BioMed Realty Trust Inc. Q3 2007 Earnings Call Transcript

| About: BioMed Realty (BMR)

BioMed Realty Trust Inc. (NYSE:BMR)

Q3 2007 Earnings Call

November 8, 2007 1.00 pm ET

Executives

Jonathan Klassen - Vice President, Legal and Assistant Secretary

Alan Gold - Chairman, President and Chief Executive Officer

Kent Griffin - Chief Financial Officer

Matthew McDevitt - Regional Executive Vice President

Analysts

Paul Puryear - Raymond James

Ken Avalos - Raymond James

David Loeb - Robert W. Bair & Co, Inc.

John Guinee – Stifel, Nicolaus & Company, Inc.

David Cohen – Morgan Stanley

Jordan Sadler – Keybanc Capital Markets

Frank Greywitt - Keybanc Capital Markets

Omotayo Okusanya - UBS Securities

Christopher Pike - Merrill Lynch

Operator

Good day ladies and gentlemen and welcome to the BioMed Realty Trust Inc, Q3 2007 earnings conference call. My name is Michelle and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator instructions) As a reminder this conference is being recorded for replay purposes. I would no like to turn the presentation over to your host for today’s call Mr. John Klassen, Vice President, Legal. Please proceed.

John Klassen

Thank you Michelle and welcome everyone. On the call today are Alan Gold, Chief Executive Officer, Kent Griffin, Chief Financial Officer, and Matt McDevitt, Regional Executive Vice President.

Before we begin I would like to remind everyone of the Safe Harbor Statement included in yesterday’s press release. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements including statements made during the course of today’s conference call. Such forward-looking statements are based on the company’s current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by the company. Actual results may differ materially from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company and are subject to change based upon various factors. These risks and uncertainties include general risks affecting the real estate industry, risk associated with availability and terms of financing and the use of debt to fund acquisitions and risks associated with a failure to manage effectively the company’s growth and expansion into new markets or to integrate acquisitions and developments successfully.

For a more detailed discussion of some of the ongoing risks and uncertainties of the company’s business I refer you to the reports filed by the company with the Securities and Exchange Commission including the company’s most recent annual report on form 10-K and quarterly reports on form 10-Q. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

With that said I would now like to turn the call over to Alan Gold.

Alan Gold

Thank you John. Thank you all for joining us here today. Obviously we are very pleased today to report another strong quarter financial performance and update our shareholders on all our recent activities. As John mentioned, I’m joined here today by Kent Griffin our Chief Financial Officer and Matt McDevitt our Regional Executive Vice President.

Our plan is to walk through several of our many highlights for the quarter and then as is our routine we’ll open it up for Q&A. I’d like to first start with the life science industry. Now while the US economy and the financial markets are quite turbulent, the life science sector remains relatively on track. The long-term factors that affect the need for research and drug development remain in place and more importantly we continue to see strong fund flows into the sector. The AMEX biotech index for the third quarter was up 5.7% while the capital markets were somewhat in disarray, the life science sector was able to pull in $1.9 billion of VC funding with more than 170 transactions for the quarter.

Now this is somewhat down from the second quarter but still a very healthy number. Mergers and acquisition activity still remains quite high. There have been some high profile setbacks from some of the big pharmacompanies which again highlights their dependence on innovation and drug development coming out of the tier two and tier three companies that we target.

Now our tenants by and large continue to be well capitalized and we don’t have any concerns at this point nor do we have any tenants on our watch lists. We’ve had another very strong quarter on the leasing front with more than 290,000 square feet of gross leasing activity bringing our total since this call last year to more than 1 million square feet. Importantly we executed leases in every market in which we had available lab space including Seattle, San Francisco, San Diego, New York and Pennsylvania and this leasing momentum has continued into the fourth quarter. Since September 30th we have executed another 50,000 square feet of new leases for our construction projects, roughly 40,000 square feet of new leasing in our operating portfolio and 60,000 square feet of amendments and extensions or 150,000 square feet of total gross leasing transactions to date. Thus our total leasing activity since June 30th represents more than 440,000 square feet of gross leasing volume.

We executed leases with 21 different tenants including leases at our stabilized properties, our lease up properties, our redevelopment properties and our construction projects. But perhaps most important this total includes leasing in Boston, New York, Pennsylvania, Seattle, San Francisco and San Diego. That represents each one of our core markets with the exception of Maryland where our occupancy is already at 100%. The broad base of our leasing success really highlights the health of the life science industry and the excellent execution of our leasing team.

Now I’m going to turn the call over to Matt McDevitt, who has been a key part of our leasing and acquisition program, to walk through some of the specifics of our recent acquisition and leasing successes.

Matt McDevitt

Thanks Alan. First I’d like to start by highlighting the largest lease transaction during the quarter. It was at our Torreyana property in Torrey Pines submarket of San Diego which we acquired in March. You may recall that when we discussed this acquisition at closing the property was subject to a short term lease with Vertex pharmaceuticals which we believe enabled us to acquire the property comfortably below full market value.

Then in August we executed a five year lease extension for the full 81,000 square feet with the existing tenant and achieved better than a 20% mark-to-market increase over expiring rent on a cash basis. We’re pleased to have executed on this plan very quickly, in part the result of our strong tenant relationship. This transaction is indicative of our approach to creating value with each and every investment opportunity.

Now subsequent to the quarter end, in our operating portfolio, we signed a ten-year lease for 48,000 square feet with Senior Whole Health at our Charles Street property in East Cambridge. All of the leases at the property were scheduled to roll in 2008. However, Senior Whole Health which already leases close to 20,000 square feet stepped up to take the whole building with rent equating to roughly 20% markup over the expiring rent.

As for our development assets, at our landmark construction project we leased the remaining floor of our second building, representing an additional 36,000 square feet, to Regeneron Pharmaceuticals bringing total pre-leasing at that property to approximately 230,000 square feet or 64% of the project.

At our Fairview grand up development in the South Lake Union submarket in Seattle we leased the entire second floor, approximately 16,000 square feet, to a company called Nanostream Technologies. Nanostream was previously a subtenant of Cell Therapeutics at our 201 Elliot Property. Nanostream is a tier four biotech company focused on single molecular identification with application to gene expression analysis and molecular diagnostics.

Now onto acquisitions. On the acquisitions side we continue to be successful in seeking out and selectively acquiring high quality properties. We made two excellent additions to our portfolio this quarter. In August we acquired the Pacific Centre property for $16.5 million. This 67,000 square foot property is located in the Sorrento Valley submarket here in San Diego. It is now 100% leased to Artes Medical as their corporate headquarters. Artes is a tier three medical technology company that focuses on the development manufacturing and commercialization of an injectable aesthetic product for the dermatology and plastic surgery markets. This off market transaction is a great example of our value added investment program. In this case we tied the property up which was 100% leased to two tenants. While under contract we were able to negotiate a lead termination with one of the tenants and leave the balance of the space to Artes. At more than 50% markup in rents which is an additional $36 TI contribution.

The other transaction during the quarter was a 230,000 square foot Forbes Boulevard property in South San Francisco which we acquired for $32.5 million. This property is immediately adjacent to properties leased to Cell Genesys and Genentech and is fully leased as a warehouse building. We anticipate redeveloping this property over time and given our very low basis, approximately $137 per square foot we are pleased to have added this to our redevelopment pipeline in this extremely exciting core market which what is effectively an income producing inventory asset.

Moving on to the dispositions. On the disposition front you may recall that when we formed the joint venture with Prudential we identified three non-core properties that we held for sale. I’m happy to report that in the first full quarter after closing the acquisition we completed two of the three proposed non-core property dispositions well ahead of our initial plan.

In August we completed the sale of several of the non life science development pads and a portion of the [Shell] retail space in East Cambridge for $15.6 million. And just before the close of the quarter we completed the sale of the Science Park at Yale asset for approximately $14 million.

With that I’ll turn it back over to Alan to walk through some of the other highlights of the quarter.

Alan Gold

Thanks Matt. On our development and redevelopment programs, they continue to make great progress specifically on the construction side and on pre-leasing activity and the pre-leasing activity remains strong. Since June 30th we’ve signed three new leases at our construction and redevelopment assets, one at 217th Place in Seattle and one at Fairview in Seattle and one at The Landmark in New York. This brings our pre-leasing level across the company’s four construction projects to 72%.

We also completed the core and shell portion of the construction of the 301 Binney in the third quarter which is now the only Class A shell ready space of size immediately available in East Cambridge. We are exploring a number of prospective tenant prospects for this property and expect to fully lease the property in 2008. Based on our expectations and the continued strength of the leasing market in East Cambridge we and our partner Prudential have elected to move forward with construction of a 280,000 square foot Class A laboratory and office facility after 650 East Kendall site, commonly known as Kendall B. The property is very well located as it sits adjacent to two other properties in our Kendall square which are currently leased to Genzyme Corporation and Vertex Pharmaceuticals.

Now I’d like to focus in on the Pacific Research Centre. Now many of you I know would like to hear how things are going at PRC. And we think they are going very well although we have not yet announced any recent activity there but we are continuing to see very strong tenant interest. While the holidays are rapidly approaching we still believe that there’s a good chance that we’ll have our first lease signed by year end. There continues to be positive absorption in the San Francisco market. We ourselves executed three leases totally almost 70,000 square feet in the bay area during the quarter including a new lease at our Industrial Road property on the peninsular and a new lease and an extension at our Bridgeview property on the east side of the bay.

We are in active discussions with several prospective tenants for PRC, both life science and non life science. More importantly we’re attracting more than two million square feet of life science user requirements in addition to several million square feet of non life science demand in the greater bay area.

The San Francisco and Boston markets continue to show significant strength. With that I’d like to turn the call over to Kent who will walk you through our third quarter results.

Kent Griffin

Thanks Alan. As noted in yesterday’s press release, funds from operations for the quarter were $30.8 million up 2.8% from FFO of $30 million in the third quarter of 2006. On a per share basis the FFO was $0.45 per diluted share.

Rental revenues were $49.4 million relatively flat on a sequential basis generally as the effect of leasing and acquisition activities more than offset the effect of lease terminations and explorations.

Total revenues for the quarter were $64.8 million, up 1.6% from the $63.8 million of revenues in the year ago quarter for similar reasons. However, on a sequential basis, total revenues were down primarily as a result of the $2.9 million lease termination revenue included in other income in the second quarter.

Tenant recoveries declined versus the prior quarter primarily as a function of slightly lower reimbursable property operating expenses and a decrease in property taxes. These expenses declined in part as we moved the balance of PRC into redevelopment and the reduction in property taxes was partially related to a successful tax appeal at one of our properties.

On a net basis un-reimbursed operating expenses were flat at just under $2.8 million. Cash basis same property NOI for operating portfolio was a positive 4.2% owing largely to a 210 basis point uptake in occupancy.

Its worth noting that we’ve revised our same property presentation in our supplement in part based on some of the suggestions and requests from our analysts and investor constituents and where as our previous same property analysis included all properties that we owned for a full year, whether or not they were in service, we now present same property NOI for all properties in our operating portfolio effectively excluding the properties that are in redevelopment. For comparative purposes the same property cash NOI for the second quarter would have been a positive 2.6% had we presented it on the same basis.

G&A for the quarter was flat quarter-over-quarter at $5.3 million modestly below our expectations. On September 14th we declared dividends of $0.46 per share on our preferred stock and $0.31 per share on our common stock. The common dividend represented 68.9% and 75.6% of FFO and AFFO respectively.

Based on the third quarter results and our continuing success on the leasing front, as well as lower than originally anticipated financing costs and some deferred increases in G&A we have raised our FFO guidance for 2007 to the range of $1.89 to $1.91 per diluted share.

Also in our press release last night we provided our preliminary 2008 full year FFO guidance of $1.86 to $1.96 per diluted share, which at the mid-point would represent a 6.1% increase over the third quarter FFO run rate. There are of course a variety of assumptions that will ultimately affect our actual results and I’d like to cover those.

First I’d like to address what’s not in our assumptions and consistent with last year we have no acquisitions in our guidance. As we indicated last year this is by no means an indication that our acquisitions group did not continue to stay very active. As you can see we’ve already acquired more than already 650 million properties year to date for 2007.

Also, not in our guidance is the effect of any financing transactions, which I’ll discuss in a minute, we are quite comfortable with our current capital position.

Then, lastly our guidance does not include the effect of the proposed FASB staff position APB 14A, which would change the accounting for our exchangeable notes. As many of you know the exposure draft for me ends in the comment period and while many believe it is likely to become effective for 2008, until we have clarity as to the final effective date and specifics of implementation we will continue to exclude the effects of the proposal from our guidance.

Now first and foremost on the assumption side our leasing assumptions are as follows. In aggregate, our guidance presumes roughly 1.2 million square feet of new leasing from September 30th through the end of 2008. This includes roughly 250,000 square feet in our operating portfolio and just over a million square feet across our construction, repositioning, redeveloping properties, a little more than half of which relates to the Pacific Research Center. Compared again to our 457, 000 square feet of expirations for the balance of ‘07 to the end of ’08 this would imply in the neighborhood of 750,000 square feet of net absorption across the portfolio. Lastly we’re estimating a G&A run rate averaging a little more than $6 million per quarter over the year.

Now on to the portfolio, as of the end of the quarter the company owned or owned interest in 68 properties representing 8.5 million rentable square feet. The operating portfolio accounted for 55 properties representing approximately 6.6 million square feet and was 93.3% leased to 111 tenants. In addition we have 1.9 million square feet of repositioning and redevelopment and another 1.9 million square feet of construction and progress and then behind that we have a land bank that we believe can support the additional development of another 1.3 million square feet.

As of September 30 our leases had awaited average lease term of 8.1 years. As we look at the roll-over schedule for 2008 approximately 216 square feet of the total 431,000 square feet of 2008 expirations. These relate to the Elliot and Eccles Properties, which as we previously mentioned we do intend to redevelop. With the Charles Street leasing that Matt referenced we’ve already addressed another 48,000 square feet of the remaining 215,000 square feet of ’08 expirations.

The overall quality and caliber of our portfolio of our tenants remains very strong and consistent with prior periods. Geographically Boston remains our largest market representing 25% of annualized base rents. Seventy percent of our rents continue to come from tier two and tier three bio-techs consistent with our focus, while 20% of rents are coming from tier one companies with less than 2% of our revenues coming from tier four start ups. Lastly approximately 90% of our rents come from government entities, research institutions and public companies giving us excellent visibility into the stability of our income stream.

Now onto the balance stream in our liquidity. As we previously discussed, in August we omitted both our unsecured involved credit facility and our $250 million secured term loan. With respect to the secure term loan we extended the maturity from 2010 to August 2012 and lowered our credit spread by 60 basis points. At the same time we omitted our unsecured revolver, expanding the size of the facility from $500 - $600 million reducing our credit spread and extending the maturity to August 2011.

Also during the quarter we’ve entered into a series of interest rate swaps with an aggregate notional amount of $535 million. These swaps have the effect of fixing LIBOR for $385 million additional value, at 4.82% percent for one year and fixing LIBOR for $150 million in a notional value at 4.68% for four years. Through the combination of these transactions we have effectively borrowed for four years, interest only on an unsecured basis at an all-in rate of right around 6%. We are extremely pleased to have executed these transactions, these transactions very expeditiously and effectively in light of the credit tightening and volatility across the financial markets. We appreciate the continued support of our lending partners and we view this as another positive endorsement and further recognition of our track record for delivering excellent financial performance.

Our credit profile remains very strong as of September 30 our debt to total capitalization ratio was 43.1%, our fixed charge ratio for the quarter was 3.3 times and our FFO payout ratio was just below 70%. Including the affect of our interest rate swaps we’ve hedged our exposure to floating interest rate risk on 92% of our consolidated indebtedness. We have less than $50 million of mortgage maturities through the balance of 2007, 2008 and 2009 in total and the weighted average term of our debt is approximately six years before giving affect defect to various extension options.

As of September 30 we had $543 million of remaining availability between our construction facility and our unsecured credit facility. As you can see this provides us with more than sufficient financing already in place to fund the $400 - $450 million of total capital needs for the company’s current construction redevelopment programs. Our solid capital structure continues to provide us with a very cost effective cost of capital. Most importantly in this climate we are very pleased to be in a comfortable capital position with ample capacity to continue to execute on our investment program. With that I’d like to turn it back over to Alan.

Alan Gold

Thanks Kent. Now before I turn it over for questions I want to again thank our team across the country for all their hard and smart work. Their ability to execute on the company’s business plan and their continuing efforts as we continue to build what we believe is the premiere life science portfolio in the country. So, operator, let’s open the phone for any questions the audience might have.

Question-and-Answer Session

Operator

(Operator Instructions)

And your first question comes form the line of Paul Puryear of Raymond James, please proceed

Paul Puryear - Raymond James

Hey good morning guys. Alan, you might expect me start at PRC a big surprise I guess but our first question there is can you just talk some more about the potential leasing? I know at one point you were looking for large leases and you talked about looking for smaller to medium sized tenants. Sort of give us some color there and then life science versus just per office.

Alan Gold

Ok, we did make the change to open up the Pacific Research Center to the smaller sized tenants in the middle part of this year. We’ve had a very positive response. When you look at the different and the number of types of tenants we’re currently engaged with they range from the 40-50,000 size, square foot size range all the way up to the 400,000 size, square foot size range, and those are primary life science tenants. We continue to have a very positive response from the life science community about the ability to provide this high quality campus environment. The Stanford Research Park is only 10 to 12 minutes away and tenants are finding that this is just an excellent location to continue to be able to have access to have positions at the Stanford Research Park and access to high quality employment bases.

Paul Puryear - Raymond James

And Kent, in your assumptions for next year, how much of the leasing is PRC?

Kent Griffin

Just over half of the million square feet that would be related to the redevelopment and development programs. So just over 500,000 square feet.

Ken Avalos - Raymond James

Can you just talk a little bit more specifically about Boston and Cambridge, I guess I just want to get a sense for what’s going on around CLS, what the market rents are and then maybe talk about the market rents around the Kendal Square area also please.

Alan Gold

Well Boston continues to be one of the strongest life science markets in the country and the current vacancy for the market is in the 7% range. Absorption levels continue to trend to record levels. Within a historical context level between 500,000 and 700,000 square feet has been absorbed on an annual basis. And as we have the only available Class A product in the market we are very excited about the prospects for both the 301 Binney and the center for life science assets. You know Matt might perhaps you might want to talk about market rents that you’re seeing in the markets in those two areas.

Matt McDevitt

Sure Alan. Ken you know the market rents for CLS or again we offer them without any TI. We’re seeing them in the $70 to $80 per square foot range and moving on over to Cambridge we’re seeing rent in the $60 to $70 range with anywhere between $100 to $125 TI. And in general we’re experiencing great fundamentals in supply and demand there so we’re very, very happy in the position we’re in, in Boston and in East Cambridge.

Ken Avalos - Raymond James

Thanks for the commentary and just one last one, Kent, can you talk more specifically about the accounting treatment and the interest capitalization for PRC next year and how that flows through the assumptions.

Kent Griffin

Sure, we, as we talked about in the past, we will continue to capitalize our interest and our operating costs related to our projects that are either in construction or redevelopment through construction and so that hasn’t changed. So, I guess our assumption we are going to be continuing to be doing most of our construction we’ll probably complete by the second quarter of ’08, but we’ll continue to be doing some of the TI build out and fit out probably through the second quarter of ’09, which is when in our supplement now we revised a disclosure to probably more fairly indicate where we would expect the interest capitalization to probably conclude.

Ken Avalos, Raymond James

Great Thanks a lot guys.

Kent Griffin

Thanks Ken, thanks for not probing in all your Boston sports teams successes.

Operator

Your next question comes from the line of David Loeb of Robert W. Baird, please proceed.

David Loeb - Robert W. Bair & Co, Inc.

Can we talk about the Red Sox? Actually maybe you just answered this, but I noticed that on a number of the development parcels the estimated in-service date has shifted by a year is that really just a reflection to give us a better idea of when you’re going to stop capitalizing or is it because you think it’s going to take a year longer to get tenants in the spaces?

Matt McDevitt

No, it’s absolutely the former and we in our disclosure last quarter we tried to make it clear that the dates that we highlighted were the dates that we would expect to complete core and shell construction and that the lease-up would be longer than that based on the first when you sign leases but secondly, the completion of those TI build outs. And so the way we devised this disclosure is to give a better indication of when we would expect the property to be in service and therefore revenue recognition and so I don’t think any of our assets have slipped, this is all just a better clarity as to capitalization policies.

David Loeb - Robert W. Bair & Co, Inc.

So core and shell are done a year ahead of when you’re going to stop capitalizing on the vacant space, but when do the tenants actually start paying rent? Is that closer to that current in-service date?

Matt McDevitt

Well that’s all property specific because as you look at the schedule, a number of those properties they’re not pre-released yet so it’s dependant on what leases we ultimately sign.

David Loeb - Robert W. Bair & Co, Inc.

(inaudible) Boston for example in terms of the development prices that’s the biggest piece, that’s 80% leased, when do those tenants actually begin writing you rent checks?

Matt McDevitt

Each of the leases is a little bit different but by and large we’re expecting in the third quarter most of the, I think all of the four tenants will be paying rent by the third quarter of next year.

David Loeb - Robert W. Bair & Co, Inc.

Ok, so you’ll get revenue in the third quarter and the fourth quarter and the first quarter, but by some time in the first quarter you’ll stop capitalizing interest on the vacant space.

Matt McDevitt

You’re talking about the first quarter of ’09?

David Loeb - Robert W. Bair & Co, Inc.

Yes.

Matt McDevitt

Correct. That’s right

David Loeb - Robert W. Bair & Co, Inc.

Great. Thank you

Operator

Your next question comes from the line of John Guinee of Stifel Nicolaus, please proceed.

John Guinee – Stifel, Nicolaus & Company, Inc.

This maybe a correct or incorrect way to look at this, but following along on the same thought process, it looks to me like you're capitalizing interest at about $0.22 a quarter, $0.22 a share per quarter.

Kent Griffin

Well, I don't know that we look at it that way, but I'll trust that you've done the math correctly.

John Guinee – Stifel, Nicolaus & Company, Inc.

Yes, if you just take $14.7 million divided by 68 million shares. And so what ends up happening is you're capitalizing interest at about $0.88 a year per share. The flip side is that each occupancy point you gain is worth $0.03 or $0.04 a share. So if you go from 73% occupancy to mid-90s occupancy, you gain $0.60 to $0.80 a share in FFO, but at the same time you've got to stop capitalizing and you have to start expensing as much, if not more, in interest costs. Is that a fair way to look at this?

Kent Griffin

Well, no, in the sense that we don't expect the yields on any of our projects to be less than the rate at which we're capitalizing costs. I would look at it, I think a better way to look at it would be to take our total projected investment, so in the construction projects, for example, it's $690 million. Estimate what the yield is that we're going to get when those properties are leased and that's the revenue potential that will be delivered as those projects are delivered. The expense that we'll be then taking will be whatever our capitalized interest rate is, which is in the neighborhood of 6% if you look at our weighted average cost of debt, it's somewhere in the neighborhood of 6%.

John Guinee – Stifel, Nicolaus & Company, Inc.

Ok, fair enough. Thank you.

Operator

Your next question comes from the line of David Cohen of Morgan Stanley. Please proceed sir.

David Cohen – Morgan Stanley

Hey, just to follow-up on that center for life sciences. If you start recognizing revenue in third quarter of '08 for example, you also have to stop capitalizing the interest on that portion of the building, right? You made it sound, I guess it sounded a little bit from your prior comment that you would still be capitalizing while you're recognizing revenue, but you have to match that, is that correct?

Kent Griffin

You're exactly correct. So for the portion that is placed in service, we would begin expensing the interest associated with that portion of the building that we're recognizing rents. Absolutely.

David Cohen – Morgan Stanley

And on . . .

Kent Griffin

If you count the space that's on lease that we would continue to capitalize until we either, until it's either stabilized or until 12 months following the completion of core and shell.

David Cohen – Morgan Stanley

Okay, great. And on the Pacific Research Center, so you're expecting 500,000 square feet to be leased between now and third quarter of '08.

Kent Griffin

Between now and the end of '08.

David Cohen – Morgan Stanley

Between now and the end of '08. So, you had I think originally anticipated 300,000 somewhat square feet to be leased at the Pacific Research Center this year. So how does that play out in terms of, in your mind right now, in terms of the timing, is this more, you know, are you behind in terms of how much you think you would lease in '07 and a lot of this will be back end loaded?

Matt McDevitt

I mean I think that as we described in the last call that we thought that the 300,000 square feet was going to happen more at the end of year '07, beginning of '08 and then additional leasing would occur at the back end of '08. So, are we behind? I think we are behind from where we want to be, but the project continues to be very well received and there's a lot of activity going on there. So, you know, right now, right now it looks like we're behind but I think in the future it could look better.

David Cohen – Morgan Stanley

Ok. Could you just talk a little bit more about the acquisitions during the quarter and I guess just the environment in general. Are you seeing any more assets traded and what are you seeing in terms of the private market values?

Matt McDevitt

I think that we are seeing a lot of additional assets out there, still being traded and you know, although we are hoping that cap rates are going to move up a little bit, we're not actually seeing that. There still seems to be a lot of interest and in this product type from a variety of competitors, you know, we still believe that we're able to continue to find our off-market type transactions which we've been able to do since the beginning of our, of the IPO and all the way through this last quarter. And we'll continue to find those off-market value added opportunities. I think that there has been a tremendous amount of turmoil in the markets and we still, you know, are waiting to see how it all plays out ourselves.

David Cohen – Morgan Stanley

Ok, just a final question. It looks like you guys put the Johns Hopkins asset now into redevelopment. How does that work through from a GAAP perspective? Does that mean you're also, are you capitalizing those costs at this point, or is that still running through the income statement?

Alan Gold

John Hopkins, and actually the One Research as well, were two properties that we reclassified to redevelopment, to be consistent with the way we have been accounting for them, although we're actively working on leasing those properties, we wanted to sync up the disclosure with what was and is. There's been no change to the accounting on either of those properties.

David Cohen – Morgan Stanley

So, the original accounting was what? Run through it, or (inaudible)

Alan Gold

In both cases, those properties are in our redevelopment portfolios. So we are capitalizing
the interest and operating costs.

David Cohen – Morgan Stanley

But there's no change from the prior quarter?

Alan Gold

There's no change from the prior quarter, exactly.

David Cohen – Morgan Stanley

Okay, great. Thanks a lot.

Operator

(Operator Instructions)

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

Jordan Sadler – Keybanc Capital Markets

I just wanted to go through the Cambridge market a little bit. I know your commentary has been, and I think the progress that we've seen in that market, independent of your portfolio, has been very strong, except we're not seeing a ton of activity per se directly, or results directly in your portfolio. And I'm curious what the disconnect might be. Maybe you can flesh that out for us a little bit.

Alan Gold

Well, I mean I don't see the disconnect. I mean we had a fully leased portfolio. We've continued to, even take our portfolio and been able to extend term on assets that we have in the portfolio.

Kent Griffin

Just to clarify, you know, if you look back at our Boston portfolio, excluding what's under construction, was 97% leased last quarter. It's still 97% leased and we had, I think, some 40,000 sq. ft. rolling next year which we've since the quarter ended, we've signed a lease to cover that and extend that out another four years. So, the current portfolio is extremely well, I mean you can't really, you can't lease it much better than that.

Jordan Sadler – Keybanc Capital Markets

But obviously, you guys are doing a good job there. I'm more curious specifically about, you know, the Center for Life Science and 301 Binney and in about a week or so we'll hit a year date anniversary on your acquisition of the Center for Life Science and it's still 80% occupied and I think you're nearing completion of that asset. I'm just curious what the, maybe to get a little bit more insight into, you know, what the process is and what kind of activity you're seeing at that asset real time.

Alan Gold

Well, I mean I think that we are, and as Matt can attest to, we're seeing a tremendous amount of activity and tenant interest in that project. It is 80% free leased. Our business plan always was to restrict the, you know, the activity there to, the level of leasing until we got the project topped out and fully enclosed so that we could show to the market the true value of the top four floors which we have available.

And we're now able to, just now able to be able to take tenants up there and show them that, and the response has been phenomenal. You know, I think, you know it's not like we bought a completed project a year ago. We bought a project that was under construction a year ago. That had more than a year of construction to go. I think, I'm really very, very excited about it. I'm extremely, we're extremely excited about the Cambridge and Boston markets, so much so that we're going to, we've started another building in that market. The activity we've seen is very, very high.

Jordan Sadler – Keybanc Capital Markets

And I see that, and that's really the nature of my question. I see you guys are starting another asset and obviously there's real value there and that's why you're starting it. But I'm just curious, you're starting another asset on a speculative basis while you have a significant amount of speculative space available for lease. And I don't know what the trend is in that market from a demand perspective. I mean it sounds like it's very good, but is it accelerating, moderating or decelerating?

Matt McDevitt

You know again, I just reiterate the fundamentals there, the supply and demand are just tremendous. I mean, there is more demand than there is supply. You know, Cambridge basically is easier to track, 500,000 - 700,000 square feet of absorption a year. We had the only space available in East Cambridge. Along with medical, you know, a little harder to track with absorption, but we are the only product in the market. And we're very comfortable with the fundamentals in East Cambridge and along with the medical area.

Jordan Sadler – Keybanc Capital Markets

So, you basically, if you were to characterize, I guess your position there. Are you guys holding out a little bit, or do you have leases under negotiation. Are you kind of holding out for higher offers?

Alan Gold

We've been accused of asking for what I would call, characterize as very healthy rents. But I wouldn't say that we're holding out. We're very focused on getting the space leased as quickly as possible, but we're certainly not going to do it on other than the best economic terms that we can get.

Jordan Sadler – Keybanc Capital Markets

Ok and then maybe could you lay out some expectations then for us, as to when we should expect that leasing, when would [CFLS] be . . .

Matt McDevitt

As we said in our prepared remarks, we believe that the Binney asset will have substantial leasing in 2008 and we also believe that the Center for Life Science, Boston, will be along the same path in 2008.

Jordan Sadler – Keybanc Capital Markets

There's a lease up in '08?

Matt McDevitt

Yes.

Jordan Sadler – Keybanc Capital Markets

Ok.

Alan Gold

But, you know leasing as you know, your going to be [lumpy], so I think it probably implies a false degree of precision to try to tie it to specific quarters as to which leases are going to hit. But we're very comfortable with our aggregate leasing assumptions and we're very comfortable with our leasing assumptions in Boston especially.

Matt McDevitt

I think that's, you know, a very valid point. It is extremely [lumpy]. Our business plan has been focused on the mid tier type tenant, the larger sized tenants. We're talking about, you know, 50,000 square feet and 100,000 square feet type leases which take time to occur. We're not talking about the 5,000 square feet and 10,000 square feet leases that you can, you know you throw those out and get those done you know two or three a quarter, or a month. It's just not the path that we're going down.

Jordan Sadler – Keybanc Capital Markets

Ok, fair enough. And Kent, maybe just on your guidance assumption for next year's role. I know you went into it a little bit. What's the overall retention rate that you're anticipating on the 431,000 square feet if you had to sort of ball park it for us?

Kent Griffin

Well, it's a little bit difficult to make those statistics consistent with some other property types. And the reason I say that is you can see of the million square feet that we've executed in leasing transactions, you know the largest piece of that, I'm talking about since last year at this call. The largest piece of that has been renewals and extensions that we've typically executed several years for the actual expiration. So, you know of that 427 thousand square feet that's next year, you know, we know that specifically Eccles and Elliot. We have always since we bought those projects been planning to try and get those tenants, or allow those tenants to leave that we can commence the redevelopment. So I think you have to look at the aggregate grossly because that's the way we quoted it rather than specific renewal.

Jordan Sadler – Keybanc Capital Markets

So of the million square feet, what's the total expected leasing that is allotted to the existing portfolio that's rolling, maybe putting it that way.

Kent Griffin

Well, maybe I should say it a different way. You know we have about 450,000 square feet rolling next year. There's, I think it's around 216 that relates to the redevelopment properties at Elliot and Eccles. Excluding those two properties, we expect the operating portfolio to be roughly neutral.

Jordan Sadler – Keybanc Capital Markets

What kind of mark-to-market would we expect on that, on that piece?

Kent Griffin

You know we have always, you know, not been inclined to give a specific mark-to-market. You know we think 2% - 3% rent growth is, across the portfolio over the long term, is the right assumption. It's going to be very case specific and certainly the last couple of quarters we've had 30%+ rent (inaudible) on most of our new leasing but we would caution people to expect that every quarter.

Jordan Sadler – Keybanc Capital Markets

Ok, that's helpful. Thank you.

Operator

And your next question comes from the line of Frank Greywitt.

Frank Greywitt - Keybanc Capital Markets

Hey guys. Three questions. The first. The range of the cap rates on what you purchased, the acquisitions this quarter, what were the cap rates? Were they within the range that you've given out previously?

Matt McDevitt

Yes. Yes they are.

Frank Greywitt - Keybanc Capital Markets

You've talked about, you indicated that, I think, three reasons for the higher 2007 FFO guidance. You ran through those pretty quickly. Could you go over those again?

Matt McDevitt

Sure. I guess the first reason's really the leasing success that we've had, really cumulative for the year but more importantly what we've done in the third quarter and then the leases that we've done since September 30 have all had a positive impact. Our G&A has come in a little bit below where we expected to some of the G&A increases we expected to happen later in the year, look like they'll happen more in 2008. We did have some property tax savings, as I mentioned. And then our financing cost. The effect of the interest rate watch was certainly helpful in terms of what we were expecting for the balance of the year.

Frank Greywitt - Keybanc Capital Markets

Great. My last question is with regards to the capitalization policy. Have you changed a little bit your thought process and what the capitalization interest policy was going to be in regard of the PRC or the Center for Life Sciences? Has it been consistent this quarter compared to what you have given for guidance from prior quarters?

Alan Gold

Well our capitalization policy hasn't changed and we don't anticipate that it will change. The big variable is when do we fully complete PRC. And while we do think that the majority of the work, the bulk work, will be done on the core and shell side, there will still be TI work to do and continued efforts and so as a result, we do think that the capitalization will probably extend longer than we may have thought a few quarters ago.

Frank Greywitt - Keybanc Capital Markets

Thanks a lot guys.

Operator

You're next question comes from the Line of Omotayo Okusanya. Please proceed.

Omotayo Okusanya - UBS Securities

Yes, good afternoon. Could you please give some insight with regards to some of your other key markets, what's going on with regards to demand and supplies, specifically San Diego, Maryland, and New York, New Jersey?

Matt McDevitt

Well the Maryland market we're 100% lease down, although we still believe that Maryland market is still quite stocked with a lot of excess capacity there, and some additional excess capacity coming on line. But as we described, we're 100% leased in that market and are very comfortable in our position there.

In San Diego, now while vacancy in the market has continued to compress from a high of about 20% to the high single digits near term deliveries of additional large blocks of space, both planned and existing have kept this vacancy higher. We are currently tracking lab demand of about 550,000 square feet in that market with a majority of the requirements under 25,000 square feet in size. Because of the nature of these requirements was the reason we began seeking multi tenant availability two years ago. We've had positive activity on our existing availability in the market. What were the other markets you were asking? San Diego?

Omotayo Okusanya - UBS Securities

New York, New Jersey.

Matt McDevitt

New York, New Jersey, the New York market is a market where the recent demand has out paced our projections, that's for sure. And like wise in Pennsylvania. We have continued to see activity in the more start up type phase. But the activity still remains below what we are seeing in Cambridge and San Francisco and Seattle markets.

Omotayo Okusanya - UBS Securities

That's very helpful. Thank you.

Operator

And your next question comes from the line of Christopher Pike of Merrill Lynch. Please proceed.

Christopher Pike - Merrill Lynch

Good morning, still I guess. Matt or Alan, back to the question on rents in Boston, Matt did you say $80 a square?

Matt McDevitt

In Longwood Medical I did.

Christopher Pike - Merrill Lynch

Ok.

Matt McDevitt

Wait, that's our range, we gave the range.

Christopher Pike - Merrill Lynch

I just want to be sure. That is for life science shell type product. That's not for typical office in and around Longwood?

Matt McDevitt

That's correct.

Christopher Pike - Merrill Lynch

Ok, so what kind of premium would you ascribe you know, I'm not looking for a point estimate, I'm just looking for direction, between life science type shell versus typical office shell in and around the Boston market?

Matt McDevitt

You know, I don't know that we…we really don't have office shell in the Boston market,

Christopher Pike - Merrill Lynch

Or just office product and lets say life science product, from your understanding what's happening in the market, is there a 10% premium for life science, is there a 5% premium? I'm just looking for some direction.

Matt McDevitt

I don't know if we could accurately give you one Chris, you know perhaps we could do some research and get back to you offline on that.

Christopher Pike - Merrill Lynch

Ok, great. Thanks a lot guys

Operator

(Operator Instructions)

And your next question is a follow up from the line of David Cohen. Please proceed.

David S. Cohen - Morgan Stanley

Just a quick question on the leasing schedule. You had 656,000 square feet expiring. I’m assuming a lot of that was from the Pacific Research Center. Is that apples to apples when I look at the rents spreads from the renewals versus the expirations, and if not what would that have been?

Alan Gold

That's a great question and you're right, roughly 420,000 square feet of that related to the Pacific Research Center. And the leasing spreads, first of all you can't compare this quarter’s expirations to new leases because it’s not always the same space. We try to go back and look at it on the same space basis. Even that's challenging because a lot of the space we have leased is space that is new, in the sense that it's always been vacant and is being leased for the first time. So, the stats are pretty good, you know, on the new leases its up 30% and on the renewals it's up 15%. But they are on, I would say, pretty small data sets. I guess on the renewals it's consistent, so that’s for the whole portfolio, but on the new it’s less then probably a third of the new leases are really part of that data set. So again, I would caution you to ascribe that to every lease we're gonna execute.

David S. Cohen - Morgan Stanley

All right, thank you.

Operator

And gentlemen, that does conclude the question and answer session. I will now turn it back to management for closing remarks.

Alan Gold

Once again we would like to thank you all for participating today and we'll see you next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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