be sensible to apply a rent that’s consistent with the entire portfolio to the $37 number?

Matt McDevitt

I think that would be true ex the long-term lease-up is at PRC. So, obviously PRC with a mix of rents whether it’s office or lab, in either case, it would be below the average for the rest of our portfolio. But you’re right, the distribution of our availabilities, excluding the long-term lease of assets are generally, pretty evenly distributed across all of our markets.

Jordan Sadler - KeyBanc Capital Markets

Well, I know that could be a big number. Is there sort of a carve out you want us to stick in there to sort of skew that down, I mean – because I know PRC could obviously be 600,000 feet, because you have the availability. But, so we just expect it to be ratable?

Kent Griffith

I would take PRC and maybe take your lease assumption, because remember it’s a $1.2 million, how much of because PRC versus how much, because elsewhere is up for debate. But at PRC, we would assume rents in the mid to high teens for office type leases, and mid-20s for lab leases. The blend of those that mix itself is going to vary. But then there is the industrial, the warehouse building of PRC as well.

Remember there is the 300,000, it’s the one building, which is obviously even lower rents. Separate those, and across the rest of the portfolio, I think the availabilities we have are very reasonably close to the average rents that we have in those markets as well. And if it helps, we can go through that math offline.

Jordan Sadler - KeyBanc Capital Markets

Good. Thanks.

Kent Griffith

Thanks.

Operator

Our next question comes from the line of John Stewart with Green Street Advisors. Please proceed.

John Stewart - Green Street Advisors

Thank you. Matt, I was wondering if you could touch on prospects for the last 9% of the space is that Center for Life Science?

Matt McDevitt

I think you’re fairly consistent and again, we are dealing with probably five institutions there and we are seeing activity from all those five all the way from Children's Hospital, to Beth Israel, to Harvard, to BI. It’s pretty consistent. We are happy with that actually.

John Stewart - Green Street Advisors

And so, should we expect to see something eminently or longer-term prospects?

Alan Gold

We don’t really comment on anything towards actually finalized, because as we all know, until a lease is signed, there is just way too many risks associated with that. But what we can’t and what we have said is that broadly speaking that the research institutions are relatively healthy, the public companies, the general public companies are relatively healthy.

They have been receiving a lot of new capital and there continues to be a lot of new capital coming into the industry. And we are very excited about the prospects for our portfolio and achieving our goals going forward.

John Stewart - Green Street Advisors

Okay. And then I don’t know maybe Alan or Kent, I see that you’ve basically given guidance for next year of $159 of acquisitions. But you’ve obviously been very active here of late. So, I was wondering if you could give us a sense for both the pipeline and your appetite going forward.

Kent Griffin

So this is Kent. I guess, the short answer is this has been a phenomenal year. And we will remain opportunistic in terms of an appetite, I think we always have an appetite for attractive investments in our core markets that meet all of our criteria. The challenge is, properties that fit through all the filters, don’t come along very often and not many of them fit through the filter.

And so we happen to have a great year this year and I think we continue to have a healthy pipeline. In fact this is the first year we’ve given the guidance that included an acquisition assumption in a number of years. But I think it would be surprised to expect the same velocity that we have had this year.

John Stewart - Green Street Advisors

Okay. Thank you.

Kent Griffin

Thanks.

Operator

Our next question comes from the line of John Guinee with Stiefel, Nicolaus. Please proceed.

John Guinee - Stiefel Nicolaus

Just out of curiosity, the Forbes building, are you going to be able to retain either half of that building and one I think expires this year and one expires in ‘12?

Kent Griffith

Yeah, I mean, once again the Forbes building is an industrial product. And we have visibility into the one that is being remained very interested in the location and the product. Given the fact that having kind of a distribution warehouse type space in that South San Francisco market, adjacent to the airport is actually a highly priced. So, we’re really, really confident on that is staying that they will stay longer if we want them to.

John Guinee - Stiefel Nicolaus

Just out of curiosity, what are those two tenants paying, because they sort of blend in as if they’re paying about $20 a foot, is that possible?

Kent Griffith

No I think that’s little bit higher than what I think than what we’re receiving. I think they’re more into the low-single-digits. I mean the $7, $9...

Greg Lubushkin

They roughly $10 type rent.

John Guinee - Stiefel Nicolaus

The reason I ask that is if I look at 2010 lease expirations of 220,000 square feet annualized base rent roughly $19.70, I’m just looking at page 26 here, over half of that space is the Forbes building, that’s a pretty high rent unless I’m missing something.

Matt McDevitt

We do have some space in Cambridge that at a pretty much higher rent.

John Guinee - Stiefel Nicolaus

Okay. And then for the second half of that question, dealing with South San Francisco overall, do you have up zoning on the Forbes building also?

Matt McDevitt

Yes we have the ability to increase the total square footage on that side.

John Guinee - Stiefel Nicolaus

So, if I look at the Gateway property, it looks to us as if you paid about $581 a foot for the physical building based on a $165 million, and then if you were to tear that building, that single storey product down and start from scratch, I guess your basis is about 134 per developable square foot, is that the right way to look at that?

Alan Gold

Yeah. I think obviously it depends on your allocation. If we take one price for both sides, but your math is generally, it seems generally very reasonable.

John Guinee - Stiefel Nicolaus

Okay, and then you also have another half million plus of up zoning at Forbes. Half million square feet at right at the Forbes building.

Kent Griffith

Yeah, I mean, I think between Eckels and Forbes, yeah.

John Guinee - Stiefel Nicolaus

Okay, thank you.

Alan Gold

Thanks John.

Operator

Our next question comes from the line of Suzanne Kim with Credit Suisse. Please proceed.

Suzanne Kim - Credit Suisse

Hi, good morning. Couple questions. First of all to the leasing spreads implied on page 31. Can you comment on that? The expirations look like there at 38 bucks and the renewals seem to be in the mid teens. If you can comment on that. And then also, if you have any LOI's for additional leasing this quarter? And the last question is on the ARE transaction, I want to get your take on what that sort of bodes for Life Sciences in the Bay Area, if we should read anything into that?

Kent Griffith

Well, first let’s talk we about the spreads. The renewal leases and the expirations associated with those assets primarily dealt with our Bay Shore or yeah our Bay Shore property up in Brisbane and those were primarily office buildings that are convertible to lab, but were originally and continue to be occupied by office type tenants.

And the rents that were originally signed, were signed during the dot com dot bomb era where the rents for office space actually reached north of $5 a square foot tripling that. And when we bought them, we marked them to market down to I think at a $24 square foot annual rent and even though that was the market at that time, office market has continually deteriorated in the rents and another 30 or so percent which we were able to renew the space at.

Alan Gold

We were happy to renew at this point at that space. The tenants Intermune and Cutera were pretty excited about staying in the location. So we’re happy with those getting those spaces renewed. What was your other question?

Suzanne Kim - Credit Suisse

LOIs, do you have any LOIs for additional leasing this does?

Kent Griffith

Yeah, we really don’t – we’ve historically have not commented on any LOIs that we have signed.

Suzanne Kim - Credit Suisse

Okay.

Kent Griffith

We’ll be focused on and only disclosing signed leases.

Alan Gold

And as you know we report lease percentage obviously – although LOIs on discussion.

Suzanne Kim - Credit Suisse

Sure. And then just a comment, if you can comment on the Alexandria land disposition and whether or not that has that has any implications or that talks about, if there is any insinuation that development of or a redevelopment of lab space in the near term is not as a good of a prospects as originally thought. Is that your take or should we read it differently in saying that it was just a good deal?

Kent Griffith

I don’t know do we have any comment on that. You probably have to ask Alexandria about that.

Suzanne Kim - Credit Suisse

Okay. But it doesn’t mean, it doesn’t have any implications on your redevelopment prospects in that Oyster Point area?

Kent Griffith

No, it was a mission-based transaction. We don’t have any assets there.

Suzanne Kim - Credit Suisse

Yeah.

Kent Griffith

So don’t we have much impact on this.

Suzanne Kim - Credit Suisse

Okay, great. Thank you so much.

Kent Griffith

Thanks.

Operator

Our next question comes from the line of Chris Katen with Morgan Stanley. Please proceed.

Chris Katen - Morgan Stanley

Thanks. One quick follow-up on Center for Life Science is it’s to is, as you look at the tenants that you’ve been showing, has it been all kind of tenants local to there or have you seen some Cambridge tenants shopping the asset? And then second, can you remind us if you built that out or do you saw some first gen TIs to spend there?

Matt McDevitt

I’ll take the second one first. It’s all first-generation space. So it’s in shell.

Chris Katen - Morgan Stanley

It’s in shell, okay.

Matt McDevitt

Now, we really don’t see any tenants coming across the bridge. It remains kind of that bench to bedside mentality in the Longwood area. They really just wanted to go from their research institute to their hospital physicians to Harvard so. It’s a walking campus.

Kent Griffith

We are seeing both small and large users there. And are fairly excited about that that level of activity there.

Chris Katen - Morgan Stanley

Thanks. And then several questions on San Diego. With regard to the restructuring of Biogen Idec. I think they are closing a few of their sites. One is in San Diego and some elsewhere. What does that tell you about the tenancy in San Diego and how it might be turning over? And then what is that do for your development site? And I think this is in UTC?

Kent Griffith

Yeah, I think everybody saw the news yesterday that Biogen announced and I guess, we weren’t started leasing up the day before. And I think most people had empathy and feel for them, those who lost their jobs first and foremost. I think, generally speaking it’s been widely known in the marketplace for some time that it was likely that they would reduce their operation here in San Diego. What I think came as a big surprise was that, there wasn’t going to be some continuing operation and I think that probably surprised a lot of people yesterday.

Chris Katen - Morgan Stanley

Did that create opportunity in a sense that there are highly skilled employees who may be looking to get some ex suites to continue their work under a different name?

Kent Griffith

Yeah, I mean, I think theoretically I mean, there is also a lot of other positive news you’ve seen couple of announcements, one yesterday by UCSD doing some additional expansion of their programs. This would likely involve additional hiring and so forth. So, I think there is obviously a large campus there to be dealt with. But there is the sort of continuing steady state demand for traditional lab properties in the core of UTC, it is not terribly impacted by that.

Chris Katen - Morgan Stanley

Thank you.

Kent Griffith

Thanks.

Operator

At this time, I’d like to turn the call over to Mr. Alan Gold for final remarks.

Alan Gold

Thank you and I would just like to once again thank everybody for their hard and diligent work and we’ll all speak with you soon most likely at the NAREIT Convention. Thank you everybody.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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