Alexandria Real Estate Equities CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb. 3.11 | About: Alexandria Real (ARE)

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

Q4 2010 Earnings Conference Call

February 3, 2011 3:00 PM ET

Executives

Rhonda Chiger – Founder, Co-President, Rx Communications

Joel Marcus – Chairman, CEO and President

Peter Moglia – Chief Investment Officer

Dean Shigenaga – CFO

Analysts

Sheila McGrath – KBW

Jay Habermann – Goldman Sachs

Jamie Feldman – Bank of America

William Marks – JMP Securities

Michael Bilerman – Citi

Anthony Paolone – JP Morgan

James Sullivan – Cowen and Company

John Stewart – Green Street Advisors

Suzanne Kim – Credit Suisse

Operator

Good day and welcome, everyone, to the Alexandria Real Estate Equities Incorporated Fourth Quarter 2010 Year End 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 Ms. Rhonda Chiger. Please go ahead ma’am.

Rhonda Chiger

Thank you and good afternoon. This conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.

Such forward-looking statements include, without limitation, statements regarding our 2010 earnings per share diluted attributable to Alexandria Real Estate equity’s common stockholders; 2010 FFO per share diluted attributable to Alexandria Real Estate equity’s common stockholders; the business plan 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, a failure to obtain capital, debt construction financing and/or equity or refinanced debt maturities; increased interest rates and operating costs; adverse economic or real estate developments in our markets; a failure to successfully complete and lease our existing space held for redevelopment and new properties acquired for that purpose and any properties undergoing development or 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 a 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.

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

Joel Marcus

Thank you, Rhonda, and thanks everybody for joining our fourth quarter and year end 2010 earnings call. We’re going to try to use maybe somewhat shortened management presentation so we have little more time for Q&A. As you know Alexandria has been build and has grown predominantly with a laser focus on the best intellectual and entrepreneurial adjacency cluster locations for the broad and diversified life science industry. A great adjacency location is absolutely key together with obviously a first-in-class facility, first-in-class sponsorship commitment to wisely invest capital, attention to first class sustainable business operations and clearly a focus on what the client tenant really needs all critical components for success that has and will continue to be our formula for success.

Interesting to note, Ian Read who is Pfizer’s new CEO in has recent conference call made the following quote. We’re strengthening the fundamentals that drive biomedical innovation with the series of actions including more closely aligning our global R&D network footprint with key hubs for science and technology. We intend to enhance our presence in Cambridge, Massachusetts to complement our existing R&D with networks including those sites located in hubs like San Francisco, New York, La Jolla and Cambridge, UK and I’m pleased to note that Pfizer is located in Mission Bay, San Francisco location for their new therapeutic innovation group and our science center in New York and very pleased about that. As I review the cluster markets and talk about the quarter real quickly let me kind of highlight each of the markets briefly.

On the West Coast starting in Seattle our focus has been on really the number one life science cluster submarket at Lake Union, really the best adjacency location, the highest ranks and really the highest quality tenants and minimized presence in places like Elliott Bay and the Boffel (ph) suburbs which have suffered. Our occupancy has remained steady at 97.5 with continuing big player demand and very stable rental rates. This past quarter, we leased 86,000 square feet during the fourth quarter, which was I think a very good outcome. We see good growth through the release of our 2011 redevelopment non-lapse based to lapse based with positive mark-to-market and even the potential put for a build to suite as well.

In the San Francisco Bay Area, we’ve got a very nice balance of three key West Subway markets, West Bay market including Mission Bay San Francisco and the Peninsula each of which are good high quality markets having exit at the East Bay in the first quarter of ‘08. Overall, in South San Francisco on the positive side Life Technologies, a competitor with Illumina in the tools and services business taking, likely taking a big block of space, which is a positive. On the negative (indiscernible) has announced they will be exceeding a bunch of space.

In the fourth quarter, we signed 158,000 square feet of leases in the Bay Area. Occupancy should remain steady with rental rates steady as well. For 2011, I think we’ll likely see some leasing transactions at the East Jamie Court, which is clearly a strong focus of ours, we’ll finally getting traction there with our 200,000 square foot of rolls about a quarter have been pushed into 2012 and the balance three quarters, we hope to have result favorably during the year, probably a little bit of slight down tick in the South San Francisco market. UCSF lease and necked our expansion, they are moving along hopefully to rapid conclusion at Mission Bay and the level of demand at Mission Bay has been pretty good.

In San Diego, clearly 2010 was a critical and seminal focus of the company to create a first-in-class regional team like our other regions and a focus on the acquisition of the best-in-class assets. We accomplished this with the Veralliance integration now being ARE and also the acquisition as we announced previously at the Biogen Idec campus 247,000 square feet as well as the 373,000 square foot campus point project where the anchors are Eli Lilly, Covance and UCSD. We’re able to increase occupancy nicely and to focus on real growth rather than trading water over the, like we’ve been doing over the past couple of years.

We see 2011 having some positive uplift on the releasing market-to-market, positive redevelopment releasing. We hope to deliver the Illumina build-to-suit early and we’re tracking over 1 million square feet of potential demand in the market. Fourth quarter was a blockbuster San Diego leasing occurrence with over, almost 600,000 square feet including about half of that, little more than half of that being the Illumina lease.

On the Illumina transaction, I’m going to ask to Peter Moglia, our Chief Investment Officer in the couple of minutes to discuss the transaction as best he can give the confidentiality with Illumina. But essentially Illumina being a leader in the tools and systems for genetic analysis, as I alluded to in the last earnings call, that market sector has doubled over the past five years now with a value of that sector itself with over $42 billion in turnover.

Moving to the East Coast quickly, Southeast unfortunately being a relatively small market, it’s been relatively quiet and somewhat remaining week. We only had about 10,000 square feet of leasing in the fourth quarter, occupancy has remained steady but and minimal rollover but again rental rates, there are pressure on rental rates in that market. Suburban DC, we had a very nice pick up of 150 bps on occupancy, signed about 66,000 square feet of leases in the fourth quarter. We’ve got about 150,000 square feet rolling this year mostly our all in process probably somewhat downward pressure on rents but hopefully not too significant. We’re seeing a bit of a tougher demand at the moment. We did complete one nice stabilized acquisition at a good yield with a long-term lease and a credit former tenant.

Moving to the New York City, New Jersey and Pennsylvania submarket, I think that one of the crowing achievements this year in addition to what we’ve accomplished in San Diego was to deliver our flagship project the Alexandria Center for Life Science at New York City with very strong leasing about 96%. The market overall, these three markets kind of combined, we lost a little bit of occupancy primarily due to weak New Jersey and a little bit of softness in Pennsylvania. We did announce or, I should say Pfizer announced their collaborative therapeutic unit moving into the, our Center in New York. First time ever that Pfizer has actually done research in New York, their headquarters has been there but they’ve never done research. They signed 15,000 square foot lease for approximately four years. We’re now tracking real demand for over 250,000 square feet for a possible anchor for West Tower build to suit. We very small 211 roll over exposure in those markets and we’re clearly focused on leasing two empty building in New Jersey and Pennsylvania and hopefully over the next year or so exiting the New Jersey totally. We’ve had that ongoing for a number of years and we’re down now to two building.

In the Massachusetts and Greater Boston area, we lost some occupancy but by and large if the stable and solid market. We’ve got good prospects for 2011 to fill vacant space and address, and to address about 500,000 square feet of lease rollover which I think will be very manageable about 200,000 of which is our 400 Tech Square lab conversion we see very good upside their compared to existing expiring ramps with Forrester. We will probably see some, one property that will be leased in Watertown we’ll see some roll down but overall positive. We did about 40, sorry, 36,000 square feet of leasing in the fourth quarter so kind of modest. We’re attracting well over 1.5 million square feet of lab demand in the market with pretty good rental rate and also a strong office market there.

On, a number of you have obviously seeing some of the announcements regarding Vertex it’s an outstanding biotech company on the verge of commercialization with their flagship Telaprevir product. They have been engaged once again with the Fan Pier site in Boston, which was where they have chosen to go pre-crash. That deal not done at the moment, there is a financing contingency so we’ll wait and see for about 1 million square feet. Our Binney Street project I believe is their backup. They’ve got about 800,000 square feet now Cambridge some marginal quality D minus product that they will exit over time, about a total of about 800,000, 150,000 in Kendall Square about 50% which is already subleased another 150,000 in University Park in about 400,000 Cambridge port. Vertex I think the earliest they can exit and cancelling about 300,000 square feet at the end of 2013. There is really no impact, we don’t have any exposure to Vertex in our asset based in Massachusetts market and really no impact on Binney although it would have been wonderful to have them as an anchor to that project.

The concept of Vertex moving has challenged Cambridge political thinking I think more than anything because they felt they were at the end all of really cluster in the Massachusetts area but it’s pretty clear there is Longwood Center and other locations that people gravitate toward and there was also a big debate over state and local city incentives to lure Vertex to that site. But it’s clear that Cambridge is and will remain the life science clusters adjacency location to be. Vertex views Boston and Cambridge a little differently than a number of companies because they are one of those companies that don’t need to collaborate for future pipeline product. They’ve already really got that build in. So, as oppose to Novartis, Pfizer and other whose were very, very connected to the technology transfer world Vertex really isn’t and are much freer to kind of move around as they see fit given their commercial stage situation.

The Genzyme deal, people have also asked about, as you’ve seen it appears that they’ve reached an agreement with Sanofi. Sanofi, this acquisition for Sanofi is really a pipeline fill according to Chris B. Boker (ph). Genzyme like Vertex has no real R&D in Cambridge today, they moved R&D to the suburbs being very cost cautious and not being needing a pipeline filled through collaborations. They built the company mostly on acquisitions. So, their exposure in Cambridge is really just office about 350,000 square feet in Cambridge and another 268 and another building in my guess is they’ll probably retain suburban R&D locations but probably exit the office. And there is very, very vibrant Cambridge office market today as you probably heard on other call, so I think that’s not going to represent much of a downturn.

I think it’s pretty clear that some are asking if this felt serous is troubling Cambridge and lot of people want to know really say that really is very surprising. Cambridge is one of the world’s most important sources of next generation technologies and companies and regularly exports them. In 2009, the Coughlin Foundation study show that MIT spin outs alone if collected together would rank as the 11th largest economy in the world and Vertex and its telaprevir Hep C drug is on the verge of approval following the time honored tradition where companies that grow up with existing products and don’t need to access pipeline spill. We’re really free to move to other locations. So I think Cambridge is going to do just fine and we don’t see any huge pressure from Boston there. I think it’s clear that the real threat long-term are places like China and other locations. So we have to keep our eye on that.

Just very recently ARE signed a new lease of 50,000 square feet with a pharmaceuticals company of Japan and Tech Square for their new personalize cancer company. This is kind of the way that the future H3 biomedicine where they’re investing $200 million in that platform and they do need to access the great institutions within Cambridge. This is really the heart and soul of why Cambridge is and will remain critically important.

We still think some interesting acquisitions and we expect to be opportunistic in 2011. I think you’ll see more recycling of some of the older buildings we owned into new or better locations and facilities as well as further land sale, example the site in San Diego for a new FBI regional headquarters. Dean will comment on the great progress we made on our balance sheet metrics and important upsize and extension in the line of credit. We did successfully match fund our September equity raise with acquisition and expect to continue that approach we find many years ago with the minimization of dilution. We hope this year we’ll see our first build-to-suit in the Binney Street corridor. So, stay tuned for that. And I think Dean will share with you, we’re likely to continue the Board to increase the dividend sharing with cash flows with our shareholders. And then finally, maybe one thing before I ask Peter too took over would be, it’s important to keep in mind that really high quality stabilized assets in the infield locations really command the top prices and assets and secondary or tertiary markets really are kind of still bouncing along the bottom.

So, with that, I’ll turn it over to Peter to give you some highlights of the Illumina deal.

Peter Moglia

Thank you, Joel. We understand you’re very interested in more details of the significant transaction but as Joel alluded to. Please understand we’re bound by strict confidentiality and are limited to what we can disclose. We hope that the following will give you enough color to better understand the positive impact of the transaction and the impact to our tier models. The cash yield ex the additional FAR is 0% in the first year then ratchets up to 7% upon full delivery of the build-to-suit. The average cash yield over the lease term is approximately is 10.7%. The gap yield ex the additional FAR is approximately 10.5% initially and then moves to just under 11% upon full delivery of the build-to-suit.

The effective rent is higher than the three most recent Class A lab office comps in the market. Illumina’s lease will comments no later than November and we’re obligated to deliver the build-to-suit in two phases no later than 2013 and 2014 with an opportunity to deliver ahead of the schedule. The tenant has the right to expand further in to three more buildings with square footage totaling approximately 297,000 square feet. It is anticipated that the tenant investment and build-to-suit buildings will be substantial. We expect Biogen to move out before the end of their 15 month term and pay full rent and operating expense through August. This will provide us the opportunity to deliver portions of the project to Illumina before their November start day with limited down time.

Thank you very much and with that I’ll pass it over to Dean Shigenaga our Chief Financial Officer to discuss financial results.

Dean Shigenaga

Thanks Peter. Let me jump right in here. We reported FFO per share diluted of $4.40 which excludes the gain on land sales and before losses on early extinguishment of debt. This is really on target with FFO per share expectations that we had from the beginning of the year. We also reported EPS diluted of $2.19. Quarterly common dividends increased to $0.45 from $0.35, up 29% and really reflects our ability to share increases and cash flows with our shareholders. We reported the highest quarter and year of leasing at 1.1 million square feet and 2.7 million square feet respectively. This really is our 12th consecutive year of positive rental rate increases. Leasing included 350,000 square feet with our lease with Illumina and 130,000 square foot lease at the Alexandria Center for Life Science in New York City. Same property NOI growth was 1.3% and 2% on a GAAP and cash basis representing our 50th consecutive quarter of positive same-property NOI growth.

Operating margins were 72% representing one of the highest operating margins in the REIT sector. Keep in mind over the past several years margins have declined primarily due to the impact of ground leased to assets. Ground lease grants are actually reported through operating expenses. Occupancy was solid at 94.3% for our operating properties, 88.9% including spaces undergoing redevelopment. During the quarter we delivered a significant amount of new spaces to the operating asset base either through ground up development for recently acquired assets. Both had a significant impact on straight-line rent adjustments either from normal straight-line rent related to long-term leases acquired with operating assets or two, free rent and normal straight-line rent on long-term leases delivered from our development projects. The good news is that, we recently delivered significant spaces under long-term leases from both recently acquired assets and recently completed development projects. Additionally, contractual cash rents are scheduled, if not already in place. Straight-line rent adjustments from these assets will burn off over the coming quarters as a result cash flows are projected to increase by 15%. Additionally, as we delivered space to Illumina over the coming quarters, we expect an increase in straight-line rent for four so quarters. Lastly FAS 141 mark-to-market lease revenue should drop to $1 million after the second quarter of 2011.

Turning to acquisitions in the fourth quarter, we acquired five properties aggregating over 860,000 rentable square feet for 282 million. Stabilized cash yields range from 10% to 8%, GAAP yields range from 11% to 9%. Acquisition activity focused on value added opportunities through releasing of space, immediate redevelopment and near term development opportunities for example to fully lease ground up development with Illumina.

Turning to our balance sheet, we completed the extension of our revolving line of credit extending a maturity to January of 2015. The revolving line increased by $350 million to 1.5 billion bringing our total facility to $2.25 billion. Pricing on the revolver is now 2.4% over one month LIBOR. Our 750 million unsecured term loan maturity remained unchanged at October of 2012 and pricing on the term loan remained unchanged at 1% over one month LIBOR. We anticipate refinancing our term loan in late 2011 or early 2012. We probably all continue to acknowledge debt market continue to show significant capacity for borrowers that includes funding from banks, life companies. We’re starting to see an opening in the CMBS market as well as ongoing activity in the bond market all of which at fairly attractive pricing. We expect to close the full year $250 million bank loan this quarter and we will provide more details on this in our next earnings call.

During December and January we retired 83 million and 43 million respectively of our 37 convertible notes. As of today, we have 250 million outstanding which we plan to retire by the first quarter of ‘12. We also expect to go through the formal rating process later this year.

Now turning to credit metrics, our net debt to EBITDA was 6.9 times reflecting the debt reduction from proceeds from our sales of land in Mission Bay. EBITDA growth and debt repayment are anticipated to continue through 2011 and net debt to EBITDA is also anticipated to improve through the year. Financial covenants under our credit facility were adjusted slightly to market and can be found on page 34 of our supplemented package. Leverage was 36%, the covenant is 60%. The unsecured leverage was 39% and the covenants 60%. Our fixed charge coverage ratio on a trailing 12 months was 2 times. The covenant is 1.5 times and I should point out the current quarter annualized fixed charge coverage ratio is 2.4 times really reflecting significant improvement. Our unsecured debt yield was 14%, the covenant 11%.

Turning to sources and uses for 2011, our net cash flows is expected to be $100 million, asset recycling and land sales are expected to be about 150 million and unsecured bank loan which I just mentioned of 250 million, other debt equity and J.V. capital in the range of 300 million bringing total sources to about 800 million. We anticipate development, redevelopment and construction spending in the $340 million range, acquisitions of approximately 200 million, secured debt repayments of approximately 115 million and retirement of 3-7 notes in the $100 million range bringing total uses for the year to $755 million. Additionally, as you point out availability under our credit facility as of year-end was 750 million, we had cash on hand approaching $100 million and I think as I mentioned earlier we anticipate refinancing our term loan in late 2011 and early 2012, and the retirement of our 3-7 notes by early 2012. And lastly moving to guidance we updated our range of guidance for 2011 FFO per share diluted was provided at 458, 468 up $0.02 before losses on early extinguishment of debt that we recognized in January of 2011. And EPS diluted of $1.97 to $2.07. Our guidance is based on various underlying assumptions and reflects our outlook for 2011 some of these assumptions included the following cash and property NOI growth in 2 to 4% range, GAAP Rental Rate steps in the 5% range on lease renewals and releasing the space for the year with some variances and results quarter-to-quarter. Straight line rents for the year in the low $30 million range, G&A expense is flat to modestly up over 2010, capitalization ventures to decrease 20% from 2010 and lastly, our guidance assumes selected sales of land and non-core assets continue over the next few years including one land parcel that’s currently under contract today.

With that, I’ll turn it over to Joe.

Joel Marcus

Operator, if you could open it up for Q&A. Thank you. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Sheila McGrath with KBW.

Sheila McGrath – KBW

Yes, good afternoon. I did want to ask a few other questions on this San Diego acquisition hopefully you’ll be able to answer them. Just in terms of on the 0% return in the first year and the 7 and then 10.5, is that you mean in 2011 and ‘12 and ‘13, is that how we should look at it?

Dean Shigenaga

Yeah, I think Sheila this Dean here, excuse me for a little vagueness on the answer but the free rent period in the first year will be based on a start data of November. But I said also caution as we’re trying to work with limited accelerate the time of when they get into their space. The exact timing we don’t have good handle on but we’ll be able to report over the next couple of quarters.

Sheila McGrath – KBW

Okay, okay and then if you just could give us some insight, did you have Illumina in mind as a tenant when you bought the acquisition?

Joel Marcus

The answer was we had four likely candidates and they were certainly on the list.

Sheila McGrath – KBW

Okay, and then if when you purchased this asset if you compare it to your returns thus far on East River is this going to end up being a bigger kind of IRR contributor than even East River?

Dean Shigenaga

Well they are different because this is a an existing asset and the Alexandria Center for Life Science in New York is obviously a development but they’re really kind of different but I would assume this would be a higher yield if you looked at on a basically a yield basis.

Sheila McGrath – KBW

Okay and...

Joel Marcus

Given the nature of the lease that we’re able to negotiate.

Sheila McGrath – KBW

Okay and Dean, could you give us some insight on the pricing and leverage metrics that you’re seeing from the life companies right now in the CMBS market on secured debt?

Dean Shigenaga

I can’t Shiela, broadly speaking and I say that cautiously because you know from my comments earlier that we’re actually not in the market on the CMBS side of the life-side today and so I don’t have a term sheet to give you an accurate number but I would say its, life companies remain aggressive, the CMBS deals in my opinion probably fall one step behind it on pricing and on the life-side and banks I would say for shorter tenure deals probably are extremely aggressive today and our pricing probably tighter but on a shorter tenure basis I’d say your seven to 10 year paper from either the CMBS or the life market would probably put you somewhere plus or minus 5%. The bank side for Alexandria, shorter tenured paper I’d probably say something approaching 200 over LIBOR.

Sheila McGrath – KBW

Okay. Thank you.

Joel Marcus

Thanks Sheila.

Operator

And next we’ll hear from Jay Habermann with Goldman Sachs.

Jay Habermann – Goldman Sachs

Hi, good afternoon, here with Connor (ph) as well, Joel just focusing on the JV capital, I guess can you give us some sense of the timing for some of the JVs and likely cost of that capital, maybe some of that yield you’re looking for in terms of sales and I guess the types of capital that you’re talking to you at this point?

Joel Marcus

When you say JVs meaning on – are you referring to projects or just specific or generalization?

Jay Habermann – Goldman Sachs

Well, project specifically and I guess in general as well, the types of capital versus you’re talking too.

Joel Marcus

Yeah, I mean we had reported back, Jay, I don’t know couple of years ago, when we started the New York project and I think it was right before the crash actually we had a term sheet negotiated for the East Tower with a JV partner, I’m trying to remember it’s been too long ago. But I believe it was more or less a 50-50 deal and we view that capital would be helpful. We were actually looking, I think at that point at maybe building the east and west tower together but obviously the downturn changed that. So I think as I recall it was probably both towers now that I think back about that. But I think when it comes to a large scale project and also that was not available really at that time for us and certainly latter it was not on that size of spec construction project. Today, I think the JV sources the capital, in fact I met with one very, very prominent JV person in New York, not too long ago, had discussed The Binney Street Project. If we kick off a large scale project as oppose to a single home (ph) JV capital something we clearly would look at as an important source of capital. I don’t know if that helps answer the breadth of your questions but that’s kind of what we’ve done to date.

Jay Habermann – Goldman Sachs

Okay. No, that’s helpful. And then in terms of returns on development, can you focus on Cambridge a little bit and perhaps compare returns that you’re talking about for those projects versus what you’re seeing on redevelopment?

Joel Marcus

Yeah. I mean our redevelopment, the biggest one we’ve done was really a pretty huge success. I think we achieved, when we did a case study a number of quarters ago maybe about, I don’t know four, five, six quarters ago on our 200 Tech Square building where I believe our returns on incremental capital we put in approached about 16, 17%. We signed anchor releases in that building, when we bought it, 200 Tech Square was going to be an updated and redone office building, we ended up being able to convert it to lab. Rents went significantly up, our anchors there were Pfizer, Novartis and Glaxo and that I think is one of our most successful projects, a big scale. And I think today we’re going to be embarking this year on redevelopment of 400 Tech Square. We don’t have pricing yet, we don’t know whether it would go new office or new converted labs because there is actually very significant demand for both in Cambridge today. It’s very, very hot companies or entities. So, we would hope to achieve obviously double-digit returns on our incremental capital into that project. When it comes to development on the Binney Street corridor, I think we would target something in the range of a high single-digit probably likely given underground parking and other amenities that we’ve had to provide to city. I would say if could reach anywhere between 8.5 and a 10 on unlevered basis, that would be pretty strong.

Jay Habermann – Goldman Sachs

Okay. And just lastly in terms of uses of capital, can you talk about the potential, you mentioned dividend increase versus conserving capital obviously to fund the external growth and potential land acquisitions as well as maybe even debt pay-down?

Joel Marcus

Yeah. We have obviously back over the last couple of years since the dividend cut that many REITS were implementing. In fact, I remember being in San Diego in November ‘08 when I think we did our first day 13 one-on-one meetings. In 12 of those meetings, people begged us to cut the dividend, it was kind of, a surreal situation as you probably recall. But I think as we go forward, we would like to see we just did make a significant, the board did a significant increase in the dividend. And I think you’ll see that going forward in a measured way so that we’re sharing the upside in cash flows with our shareholders but at the same time retaining as much as we can because it’s the cheapest source of capital. I don’t know Dean if you want to add anything to that.

Dean Shigenaga

No, I think Joel summarized it at the end they’re very nicely like we did earlier been able to share the increase in net cash flows to our business while retaining some as the primary objective going forward.

Jay Habermann – Goldman Sachs

Okay. Thank you.

Dean Shigenaga

Thanks.

Operator

And moving forward, we will hear from Jamie Feldman with Bank of America.

Jamie Feldman – Bank of America

Thank you. Can you talk a little bit about the significance of Pfizer, Center for Therapeutic Innovation coming to your center. I mean it looks like from the press release, they put out that there’re other organizations that will be housed within it. So, I’m trying to figure out is that kind of competitive to your space or is this just a toehold and maybe they can expand from here. But I’m just trying to get a sense of significance of that lease in specific?

Joel Marcus

Yeah, the Center for Therapeutic Innovations is really a brainchild that’s emerged over the last couple of years since Pfizer has gone through a pretty gut wrenching reorganization starting with Jeff Kindler and now with the new CEO. Clearly they want to exit more and more of their siloed campus location which aren’t really adjacent to the innovative and entrepreneurial locations and part of that was the establishment of kind of a standalone entity called the Therapeutic Innovation Center. Their goal is to create put in something in at least initially and it may grow over time obviously depending upon product opportunities somewhere between 40 and 60 scientists in a very high-intensity, high-quality lab and they are not doing Pfizer research. They are not developing either small molecules or biologics. What they’re aimed at doing their sole goal is to access innovative technologies and opportunities from the significant academic and institutional centers that are adjacent to these locations. So they have already embarked upon setting it up at Mission Bay obviously. I think they’ve signed the deal that was announced, maybe by Jeff Kindler before he left as CEO with UCSF and my guess is they probably will find others there. So they’re not leasing space or doing anything but it’s solely external collaboration and same thing in New York when they move I think in the next couple of months. That group will be aimed at and they’ve signed as you saw the press release that Pfizer put out, they’ve signed some 7, 8, 9 I can’t remember how many collaborative agreements with major New York City institutions and again it’s aimed at collaborating with those institutions not doing internal Pfizer research. They’re looking at other site as Ian had mentioned in his in the quote I gave to really access worldwide innovation. So this is where big pharma is really headed in, less focused on places like we’re out in Connecticut et cetera.

Jamie Feldman – Bank of America

And then what’s the appetite for growth for that, I mean, could they be, is that anything large enough to do like an anchorage tenant second building?

Joel Marcus

I don’t know that this will be because these are obviously projects that take time but they’re early stage projects, so thus the 250 to 300,000 square feet of demand, real demand that we have right now and we’re working pretty hard on it in New York for example. One is a biotech company, the other is a major institution in that a particular disease areas. Those are the two big ones. There is a bunch of small ones. So, we’re not accounting Pfizer in that. But I would expect overtime if Pfizer is successful and accessing innovative technologies that could move from R to D that they would expand in New York City.

Jamie Feldman – Bank of America

Okay. And then could you just walks through your 2011 remaining expiring leases kind of the big ones that have some vacancy risk?

Joel Marcus

Yeah I try to do that a bit in my kind of geographic review but let me just go to that page, bear with me one moment here. So, it’s page 40 of the supplements and I’ll just run down each of the markets. So in San Diego, we’ve got a total of 550,000 square feet expiring and as you can see the bulk of that is already leased. So, we don’t see much risk there. The Bay Area, we got about 100 – 269,000. Most of it still is remaining and so we see that as a modest challenge but we think we can work certainly up to that challenged in the greater bofinary about 484,000 square feet almost 200,000 of which is the 400 Tech Square which we have a high degree of interest in, probably single building users and about 120,000 that’s’ remaining that isn’t resolved. So, we think that inordinately handle able New York, New Jersey suburban about 38,000, which is pretty small, southeast is pretty small DC. We’ve got one big one we’re working on and the balance is pretty small and Seattle is pretty small. The Gates Foundation building which is coming back to us which is an office building, we’re converting it for lab we’ve already signed a major league there and we see that is resolving. So, we don’t see inordinate challenges in the releasing risk for 2011.

Dean Shigenaga

And then Jamie just to add some color there. In the marketing actually the tail column, most of the leases are below 20,000 square feet in size. And I think there is only one lease that is north of that and it’s in the 50,000 square foot range. So, it is spread across a number of smaller spaces with no large lumpy exposure.

Joel Marcus

Yeah and in San Diego if Dean will make sure my recollection is correct, I think he is pointed out the 34, 36 annual base rent expiring in San Diego, a big part of that is the Biogen Idec lease and if you back that out, that number drops to about 25 bucks or something, so that’s important to remember too.

Dean Shigenaga

Yeah, that is correct. So and then if you think of market rents across the three major submarkets down there that might initially draw some concern, but at $25 of expiring rents excluding the Biogen space because that’s really been a result we’re in pretty good shape.

Jamie Feldman – Bank of America

Okay. And then finally actually Dean so if you look at the increase in FAS 141 and straight line rent in quarter, can you give us a sense of how, the timing and those actually burning off and turning into real cash?

Dean Shigenaga

Sure, 141 I think I commented on that by the, after the second quarter of ‘11, 141 will drop down to about $1 million a quarter. And straight line rents will run a little high for a while for two reasons, one a lot of deliveries on the developments and large leases that have been executed. As those burn off space by space to cash flows that’ll tail off. However, as I mentioned them in my prepared comments you also have the Illumina lease coming in, timing to be determined over the next few quarters but no later than November of this year which will contribute meaningfully to Straight line rent adjustments that are going to be fairly significant for a number of quarters.

Jamie Feldman – Bank of America

It sounds like that’s at least flat is not increasing by year end, straight line?

Dean Shigenaga

No I don’t it’ll increase relative to the current quarter straight line rents a number of roughly $9 million. I think I was forecasting somewhere to be in the low $30 million range on straight line rents for 2011 that kind of frames the range that we would expect.

Jamie Feldman – Bank of America

Okay, thank you.

Dean Shigenaga

Thanks Jim.

Operator

Okay and our next question will come from Will Marks with JMP Securities.

William Marks – JMP Securities

Hello Joe, Dean and everyone. Just a question on very, very broad question on acquisitions and development, and who you’re seeing in terms of competition, I don’t expect you to name, names but are there some new players that are building this type of space at all and are the number of acquires, has the number of acquires increased in terms of your competing with when you look for a deal?

Joel Marcus

Well, virtually everything we did this year was up market. So in that sense, we didn’t have any competition to speak up. But I think deals we saw and we passed on, there was one deal in Sorrento Valley in San Diego, another deal in the Bay Area of South San Francisco. There have been a number of deals we’ve seen that we passed on. So I don’t know necessarily the number of bidders and kind of what their makeup is. But I think it’s fair to say, I did quote a couple of quarters ago, there was a deal that we really like and went after but lost to a pension fund back in June in the Massachusetts region, which we thought was kind of emblematic of what you’re talking about. It was a – I don’t remember how big it was but it was about a 60, 70,000 square foot building, B building, B location but triple-A credit tenant and lease through 20, 28. And there were quite a number of bidders because people view that as an almost like a borrow on. So I think, it depends on the nature of what the acquisition is.

William Marks – JMP Securities

And then what about development, is there?

Joel Marcus

Well, in developments, we own our sites, we obviously...

William Marks – JMP Securities

Well, I just mean others, are you seeing any kind of increasing activity.

Joel Marcus

The only group that, the only group that I have seen recently in any of our markets actively developing with the Boston Properties on a site in Cambridge that we believe they’re going forward with and I believe that will be a lab building and but other than that I would say we haven’t seen any development in the markets at the moment.

William Marks – JMP Securities

Okay.

Joel Marcus

And most people don’t really have, most people frankly don’t have great land sites. You can have land sites, but if they are not really AAA land sites your competition for a really high quality tenants isn’t very good.

William Marks – JMP Securities

Okay. Thank you.

Joel Marcus

Yeah, thank you.

Operator

And we are moving forward we will hear from Michael Bilerman with Citi.

Michael Bilerman – Citi

Hi this is Mark (indiscernible) with Michael Bilerman. Looking at China and India I’m hoping you can provide a rough timeline of how long you expected to fully build out the current projects there? I think there is just 7 million square feet, also shed some light on the plan behind the added 2.4 million square feet of potential building India and just the overall long-term pieces on the regions? Thanks.

Joel Marcus

Sure, great question Mark. So taking China first we have a – our first really test development there was a building in South China for a variety of reasons we choose that location. We also had our early partner that decided to exit. And that really got our feet wet in doing our own, having our own team and our own ability to build in China high quality buildings and we do have good activity on that building of 280,000 square feet, if not a lab building we ultimately want to lease it and sell it because we have no desire to be there. In the North we have a land use REIT that we can build. It’s a little bit like Mission Bay near a rate one of the top five technology centers in all of China. We have our first two buildings underdevelopment about 300,000 feet 150 each. It’s really – they are today, the only first class lab facilities for lease in China. We just had team there. We’re putting together our whole marketing plan, that construction is going well, we hope to have space available actually, some prebuilt space for moving late in the year. And our big challenge in that project in addition to executing it but which we’ve done I think very successfully so far is really getting incentive packages from both the local and national government to be granted to us to give to tenants as opposed to having tenants have to shop around the 30 locations in China comparing a benefit. We’ve now secured that as of – I think I may have mentioned in our Investor Day, I can’t remember but we have finally secured that on our last call and now we can actually go out and put forth an incentive package that is highly competitive. That was a critical step.

So I think you’ll see activity through the balance of this year. We’re also working on another possible center in the heart of Beijing. We view China as you have to do it very carefully, very slowly and not get ahead of yourself. So we want to make sure we get fully leased on our 300,000 square foot building as rapidly as possible before we go to break ground on our next center in the heart of Beijing which will have a little bit of a different scope collaborating with the major universities. So it’s a bit of a different business model. But I think our goal is the journey of a thousand miles is the first step, I guess as was said in China and so we want to travel that road very, very carefully but clearly over the next decade or two China’s going to be huge and we think we’re well positioned to take advantage of that.

In India, our view is a little bit different, the market is different, the infrastructure challenges are very different. But we view India as an easier nothing is easy in Asia but an easier market operating because it’s obviously free market. It’s not government control. And so we have a plan there to develop a series of clusters again in lab and related kinds of businesses much like the alumina business and life technologies and others and we think we have a great chance to kind of dominate that market. We did announce or – and we didn’t but there was an announcement in one of the newswire of an acquisition we made from Indian company of a project in Hyderabad.

And so we think over the long term, India the benefit of India versus China in one sense is, it’s lower cost, the access to great people and intellectual capital there is pretty amazing because there is a very young highly educated population, and we think it make sense to have footholds in the two most important actually the two countries that have half the world’s population. So I don’t know if that answer is fully your question but.

Michael Bilerman – Citi

No, it’s very helpful. Just finally 426,000 square feet under development in India , is that can be readily available some or just some of the space in China by year end or is that?

Joel Marcus

We think so correct and a significant part of which we already have committed tenants in India, existing tenants.

Michael Bilerman – Citi

Okay. Great, thank you very much.

Joel Marcus

You’re welcome.

Operator

Moving forward we will hear from Tony Paolone with J.P. Morgan.

Anthony Paolone – JP Morgan

Thanks, good afternoon. Dean I think you mentioned $340 million of development spending this year. Can you give us a sense of how much of that is for projects that are underway right now versus starting new stuff for instance like Binney Street build to suit?

Dean Shigenaga

Sure, you probably picked up from the pages of our redevelopment projects and development projects that there are – we estimating 110 million and 70 million respectively of constructions spending for those projects. You probably also noted in the real estate section for projects in China and India that we’re forecasting construction spend in roughly $60 million range. We also have a couple future re-developments where we’re likely they are not in redevelopment today but we anticipate spending some money later this year which is probably in the range of $26 million. The rest includes spending both in our development site in Denny (ph) to accelerate our opportunity to go vertical as well as an estimate for unknown projects which we know are quite possible to occur.

Anthony Paolone – JP Morgan

Okay, just to make sure I got that so when in your prepared comments the 340 million was that just development, or was that just development and redevelopment spending?

Dean Shigenaga

That was all construction spending.

Joel Marcus

Worldwide.

Dean Shigenaga

Yeah, it’s everything redevelopment, development Asia, pre-construction projects, every construction dollar we expect to spend this year.

Anthony Paolone – JP Morgan

Okay and then just to make sure I got you answer right, there was 70 million, I think in the supplemental on the ground up, 60 million in Asia, and then I think you mentioned 26 was it in the redevelopment?

Joel Marcus

26 of future redevelopment projects that are not in the redevelopment schedule and 110 in actual redevelopment.

Anthony Paolone – JP Morgan

Okay, so it sounds like...

Joel Marcus

Another 50 that would be kind of other potential, yeah.

Anthony Paolone – JP Morgan

Okay, the 50 or I’m getting something closer like 100 million of stuff that’s otherwise...

Joel Marcus

Yeah, let me rail through 110 on redevelopment, 70 on development, roughly 60 million in Asia, 26 on new redevelopments that are not in the redevelopment pipeline today. Roughly 16 million on pre-construction substantially all related to Binney and the remainder is unidentified. It’s a projection of spending that we think is likely the curve, but not specific to any project.

Dean Shigenaga

Which could be over 50 million, so should put to about 340.

Anthony Paolone – JP Morgan

Yeah, got it. Thank you. The other question I have is your New York center now, you talked a lot about the bigger tenants as being key anchors for the Westar (ph) but then it seems like over the quarters there were a lot of smaller tenants that had demand. Can you give us a sense as to where those types of tenants ended up going and kind of what that looks like if you do start a second tower?

Dean Shigenaga

When you say smaller tenants who may have had interest in the East Tower you mean?

Anthony Paolone – JP Morgan

Correct. I know you had mentioned some smaller ones, but not likely anchored size for the West Tower?

Joel Marcus

Yeah. Well, there are hosts of smaller tenants that looked at the East Tower and some of those were up at the Columbia incubator, some of them were in the suburbs Connecticut, New Jersey et cetera. And if you’re comparing prices and then having versus those, it’s obviously easier to kind of stay in those locations. I think the West Tower will be the anchors are probably the two that I mentioned if and when we decide to go forward with. That one is a large well known independent translational entity focused on a particularly disease area much like the Neuroscience Institute we have in the West Tower but it’s a standalone, it’s not, doesn’t have an affiliation per se aimed at commercializing products. And then secondly, there’s a pretty fast growing biotech company that has its eyes on a lot of space north of 100,000 square feet and this would be the logical location. So, those are the two most important current anchors that we would see. There could be some smaller tenants, I can’t tell you today exactly but we certainly have a list of one that have looked and express some interest but we haven’t, I mean we don’t really account those as logical or credible to kick off a project of that size although we do clearly own curtain wall and steel today.

Anthony Paolone – JP Morgan

Okay, got you. And then just last question clarify, I think you had mentioned earlier an 8.5 to 10% type return on Binney Street project.

Joel Marcus

And that cash unlevered.

Anthony Paolone – JP Morgan

And is that going in or is that an IRR?

Joel Marcus

Yeah, because that’s initial.

Anthony Paolone – JP Morgan

Okay, got it. Thank you.

Joel Marcus

You’re welcome thanks Tony.

Operator

(Operator Instructions). And moving forward we’ll hear from Jim Sullivan with Cowen and Company.

James Sullivan – Cowen and Company

Hi, I have two questions. First of all in terms of same store NOI number reported, the expenses were up 4.2% in the quarter and I’m just curious what the major driver of that was and whether we should expect that to continue and also Dan if you could address what kind of expense growth is baked into the 2 to 4% forecast for ‘11.

Dean Shigenaga

All right, Jim its Dean here. This, the same store performance in fact the entire portfolio we should keep in mind that with the majority of our leases being triple that very little leakage to the bottom-line from fluctuations in operating expenses year-to-year or even quarter-to-quarter whether it’s hot summer period, cold winter or just fluctuations in utility rates. So the good news is as you look at other property types you do need to be concerned about fluctuations and operating expenses but for Alexandria, the fluctuations are passed through whether OpEx runs high or low, the tenants will bear either the expense or the benefit from lower operating cost. In this case expenses were running a little bit I think primarily from utility related cost. So I don’t expect it to be sustainable. I think year-to-year, quarter-to-quarter we see most of our OpEx variations at the utility level, occasionally a little bit on the insurance level and occasionally some at the property tax level.

James Sullivan – Cowen and Company

Okay, second question this is really for Joel and Joel I was intrigued when you talked about the Illumina transaction. You had talked about, I think a response to a question from Sheila that there were four potential candidates for that space and I am curious whether the other three potential candidates have found alternative locations and number one. Number two whether their requirements represent net additional absorption or trading places or both?

Joel Marcus

Yeah, so what I can tell you is that several of those we are certainly engaged in finding other suitable facilities for it. So stay tuned and I will comment about a net positive absorption, yes some of it would be absolutely net positive absorption. And I think Illumina is a good example. There are number of entities that seek growth. They have existing facilities but they’re just not able to grow to the extent they need to grow to satisfy the platform and the business opportunity and so we hope to be there to provide that opportunity for them.

James Sullivan – Cowen and Company

Good.

Joel Marcus

And that’s why we been pretty bullish on our prospects in San Diego.

James Sullivan – Cowen and Company

Thanks.

Joel Marcus

Yeah, thank you.

Operator

And next we’ll hear from John Stewart with Green Street Advisors.

John Stewart – Green Street Advisors

Thank you. Joel this is a couple of follow up questions on the Illumina deal, first of all I am curious what role if any Dan Ryan played in bringing that across the finish line?

Joel Marcus

None whatsoever. Just kidding, Dan and his team and Peter really were the critical elements in that and I think when you’ve got first-in-class team and you’ve got a first in class site, nothing is ever easy but it really made it much more possible to execute such a complicated and such a large size transaction really in record time.

John Stewart – Green Street Advisors

I guess, was that sort of a deal that Dan brought with him or was that a Alexandria at entity level, all pistons coming together to get the deal done?

Joel Marcus

Well, I think it’s probably the latter in the sense that the sales of the Biogen Idec transaction really emerged before the time that we finalized arrangements with Dan. But I think it’s fair to say that it’s really a combination of all of those factors and again what you need is great leadership and Pete brought that to the table.

John Stewart – Green Street Advisors

Thanks. And I am sorry, if I missed this when Pete was going over it but I caught it said, I think November 1 start date for lease but what exactly is the free rent period?

Joel Marcus

You’ve got a significant period on the front end with no cash rents in the first 12 months of the lease.

John Stewart – Green Street Advisors

Got it. And then it phases in year two?

Joel Marcus

Yeah. And then the cash rents actually will accelerate in overtime.

John Stewart – Green Street Advisors

Got it, okay. If I could maybe Joel get you to comment and first of all, thank you for the continued improvements in disclosure and looking at the leasing economics, pretty impressive particularly overtime and I guess the one thing that is sort of missing from the disclosure is pre-rent. So I could, if I could just get you to comment on the prevalence of free rent in terms of leasing on a general basis?

Joel Marcus

Yeah. I don’t know that you can ever make a generalization. I think you really have to deal with the market reality and so today if we were to lease or do a deal in Binney Street which we’re working on some things or on our conversion at Tech Square. You really have to be responsive to a marketplace. And so the marketplace really dictates what roughly is marketing any given point in time and it changes pretty rapidly. And I don’t know that I can be more specific. There is no, it is always very market dependent and very time dependent in a given point in time.

John Stewart – Green Street Advisors

And I guess....

Joel Marcus

The other thing I would add...

John Stewart – Green Street Advisors

Sorry, go ahead.

Dean Shigenaga

Sorry, John, No one thing I’d add, is that when you’re dealing with some large lease transactions for 15 or 20-year terms, you’ll have a component of free rent if that’s market at the time and it’s not an unusual environment that we’ve seen in the last year on our leasing front with any free rent that we’ve deal with this year.

John Stewart – Green Street Advisors

Sure, fair enough. Okay, and then lastly Joel, without speaking necessarily to these specific acquisitions in the fourth quarter, but we obviously just don’t get as any many data points in the lab sector in terms of values. Could you speak particularly when you consider the trend more broadly in terms of real estate values and interest rates, can you speak to cap rates for you product?

Joel Marcus

Well, I think what I mentioned earlier in one of the questions, the project that came some market, widely marketed in Massachusetts in June went for I believe 64 cap rate that’s without any frills, B building, B location, AAA credit and very long term lease. We certainly have thought to buy product that under replacement cost, that isn’t always the case with a lot of buyers out there people are paying sometimes extraordinary prices which seem a little whacky sometimes to us, but I think again it’s very dependent upon, is there a value-added component, is it an off market transaction, is it widely marketed, I mean the widely marketed transactions frankly are going to be very aggressive in pricing. And I don’t think that, necessarily an indication of either higher low cap rates, I think it’s just – it is what it is a point in time. And I would say, some of the cap rates I think you guys have assigned out there probably seem on the high side.

John Stewart – Green Street Advisors

And you haven’t seen a shift necessarily in the last 90 days?

Joel Marcus

No, I’d say it’s been going on since we all emerged from the two-year debacle and that’s probably started in the spring. So, I don’t think there has been a noticeable shift. I mean you could look at one transaction or another and say does that make a data point back, I don’t think so. But I think if you’ve got a first class location you’ve got a first class facility and you have term and credit that isn’t even a lab product anymore that becomes, almost a desirable acquisition for anybody like the one I described pension fund the one I’d said, they just viewed it as a bond.

So I think that’s prevalent, not only in this product I said broadly out there today. But if there are poor locations, poor quality and you’ve got some value out then I think the world kind of changes on that. So, I mean if you look at our markets, Lake Union kind of Mission Bay, the good places at San Diego you look at Cambridge, you look at Gaithersburg, Rockville in Maryland and New York city, I mean the cap rates there. If we’re to sell flagship assets with term and top quality tenants. Those things would be at very aggressive cap rates today.

John Stewart – Green Street Advisors

Okay, thank you.

Joel Marcus

Thank you.

Operator

And we’ll take our final question from Suzanne Kim with Credit Suisse.

Suzanne Kim – Credit Suisse

Thank you so much. I do appreciate disclosures this quarter. The first question is to just to clarify on the dividend rates. I’m just wondering what sort of metrics that we should sort of look at to focus on. I know you said you’re going to increase it with net cash flow but I’m wondering if you’re looking at a payout ratio or targeting a payout ratio. And then secondly with regards to your pre-construction pipeline, I know that big chunk of it is Binney and the other chunk is the tower in New York City. I’m wondering what is, what the first two priorities are, what you kind of see as most feasible in near term as coming online?

Joel Marcus

Yes, so let me maybe answer the second question and I’ll let Dean the answer to first. Between New York and Binney, I think we see a piece of Binney probably going sooner than New York although frankly if we wanted to start New York today we could but we’re mindful of a whole lot of things we’re working on and some of the goals that we set for ourselves that we don’t want to push things too rapidly it doesn’t make sense. But I do see early start to maybe one of the Binney buildings if we can secure are an important anchor tenant. I think that’s how I would line it up. Dean, you want to comment on the dividend?

Dean Shigenaga

Yeah, Suzanne its Dean here. As far as the dividend strategy the increase as well as future increases I think we committed in both situations that our strategy is to share increases in net cash flows with our shareholders while also allowing us to retain increases and net cash flows to recycle or reinvest into our business. I guess, I should additionally point out that we don’t forecast any shortfalls in our dividend deductions to meet a 100% or zero taxable income I should say going out over the next few years. So, really it comes down to our desired to share increases in net cash flows with our shareholders.

Suzanne Kim – Credit Suisse

Great. Thank you so much.

Joel Marcus

And our payout ratio is historically book pre and post-crash, has been I think among the lowest in the industry. So, we have I think a good basis going forward. But as I was mentioned earlier, we certainly want to retain as much free cash flow as possible as well to reinvest in the business.

Suzanne Kim – Credit Suisse

Thank you.

Joel Marcus

Thank you.

Operator

And that is all the questions we have at this time. I’d like to turn the conference back over to you, sir for any additional or closing remarks.

Rhonda Chiger

Well, thank you everybody very much and we’ll talk to you in May on our first quarter call.

Operator

And that concludes today’s conference. We thank you for your participation. You may now disconnect.

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