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

Q4 2011 Earnings Call

February 8, 2012 3:00 PM ET

Executives

Rhonda Chiger – IR

Joel Marcus – Chairman, President and CEO

Dean Shigenaga – CFO, SVP and Treasurer

Analysts

Sheila McGrath – KBW

Jay Habermann – Goldman Sachs

Jamie Feldman – Bank of America

Philip Martin – Morningstar

Ross Nussbaum – UBS

Michael Bilerman – Citi

Quentin Velleley – Citi

John Stewart – Green Street Advisors

Jason Ren – Morningstar

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Alexandria Real Estate Equities Incorporated Fourth Quarter and Year End 2011 Results Conference Call. My name is Tisha, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Rhonda Chiger. Please go proceed.

Rhonda Chiger

Good afternoon. This conference call contains forward-looking statements within the meaning of the federal securities laws. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company’s Form 10-K Annual Report and other periodic reports filed with the Securities and Exchange Commission.

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

Joel Marcus

Thanks, Rhonda, and good afternoon everybody. Happy New Year and thank you for joining us today for the fourth quarter and 2011 year end call. With me today are Dean Shigenaga and Krupal Raval. We hope that you like the new format and content of our press release and supplement. Hopefully, it will be very informative as well as a more user-friendly and simpler to follow document.

As we look forward to 2012, it appears promising as the Dow reached 12,878 yesterday at the close, the highest since pre-Lehman in May 2008. 2012 will be an important year for Alexandria. We will begin the transition of our balance sheet from the bank debt – the long-term unsecured bank debt – I’m sorry, long-term unsecured bond debt having received our investment grade ratings in mid-2011 from Moody’s and S&P.

And as many of you remember, the keys to the ratings by the two agencies were the size and leadership vary within our life science sector and our markets, a well diversified asset base by geography and tenant, modest leverage, and the size and quality of our unencumbered asset pool, our ability to manage liquidity, our ability to handle higher funding costs and the health of our operations and leasing all of which I think have proved true in this reporting period.

We will continue our expansion domination of our key urban and CBD adjacency cluster markets with our unique and important first-in-class and first mover advantage. And I think this was clearly demonstrated by the breadth and depth of our fourth quarter of 2011 and 2011 full year leasing success. We look forward to on-boarding significant cash flows later in 2012, as we move strategic non-income producing assets to cash flowing operating assets.

From fourth quarter 2010 to fourth quarter 2011, we increased the – the board increased the dividend approximately 40%. It’s likely the board will continue that approach of sharing increasing cash flows with our shareholders. As we proceed through 2012, it appears the fundamental drivers are in place to enable the continued expansion of the life science industry in our key cluster markets and for us to take advantage of that and certainly for Alexandria to continue to dominate and capture the plum requirements which we’ve done in San Diego, Greater Boston, and South San Francisco this past year. We have more requirements today in some of our key cluster markets than we can actually handle, however, as we reduce our non-income producing assets, this will enable us to pursue more of these key opportunities.

We hope investors focus on the fundamentals of ARE as a very high quality, innovative company with uniquely built-in platform for growth in net operating income, earnings are best-in-class assets in irreplaceable locations with solid tenant demand for our unique lab space.

For 2011, again, we are very pleased and proud to report the highest leasing quarter and year in the history of the company. And again, it confirms I think the meaning and the impact of our leading franchise in the life science industry. For the fourth quarter, we leased over 1.1 million square feet and for the year about 3.4 million square feet, and almost 1 million square feet out of development and redevelopment.

We have a solid flow of requirements. This past year, the three biggest leases for development and redevelopment space were two in San Diego and one in Cambridge, of the 650,000 square feet of renewals and re-lease space, San Diego where we clearly dominate contribute about 50% and Greater Boston about 23%. For the 492,000 square feet of redevelopment and development space, San Diego contributed 51% and 21% for Greater Boston.

Some of the, I think, most notable leasing accomplishments certainly during the last quarter was the leasing of our new 43,000 square foot University Town Center Drive property. Our – the initiation, the leasing, and the initiation of our build-to-suit for Biogen Idec in East Cambridge are 100% pre-leasing of small build-to-suit for a top pharma, which we were really compelled to do in Canada. And the lease-up of from 43% to 91% of our flagship Campus Pointe asset in UTC, San Diego with an existing credit tenant in another market, but now one of our dominant tenants in San Diego is Celgene.

We like to address the fundamentals in three of our key life science cluster markets and our expectations for 2012. Going to San Francisco, Mission Bay remains tight with Nektar and Bayer exercising their options for a total of 30,000 square feet at our 455 Mission Bay property. Bayer’s expansion was especially noteworthy as it again marks an overwhelming trend for big pharma to establish tight networks and close physical proximity to leading intellectual centers. As you remember, they exited the East Bay to move to Mission – their R&D to Mission Bay.

Mission Bay life science rates remain strong in the low 40s with about $125 square foot of generic infrastructure allowance over a shell and tenants contributing significant capital to complete their mission critical fit-ups.

2012 lease rollers are minimal with about – almost about 13,000 square feet of space and we’re in discussions for 9,000 about. Regarding our flagship 499 Illinois project, we’re engaged with some serious discussions and negotiations with a variety of technology companies and life science institutions, both seeking large blocks of space. I’m hopeful we’ll be able to beat both the time and the returns of our acquisition pro forma.

South San Francisco is growing a little bit stronger incrementally. We’ve captured the majority of the market demand in the fourth quarter, including in a lawn expansion at the Gateway project. And a new cleantech company is leasing a block of space at our East Jamie Court project. We’re also engaged in negotiations with two – final negotiations with two tenants that will stabilize the West building of the East Jamie and early negotiations with an existing tenant to take another floor in the East building, putting us on track to overall stabilize that building in the second half of 2012.

South San Francisco lease rates remain in the low 30s. Our lease rollovers in the sub market are about 100,000 square feet and we are working on negotiations and discussions about 75% of that space. The Stanford, Palo Alto, Mountain View market remains very tight and the overwhelming technology demand has really made that market – those markets pretty hot these days.

If we move to the Cambridge market, Cambridge market has been relatively steady and stable all year. Vacancy down to about 10% Class A. Although, Class A second-generation space is pretty scarce. Our major recent deals as you may know were Pfizer committing to MIT we had – we couldn’t accommodate their size. We didn’t have the space available and we did sign an important requirement for Mass General, a 15-year lease, 75,000 square feet, 400 Tech Square, and hopefully we are on our way to stabilizing that building before we deliver it.

Some other significant leases have been signed and tech demand in that market again strong. Right now we’re tracking over 2.4 million square feet of demand both in the lab and in the office sector in Cambridge. Cambridge office market low 40s to mid 50s, on a gross basis East Cambridge Class A mid 50s to mid 60s and East Cambridge Class B and C low 40s to high 40s, so – and the suburbs kind of in the low 20s to mid 30s. So that market stays healthy and the continuing flight to the core cluster markets with Cambridge being benefited certainly continues with the larger tenants.

And then finally in San Diego, as we indicated Celgene more than doubled in size their San Diego footprint and we successfully leased 172,000 square feet to them at Campus Pointe. At the end of 2011, Alexandria was responsible for well over half of San Diego’s annual lab space leasing activity. If we look at Torrey Pines today, our almost 0.75 million square feet, we’ve got a vacancy rate of 10% and headed down, rental rates are in the mid to high 30%s; in the University Town Center, our 1.3 million square feet, we’ve got a vacancy rate of about 3.4%, and again a very strong and solid market.

So with that kind of color on a little bit of a preview of 2012 and a little bit of hindsight review of 2011, let me turn it over to Dean to give you pretty detailed color on the quarter as well.

Dean Shigenaga

Thanks, Joel. Let me just open up with results. FFO per share diluted was reported at $1.10 for the fourth quarter and overall in line with our expectations. Earnings per share diluted was $0.44. Total revenues were up $14 million over the fourth quarter of 2010 and almost $88 million over 2010. NOI for the fourth quarter was $101.8 million. It was up about $7.3 million over the fourth quarter of 2010 and about $0.01 over the third quarter of 2011, and really was reflected of the expected decline in NOI related to the completed rollover and start of the full redevelopment of two assets, 1551 Eastlake in Seattle and 400 Technology Square in Cambridge.

Looking forward into the first quarter of 2012, NOI is expected to be flat when compared to the fourth quarter of 2011 for the following reasons. Overall, we’re expecting 100 basis point to 150 basis point decline in overall occupancy by March 31, primarily driven by occupancy dips in South San Francisco, Boston and Suburban Washington D.C. Occupancy in South San Francisco and Boston are expected to recover by 3Q, with occupancy gains in Maryland requiring a little bit more time. Overall, we anticipate our total occupancy by December 31, 2012 to be in the range of 94% to 95%.

In summary, NOI is expected to be flat from 4Q into 1Q, up slightly into the second quarter and into the third quarter, and up significantly in the fourth quarter of 2012 as we’ve expected.

G&A was about $10.6 million and above our expectations for the fourth quarter. The higher G&A was really related to professional fees and consulting, some of which related to training for new systems placed into service related to paperless invoice processing software, GO and property management and ADP payroll related software implementations. We also had a small amount of dead deal costs in the quarter, some domestic and some international.

Moving to the balance sheet briefly with some comments on our overall balance sheet strategy and capital strategy. Starting with bank debt, over the next few years we remain focused on the transition from variable rate medium term bank debt to longer term fixed rate unsecured bonds. However, long term, some bank debt will be a component of our capital structure, primarily consisting of our unsecured line of credit for liquidity and flexibility and bank term loans when appropriate.

Variable rate debt from our unsecured line of credit will be used to fund construction activity short-term, and ultimately financed with longer term capital. Construction loans may be utilized from time to time. And in the interim, like we did in December, interest rate hedge agreements will be used to mitigate interest rate risk. Near and medium term, we will transition variable rate bank debt to fixed rate debt.

A small amount of secured debt will always be part of our long-term capital structure. Pricing today remains very attractive and will remain part of our sources of capital when appropriate. With our investment grade ratings, we can tap an important new source of longer term fixed rate capital, and accordingly we expect to be a periodic issuer of unsecured notes.

Perpetual preferred stock will remain a key component of our long-term capital structure. However, we also believe that our 8.375% Series E preferred stock can ultimately be refinanced with lower cost long-term capital.

JV capital has not been a significant component of our capital structure, but remains a real opportunity for the right transaction. However, we do not expect this to become a significant component of our capital structure. Asset dispositions will continue to provide capital for reinvestment. Common equity, whether traditional follow-on or through an ATM type program, will be considered as necessary to balance our use of incremental capital over time.

We remain committed to lower leverage. Our debt-to-EBITDA is projected to be slightly plus or minus seven times for the fourth quarter of 2012. This leverage metric will benefit from the significant amount of NOI and EBITDA contribution beginning in the third quarter of 2012 and ramping up significantly in the fourth quarter from the delivery of our significantly leased redevelopment and development projects. We expect over time to improve debt-to-EBITDA to a target of 6.5 times.

Our goal is to maintain greater than 50% availability under our $1.5 billion unsecured line of credit. Over the long term, we expect our outstanding balance under our line of credit to move closer toward 25% or less, similar to most investment grade rates. Our goal is also to maintain a laddered maturity profile. Our current debt maturities over the next four years are very manageable.

Additionally, our goal is to lower non-income producing assets to 15% or less of our gross investment in real estate. Our current active development and redevelopment projects aggregate about 7% of our gross investment in real estate. And the completion and delivery of these projects, again a significant amount of which is scheduled for delivery in the fourth quarter, will transition these into income-producing assets.

Briefly let me comment on the bond market. As we all know, 2012 to-date has shown several positive trends in the investment grade unsecured bond market. The fed recently announced their commitment to low interest rates into 2014. The European headlines have not spooked the market as frequently as the second half of 2011. And Treasuries has rallied and dropped meaningfully. REIT bond spreads have also tightened meaningfully. As a result, a few REITs had very successful bond deals this year.

We remain optimistic with recent market trends and would like our bond offering to occur sooner than later. We are also cautious that the market is still subject to volatility from the European crisis and other major headline news.

Our guidance for FFO per share and EPS does not include a bond offering since it’s difficult to predict the timing and pricing for a debut issuer. All indications support a meaningful tightening of pricing for ARE, but ultimately pricing will be determined based on market conditions when the event occurs.

In December, we executed interest rate swaps lowering our unhedged variable rate debt from 51% as of 9/30 to 21%. Our goal was to reduce our exposure to interest rate risk in the interim, while also leaving an appropriate amount of unhedged variable rate debt in our projections in order to allow for the transition of bank debt to longer term fixed rate debt.

The $1 billion of additional swaps in effect for 2012 fixed one month LIBOR at approximately 48 basis points to 49 basis points. When combined with the existing $450 million of swaps in effect, the aggregate $1.45 billion of notional amount of swaps in effect for 2012 fixed one month LIBOR at 1.5% through September 30, at which point certain swap contracts terminate.

Going forward, our unhedged variable rate debt may hover around 20%, and occasionally approaching the high 20% range. This will provide us flexibility to transition from variable rate bank debt to longer term fixed rate debt. Subsequent to December, in January we retired about $84 million of our 3.7% convertible notes, leaving us with approximately $1 million outstanding today.

Moving next to our value-added opportunities, I’m sure you’ve noted that our revised supplemental presents value-added development and redevelopment projects and provides significant detail on key projects making up the majority of our projected construction spend for 2012.

As shown in our supplemental, approximately 80% of our 2012 projected redevelopment and development construction cost is related to certain developments and certain urban redevelopment projects with an estimated stabilized yield of approximately 7.5% on a cash basis and 8.2% on a GAAP basis. The remaining 20% is related to suburban and other redevelopment projects, and projects in this category will generate stabilized yields ranging up to 8% on a cash basis.

Our total estimate of construction cost to complete related to our construction projects increased about $15 million since our Investor Day in December 7. We also updated the timing of certain payments between 2012 and thereafter, resulting in a shift of approximately $25 million of anticipated cost from thereafter into 2012. Additionally, the amounts presented at Investor Day separately presented indirect project costs like capped interest from our estimates of construction cost to complete.

In our supplemental package, we added these indirect costs to our estimate of total construction cost to complete. And keep in mind, this update only impacted our projected spend in aggregate. In putting the numbers together, our estimates of stabilized yields for active redevelopment and development projects included indirect project cost and have not changed since our Investor Day presentation.

Lastly, let me cover our guidance for 2012. We updated FFO per share diluted to $4.50 and $4.54, no change since our previous guidance. Earnings per share diluted was updated to $1.73 to $1.77.

Our guidance included the following assumptions, all of which are highlighted on page 16. Same property NOI performance, cash, is expected to be up 3% to 5%; GAAP up 0% to 2%. Rental rate steps on lease renewals and re-leasing of space, cash, slightly negative to slightly positive; GAAP up 0 – up to 5%. Straight-line rents are averaging $6.5 million per quarter with amounts each quarter declining from the $9.6 million run rate in the fourth quarter of 2011.

The largest single property decline in straight-line rent from fourth quarter to the first quarter is related to the East Tower in New York. And that property generates about $1.2 million decline in straight-line rent, obviously with a corresponding increase in cash rents really related to the burn-off of free rent there on that project. FAS 141 amortization is projected to be about $800,000 per quarter. G&A expenses overall for 2012, compared to 2011, will be up about 5% to 8%. Capped interest is expected to be in a range between $54 million and $60 million and is dependent on timing of construction activities. And interest expense, net of capped interest, will range between $68 million and $75 million.

Again, due to the significant amount of rentable square feet under redevelopment and development that is leased – projected to be leased, placed in service and contributing to NOI and EBITDA by the fourth quarter of 2012, we have also provided a range of guidance for certain items for the fourth quarter.

Our guidance is as follows: NOI in the range of $111 million to $113 million, up from the $101.8 million as of the fourth quarter; G&A in the range of $10 million to $11 million; net interest cost in the range of $20.1 million to $23.1 million; aggregate FFO in the range of $71.7 million to $74.1 million; and an FFO per share diluted in the range of $1.16 to $1.20.

In closing, I just want to clearly remind everybody that our projected NOI is flat into the first quarter of 2012, a nominal increase into the second quarter and then into the third quarter as well, with most of the increase in NOI occurring in the fourth quarter of 2012.

With that, I’ll turn it back over to Joel.

Joel Marcus

Thanks, Dean. And operator, we’ll be happy to open up for Q&A.

Question-and-Answer Session

Operator

Sure, no problem. (Operator Instructions) Your first question comes from the line of Sheila McGrath from KBW. Please proceed.

Sheila McGrath – KBW

Yes, good afternoon. Joel, you did give a lot of detail on the markets, but I was wondering if you could characterize the demand picture, how you see it now versus a year ago and which markets you would categorize as strongest and which weakest.

Joel Marcus

Yeah, Sheila, will be happy to try to do that. So I think just kind of going around the country quickly, in Seattle and I – boy, a year ago is a little hard to remember, but I think the demand there has been I think quiet, it’s been selective, more focused on the institutional side and I think it has been a pretty busy time for tech there with Amazon leading the way. I would indicate that market is – they’ve held rental rates, but I would say demand is kind of average. In the San Francisco Bay Area, again a little hard to remember exactly a year ago, but I think Mission Bay we’re seeing more on the tech demand and institutional demand.

At this point, South San Francisco, we’re seeing more on the biotech demand. I think we’ve been pleased that although that market has been slower and more lethargic because of Roche’s really re-evaluation of the integration of Genentech, so previously Genentech was really growing like crazy, Roche has really rationalized that. They’ve moved a lot of people into their campus in South San Francisco, but we haven’t seen any real new requirements from them. But we’re seeing activity in biotech and cleantech and we’ve managed to capture most of those requirements. The Palo Alto area, we’re full. And Mountain View has been strong heavily in the tech area and also a number of life science.

Down in San Diego, I think we’ve indicated that market has really come back pretty dramatically over the last 12 months, not only due to the market itself, but I think the integration of the Veralliance team has really benefited us greatly, and they’ve executed in a marvelous fashion. We’re seeing requirements down there institutionally biotech, cleantech product and service companies, not so much pharma, and that market remains very strong for us.

Cambridge has been I think continually followed all year. No dramatic change. As I said, we’re tracking some pretty big tech and life science demands today and so that market has held well. New York, we’re full up there. We’re literally 100% occupied and talking to a number of folks for a potential West Tower kick-off as we look into the future, not sure what the timing of that might be at this point, but we’re having some very serious discussions.

I’d say Suburban D.C. that market has been challenging. I think with the cutback in the NIA or cut back I should say in the overall budget. NIH is flat for the year and that’s good. There’s no cut for this year. We still see less requirements obviously out of the government side. We just see a number of tenants really looking at current and future requirements, but nothing new dramatic entering that particular market.

And then I think Research Triangle Park, we’re seeing a number of small tenants, nothing dramatic there. So I’d say that market remains quiet, but promising on the institutional side. So if that’s helpful, that’s kind of a quick (inaudible).

Sheila McGrath – KBW

Yeah, that’s great. One other question for Dean, I guess. Same-store expenses in the quarter were pretty high and I was just wondering if you could give us more detail on what was driving that and your outlook for 2012?

Dean Shigenaga

Well, OpEx, I think has been up primarily from utilities and some winter-related matters, whether it was the storm on the East Coast or snow removal matters. Most of those costs because of our triple net nature of our portfolio are passed through to our tenants, so it’s recovered. Although OpEx may highlight in the same-store pool as fairly meaningful increase on year-over-year, those costs are borne by the tenants substantially. And that would be true for 2012. Hard to predict how summer or winter weather patterns impact utility cost, but again the same thing would occur. Any increase or decrease in those operating expenses are absorbed by our tenants.

Sheila McGrath – KBW

Okay. Thank you.

Dean Shigenaga

Thank you, Sheila.

Operator

Your next question comes from the line of Jay Habermann from Goldman Sachs. Please proceed.

Jay Habermann – Goldman Sachs

Good afternoon. Dean, maybe just starting with the occupancy and sort of the outline that you gave, you mentioned the decline going into the start of the year. Can you talk about the pickup? I guess should we assume that it recovers evenly throughout the year, or do you think this will be much more back-end weighted as you pick up occupancy?

Dean Shigenaga

I think you’ll see some occupancy improvement in those three submarkets going into the second quarter and that’s really between South San Francisco and Boston. Both of those markets, I think being substantially recovered as we get into the third quarter. Maryland just given the dynamic in the Maryland market being much quieter market than Cambridge as an example. I think that might take a little bit more time. But again, by the end of the year, overall, we expect to be relatively in the range of where we are, again, in the 94% to 95% range.

Joel Marcus

Yeah. And part of that’s driven, Jay, by – we’ve got two significant roles in the Maryland market coming up in the second quarter, one tenant that’s exiting and another tenant that we’re still unsure of, and then we’ve have got one roll in South San Francisco we’re working on. So, there are a number of rolls that have figured into how Dean has kind of given that guidance and kind of the flow from early in the year to late in the year. But, we’re pretty confident outside of the Maryland market that we will be able to either re-lease or backfill space pretty successfully. We certainly have done it over the past few years.

Dean Shigenaga

Yeah. And I think in my – our last call comments, last quarter also highlighted that in Boston, we have temporary downtime on some space that rolled and was re-leased. So it is subject to a lease today and that will be delivered in September I believe and it’s about 25,000 square feet.

Jay Habermann – Goldman Sachs

Okay. And maybe just following on that, in terms of your outlook for CapEx, can you talk about tenant improvement and leasing costs for the year? I mean clearly the rate for 2011 increased versus 2010, but help put into perspective I guess the fourth quarter run rate?

Dean Shigenaga

Yeah, I think if you look – I think you are referring to generally speaking page 23 of our supplemental, which highlights our leasing activity for the year. And on the renewals, we’re averaging just under $6 a foot both on TIs and leasing commissions and then closer to $13 on previously vacant space, whether that was inclusive of redevelopment or development. I would generally expect the dollars to remain in the range. And I think in our 10-K, we gave a pretty good summary of CapEx in TIs leasing cost related to the renewals and re-leasing the space and they generally over five-year average stay within a fairly narrow, fairly small bandwidth. I don’t expect 2012 to be meaningfully different from our historical averages.

Jay Habermann – Goldman Sachs

Okay. And maybe just to dig a bit deeper on 499 Illinois, you mentioned the activity and I guess the tech tenants there, do you expect this to be something you could announce in the first half of the year, I guess, in our tenants looking at the full space or is this just a portion of the space?

Joel Marcus

The answer to the first question is that would be our hope. We don’t know for sure, in this our initial tenant would be a three floor tenant. And then, potentially a follow-on would take up the rest of the buildings. So, we’re potentially looking at two tenants.

Jay Habermann – Goldman Sachs

Okay. Thank you.

Joel Marcus

Yeah, thanks J.

Operator

Your next question comes from the line of James Feldman from Bank of America. Please proceed.

Jamie Feldman – Bank of America

Great. Thank you. I was hoping you could talk a little bit more about what you’ve seen recently in terms of tech demand versus life sciences demand and how you guys are thinking about in your main markets maybe tipping the portfolio exposure more towards tech, given the demand prospects for that sector? And how you guys are just kind of thinking about it internally?

Joel Marcus

Yeah. That’s actually a pretty great question. I think that we are a life science niche focused REIT obviously. So we’re not trying to change what we are and who we are. But I think as you have significant projects in a number of markets, for example, the Binney Street development, we are looking at – I’m just looking right now there outside of lab there is over 1 million square feet of today demand for tech.

So, for us to look at in learning our return hurdles, how we might lease to a tech user if there is 1.1 million square feet of demand that’s real, and we are looking at that, how that might work from a rental rate that would obviously be somewhat lower than the lab rate, but at a tenant improvement allowance – infrastructure allowance that would be considerably less versus a lab tenant. I think we have to just look at it on a case-by-case basis.

We have no real desire to change the tenant base in the portfolio. I think as we look at 499 Illinois, we are mindful that with sales force taking down 2.1 million square feet there that has created a new kind of hotbed of tech tenant interest, south of market is pretty much on fire as you know certainly from other calls, I’m sure.

So, we just have to pay attention. Our goal is obviously to have a highest quality tenants with the strongest cash flow in place. And if at any given point in time, we’ve got a tenant that it makes sense then we are likely to consider that as opposed to just hold out for the right lab tenants. But I don’t think you see any big fundamental strategic shift, it really is a building-by-building basis. We’re in a kind of a tech bubble of sorts, I’m sure when the Facebook IPO comes to market, it will be even be even more poignant.

But these are as you remember many years ago from the Internet boom we saw, I remember when Speaker reported I think something like rates going from $1 or $2 to maybe as highest $10 or $12 bucks a foot and then a year or two later they collapse. So, we are mindful that that’s a pretty up and down market, but we’ll take advantage of it selectively in the best way we know how.

Jamie Feldman – Bank of America

Are you – I mean to your last point, my understanding is the biggest difference now, you’ve got companies that are cash flowing. I mean, do you really believe that we are getting close to a bubble in terms of the fundamentals and the economics of leases?

Joel Marcus

Well, I think from a valuation standpoint, I kind of believe that. We were talking this morning when you look at Facebook that maybe a 100 times earnings that probably when you compare that to Google or other companies that are out there, Apple and so forth, that have had stellar operating histories, it seems to strike, U.S. being a little bit unusual but that’s kind of the further of the unknown.

But I think again, our view is the tech is – the intersection of tech and pharma and bio is important, because these are all core knowledge markets. And I think we’ll remain in these markets and we’ll take advantage of that sector as best we can, but we’re not focused on diversifying into the tech sector as a major strategic change.

Jamie Feldman – Bank of America

And when you think about your most active tech markets, I mean is there a material delta between the kind of yield you can have based on where tech rents are and the kind of build-out you would need to do versus biotech, or life sciences?

Joel Marcus

Yeah. I mean I think it’s pretty fair to say that in Mission Bay and in Cambridge, those numbers penciled pretty favorably. We haven’t really been faced with it up in Seattle, nor in San Diego, nor in Maryland, or New York, or Research Triangle Park. But I’d say in the Bay Area and in Cambridge those are compelling opportunities. I remember when we did Google’s first campus, we had a redevelopment, a sale leaseback we did with FIOS-NOVA that ultimately got bought, but we bought their campus.

Google came in and paid us, this is back in 1997, 1998 kind of an obscene amount, because they wanted that campus in Mountain View that was our first foothold. They ended up getting all of the infrastructure, and it turned out to be great deal for them and for us. So again, we just have to be opportunistic and play our cards the best we can, but we’re not focused on creating a tech sector portfolio.

Jamie Feldman – Bank of America

Okay, thanks. And then just for Dean. I’m curious what – I noticed there was an increase in the straight-line rent assumption in the 2012 guidance, but the FFO outlook is flat from the prior guidance. I’m just curious what that was? And I apologize if you already said it.

Dean Shigenaga

It was – Jamie, I think you’re picking up on a change from $6 million to $6.5 million. It was really rounding more than anything. Nothing really drove the difference significantly.

Jamie Feldman – Bank of America

Okay. All right, thank you.

Joel Marcus

Yep. Thank you, Jamie.

Operator

Your next question comes from the line of Philip Martin from Morningstar. Please proceed.

Philip Martin – Morningstar

Good afternoon.

Joel Marcus

Hi there.

Philip Martin – Morningstar

I wanted to just talk a little bit about leasing terms. Has there been any meaningful changes in leasing terms given what appears to be still a rather challenging environment out there? Are you seeing any meaningful changes?

Joel Marcus

Well, I think what is striking is in a number of the build-to-suits or redevelopments that we’re working on, I think you’re seeing substantially long lease terms. We’re able to achieve 10, 15 and even 20 years, these are from bigger well-capitalized entities, whether they’d be big biotech, obviously pharma or institutional. I think some of the meat and potatoes leases that run from small-to-medium still are three, five, seven years. So that hasn’t substantially changed based on the size of the space and based on the size of the entity.

Philip Martin – Morningstar

Okay. And you’re not giving more – I mean you’re negotiating leverages still more or less the same as it was, before challenging times?

Joel Marcus

Well, I would say if we’re talking about 2006, 2007, I would say, no I think today is tougher. And I think occasionally there are landlords in the market that are willing to do things that we normally wouldn’t consider rational, so we have to be mindful of that. And – but I would say, although we had a spectacular quarter and really year from a leasing standpoint, it’s never easy and it’s always challenging. And I think boards of entities, whether they be big pharma, big biotech, institutional boards, smaller company boards are all mindful. We’re in a – we are still in a tough macro environment and people aren’t making dumb decisions. So, I think, we just have to be very, very careful, very competitive and focused. But we have on occasion decided if a tenant wanted a certain opportunity or wanted a certain situation and we just felt it wasn’t worth it or our underwriting of the tenant that’s happened recently didn’t justify economics that a tenant wanted, we just passed on the deal.

Philip Martin – Morningstar

Okay, okay. Okay.

Joel Marcus

But I say it’s tougher today than it was in 2007 for sure.

Philip Martin – Morningstar

Yeah. I mean it dovetails a bit to that CapEx question or your CapEx went up a bit. I know there were a tenant or two there from the dot-com era, et cetera, but just looking at trends generally and again, just trying to...

Joel Marcus

Yeah. It’s hard to know because, again a lot of bigger tenants tend to want to put their own capital in but it varies actually lease – it truly varies lease-by-lease.

Philip Martin – Morningstar

And lastly, how has the confidence among your tenants changed if at all even in the last six months, are you having any incremental discussions with tenants on more redevelopment or expansion opportunities? I mean, obviously from what you said in your opening remarks, it sounds like you have almost it’s a high-grade problem, more internal growth opportunities than you can almost handle?

Joel Marcus

Right. I think the difference is and Phillip, you know the sector well, let me just break it down by groups. In the pharma area, you have specific requirements, a specific requirement like Pfizer had coming out Groton or Pearl River and they’re looking for 250,000 square feet for that specific requirement. So, we see specific requirements in pharma generally moving a group or starting up a group into a clustered location. So, that’s a dynamic.

In the biotech sector, when you have a clinical milestone or a regulatory approval made, obviously the need to them take down whether it be additional space or shift what they may be doing becomes very milestone driven and so we’ve seen that. And then, in the smaller companies, it really is just milestone driven as they begin to grow up and their funding is tied to milestones whether it would be on the private side or the public side, we see those just develop again based on a milestone-related situation.

So, I don’t think that’s fundamentally changed in the institutional side. It usually is again a specific requirement funded by whether it would be bond funds or a particular gift. A deal we signed in the New York happened to be endowed and so when the endowment was made for the long-term that requirement then got generated and we were able to secure it. So, I think those things fundamentally haven’t changed so much, maybe the pharma situation has changed more over the past couple of years than anything else.

Philip Martin – Morningstar

How about from universities? Certainly this economy has caused a lot of groups to rethink strategies. Is Alexandria having – are you being approached by universities to help them manage a growth platform in biotech or life sciences or something similar?

Joel Marcus

Yes, unequivocally, yes.

Philip Martin – Morningstar

Okay, okay. Okay, I appreciate it. Thank you very much.

Joel Marcus

Yeah. No, thanks, Phil.

Operator

Your next question comes from the line of Ross Nussbaum from UBS. Please proceed.

Ross Nussbaum – UBS

Hi, good afternoon guys.

Joel Marcus

Hi, Ross.

Ross Nussbaum – UBS

Just a couple of questions here. First, in the supplement we appreciate all the new disclosure. On page 33, on the development – redevelopment schedule, you’ve got a sort of all the way to the bottom about $215 million worth of suburban and other redevelopment projects. But there is notably no stabilized yield listed there. Can you give us a sense of what’s the return on that capital?

Joel Marcus

Yeah. I think, Dean suggested that’s about 20% of the total I believe of the redevelopment and returns range. Generally, I’d say mid-single digit to high-single digit. That’s kind of where those are there a number of smaller projects, but that’s kind of typical.

Ross Nussbaum – UBS

Was there a specific reason that that was left all stable?

Joel Marcus

It’s just a lot of detail for a lot – we’re trying to kind of highlight the principle matters. And then, I think, over time, our view is we probably will be doing a lot less suburban work.

Ross Nussbaum – UBS

Okay. The other question I have is on the page before. And I know it’s minor, but with respect to India and China, the square footage from September down to December went down by 100,000 square feet. So that’s question one is why the square feet change? And then, number two, just can you give us a sense of what the $41.3 million that will take you to expect to invest in 2012 is going towards?

Dean Shigenaga

So the first question relates to just the transition of some of the basis into land. So, we completed what we needed to complete on that particular project. Broadly, the other question you asked about the $41 million to spend, that’s really on construction related to laboratory facilities in India. A little bit of the final interior improvements for China as well, but the majority of those dollars are focused in India.

Ross Nussbaum – UBS

And if I think about the $148 million plus because there’s still a TBD there that you’re investing in those two countries. What should we be thinking about for the returns on those because I don’t see those listed on page 3?

Dean Shigenaga

Yeah, I think I’ve said and I think over time as we get to some more critical mass, we will try to be pretty detailed about this. But I think our goal is in India. China remains to be seen. We don’t have a lot going on there at the moment in the sense we clearly aren’t doing any expansion. We really are test running a project. But I think in India, our goal is to try to achieve 500 basis point return over what we would achieve in the U.S. on a net after-tax basis. And that’s I think what I’ve pretty much said and I think it turns out to be pretty true.

Ross Nussbaum – UBS

So, that’s the anticipation on those current projects as well?

Dean Shigenaga

More or less, yes.

Ross Nussbaum – UBS

Thank you very much. I appreciate it.

Dean Shigenaga

Yes. Thanks, Ross.

Operator

Your next question comes from the line of Quentin Velleley from Citi. Please proceed.

Michael Bilerman – Citi

Yeah. It’s Michael Bilerman with Quentin. Yeah, I agree with Ross also, on page 33, I think to present a whole picture of your billing one of completed investment having the complete total return at the end would be helpful. I think Joel you said mid-single digits to high-single digits. Do you just have the weighted average stabilize cash and GAAP yield so that we know on 20% of the pipeline, most of the stuff is coming in late this year and early next year. What yield we should be using for that capital?

Joel Marcus

Yeah. We can probably give that. I don’t have that at hand, but we can probably give that to you.

Michael Bilerman – Citi

Okay. And then, thinking about sort of sources and uses of capital into – for this year, and this is in reference to the guidance that you provided, it’s on page...

Joel Marcus

16.

Michael Bilerman – Citi

16, correct. The thing about – I mean, your uses are pretty identified and rigid and I recognize you have full availability of that’s remaining in the line of credit to fund that. But if you think about this line item of $700 million for debt, equity and joint venture capital, obviously each of those has a different cost.

Each of those have different ramifications in terms of when it’s raised, how it’s raised, and so maybe just talk about how are you thinking about raising that $700 million both in terms of time but obviously debts very different than common equity, very different than preferred equity and joint venture capital of obviously effectively sale of interest and assets which would be very different. So what are you progressing down the road with to raise that money?

Joel Marcus

Well, a little bit will come off of our line, but I think our hopes, Michael, as we mentioned in our prepared comments is that the bond market has shown some significant improvement in 2012 and we’re optimistic that we have the opportunity to have our bond issuance sooner than later and that would allow us to fill a large chunk of that $700 million of incremental capital.

Michael Bilerman – Citi

So, you would view the unsecured bond in terms of say $500 million as a debut as part of that $700 million, if you were to execute it?

Dean Shigenaga

Yeah, I’m sorry. Yeah, I’m sorry, that was confusing. That would not be incremental to generate our total sources to – if you add – if you assumed it was $500 million, it wouldn’t be additive to the $899 million resulting in roughly $1.4 billion of sources. It would fill that $700 million requirement.

Michael Bilerman – Citi

But if I just take it for one step further, I mean, one of the things you talked about at Investor Day was buying back the preferred – the $140 million of preferred which obviously you have a very high coupon on them as a way to offset the dilution from doing the bond deal. So that would obviously chew up some capital. But if you were to swap out $500 million out of $700 million, you’re also not making a lot of goals towards your sort of reducing your floating rate. I know you have hedges in place, but eventually those will roll off. Part of the bond issuance was to elongate the maturity schedule and fix it, but you are spending $900 million of capital, so wouldn’t you need to raise some form of equity for that?

Dean Shigenaga

Actually to maybe clarify a little bit what will likely happen from a bond perspective, because we do have a specific use to retire our 2012 term loan. If a bond event was to occur before the maturity date of the bank term loan for $250 million, we would likely concurrently retire that $250 million term loan and part of that has to do with the legal structuring of that transaction where we need to – I think it’s the only bank agreement that has provisions that were not modified to release our borrowers.

And so, it was always contemplated that one of the key chunks of bank debt that would retired was the 2012 term loan. So part of the answer to your question, Michael is, yes. Some of the proceeds will be used to retire bank debt at a minimum the $250 million term loan. The remainder will obviously depend on the size of the transaction and how much incremental capital we have.

But ultimately we are going to work on retiring bank debt, replacing with longer-term fixed-rate debt over several years. I think it’s difficult for us to – it was much more difficult for us to sit here and think about this 60 days ago, probably relatively difficult for us to contemplate much on this 30 days ago. The recent short trends in the last four weeks in the bond market, for six weeks in the bond market have been pretty spectacular to say the least. So we’re a little more optimistic.

We are set on that transition, Michael. This is just the first start of it.

Michael Bilerman – Citi

Okay.

Joel Marcus

And I’d say, the other thing that factors in and we’ve said this without being particularly specific and I mentioned in my comments, we do are sitting on and you’ve been one of the proponents of this, a fair amount of non-income producing assets and we clearly are focused pretty laser like on the movement of some of that to aid in our funding of both the retirement of variable rate debt as well as the reinvestment in development and redevelopment. So that is likely to be an important part of this line item as well.

Michael Bilerman – Citi

Great. That’s helpful. Just sticking on this page in terms of the guidance, when you look at the fourth quarter, you’d also provided guidance at Investor Day for the line items listed here and it would appear that NOI came out about $1.7 million higher, but G&A was commensurately $1.7 million higher than the mid points of the ranges of guidance that you gave then. Can you just talk about what sort of drove the higher NOI? Was the timing of commencement higher? Was it something happened in the core? And also what happened with G&A at the end of the year?

Dean Shigenaga

Yeah, I think he was – really the contributions came in stronger as a result of, I think OpEx being inside of where we thought it was going to be, because I don’t think there was much change in top line. And we do have some OpEx numbers, as you know from our recovery ratios, that don’t necessarily move hand-in-hand with recoveries. And there’s about 15% of that. So I think we had a favorable non-recoverable component of our OpEx that dropped down. I would say, a little bit of the contribution at the rental income level, but nothing significant stood out in my review. So I think you had a little bit of contribution from all areas and it definitely wasn’t another income, because other income was down.

Joel Marcus

And then on the G&A, it was primarily the systems (inaudible).

Dean Shigenaga

Yeah. And most of the G&A stuff – a good chunk of that, I think is non-recurring. So we had unfortunately not anticipated some of the cost coming in.

Joel Marcus

Yeah, pretty big systems conversion as Dean mentioned on a number of particular areas of the operation of the business.

Quentin Velleley – Citi

Hi, it’s Quentin here, just going back to the sources of capital in guidance is $112 million of assets sales, would you mind to comment that you got to be more aggressive on asset disposition and Joel, you kind of alluded to this, but I’m curious sort of how many assets you’re looking at – what volume of assets you’re looking at marketing and what the split between land and actual income-producing assets might be?

Joel Marcus

Yeah. I think we have to tread carefully there, because we have to – we don’t have specific transactions at this point in time obviously teed up. But, as I said, we have – you look at the supplement, we’ve got 24% non-income producing assets to GAV. And so we’ve got a pool of assets on the non-income-producing side that we’re pretty laser focused on that we hope over, as the quarters unfold through the year, we can do some things with that would help us supplement the sources of capital.

And so that’s probably going to be one of the dominant factors and features. And we’ll keep you posted obviously over the coming months and quarters. So that’s pretty important. On the $112 million, Dean can give you the ratio of asset to just kind of our rough estimate of land income producing. I don’t recall exactly what that number is, but it’s probably maybe 50:50, 60:40.

Dean Shigenaga

It’s in that general range and I think we’ve got three assets I believe under contract in that number. They’re relatively small, but I think they aggregate somewhere just under $20 million in proceeds.

Quentin Velleley – Citi

Thank you.

Dean Shigenaga

Thanks guys.

Operator

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

John Stewart – Green Street Advisors

Thank you. Dean, hope you can help us understand, I mean, I fully take your points about the evolution in the state of the corporate bond market over the past 60 days, but given the improvement just to put it bluntly, why aren’t you just jumping through the window?

Joel Marcus

Well, maybe let me pre-empt, Dean, the answer is we have to report earnings and get things done. But I think the fair statement is, if you listen to Dean’s words carefully, he said sooner rather than later. So we’re very mindful of that, John and I would say stay tuned.

John Stewart – Green Street Advisors

Okay, that’s helpful. Thank you. And, Dean if I could come back to you, just you’ve alluded to the ramp up in NOI as projects come online throughout the year and also kind of gave us a sense that one through 3Q should be relatively flat, but so if you assume $100 million NOI run rate, what’s the step function in the fourth quarter?

Dean Shigenaga

As a percent of the incremental NOI, it’s probably somewhere close to 60% of it coming in in the fourth quarter versus 40% being spread over two and three.

John Stewart – Green Street Advisors

60% of – can you remind us what the number was?

Dean Shigenaga

(Inaudible) a little bit higher than 60%, but it’s in that 60% to 65% range.

John Stewart – Green Street Advisors

And what was the base and what’s the improvement?

Dean Shigenaga

I’m not following you, John. I’m sorry.

Joel Marcus

If you look at Page 16 John, NOI goes from the actual which is $102 million and then our projection for fourth quarter 2012 is $111 million, $113 million. So, it’s about probably $10 million of improvement.

John Stewart – Green Street Advisors

Got it. Thank you. And lastly, Joel could I ask you to just touch on the of course, I guess Illumina is out today rejecting Roche’s bid, but given the Genentech example that you cited in South San Francisco, could you touch on the potential for redundancy in San Diego and then just perhaps more broadly consolidation in the big pharma sector?

Joel Marcus

Yeah, that’s a good and timely question. I think, if you look at what Roche has said the – and what commentators have said, there has been a lot written recently both street commentators and then people from the industry believe that the Roche – if anybody would buy Illumina, the Roche and whether they stay independent or not, I don’t know, and that’s obviously for their board and shareholders to determine, but that the Roche integration might be the most seamless and the best with Roche’s Applied Science Group.

We have seen public pronouncements by Roche that they were going to move their headquarters of Roche’s Applied Science Group. I forgot it may be in Europe to San Diego build around Illumina as the flagship piece of its whole focus in the diagnostics and tools area. Obviously, this is a huge growth area given the personalized medicine and it gives them a – how they view moving whole genome sequencing as a routine clinical practices would give them a huge advantage. Roche is a huge leader in that area.

So we – if we believe what comes from Roche directly, this would not be a consolidation and some kind of a movement out of San Diego, would rather be a movement into San Diego and build around Illumina as kind of the flagship piece of their whole DX effort.

With respect to pharma M&A, I mean, all we can say is, it has gone on, I mean Wyeth and Pfizer being one notable part. Pharma has really kind of moved on from that world and there still may be more, but they’re really in the rationalization of their own R&D and the – really measuring the productivity and moving much more of their R&D to the touch points of innovation. I mean, that’s where they are today.

They get a lot of capital, cash on the balance sheet. Yeah, there are patent expirations. Yeah, there are a whole range of different issues that all the pharmas face, but fundamentally many of them and most of them have successfully transitioned to kind of the new model. And again, we’ve seen that in spades in the requirements that have come to New York, come to Cambridge, come to Mission Bay. So we’re pretty comfortable with the state of pharma affairs today.

John Stewart – Green Street Advisors

Okay. Thank you.

Dean Shigenaga

Yeah, thank you.

Operator

Your next question comes from the line of Jason Ren from Morningstar. Please proceed.

Jason Ren – Morningstar

Hi, thanks for taking my question. In the third quarter call, Dean you made a comment that Alexandria was committed not to raise equity at the price of the stock at that time, which I believe was around $66 or so. Since then, you guys raised – funded out the maturities, scheduled, raised lot of debt, but – and the stocks also moved up. And I just wanted to see whether you are sentiment on issuing equity at current levels would be similar to your sentiment that was expressed in the third quarter call?

Dean Shigenaga

Yeah. Well, I would say, I don’t want to get in the role of trying to handicap what we may or may not do on conference calls, but I would say we’ve really set out our strategy on the capital plan. And as we see it today, certainly now and here and where we are in time and space, equity – common equity capital is really not our priority at this point.

Getting to the bond market clearly is potentially at some point when the market is appropriate refinancing, but perpetual preferred obviously to the extent that we look at any other situation trying to match source with use. I think that’s kind of how we’re thinking about it, but we – we don’t – that at the moment is not a priority of ours. And obviously, probably the other top priority in addition to getting the bond market is really moving that non-income producing asset base down a few notches and thereby freeing up capital to both to pay down variable rate debt and to reinvest in what we’re doing. So I’d say those are the two dominant priorities at the moment, Jason.

Jason Ren – Morningstar

Okay, great. Thanks for taking my question.

Dean Shigenaga

Yeah, always a pleasure.

Operator

Ladies and gentlemen, there are no more questions in queue. I would now like to turn the conference over to Mr. Joel Marcus for any closing remarks.

Joel Marcus

Just want to thank everybody for their time today during earnings season. And look forward to talking to you likely early May on first quarter. Thanks again.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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