Executives
Jon Klassen – VP of Legal
Alan Gold – CEO
Matt McDevitt – EVP of Acquisitions and Leasing
Kent Griffin – CFO
Analysts
Paul Puryear – Raymond James
Chris Haley – Wachovia Securities
Jordan Sadler – KeyBanc Capital Markets
Tayo Okusanya – UBS
John Guinee – Stifel Nicolaus
Dave Rodgers – RBC Capital Markets
BioMed Realty Trust, Inc. (BMR) Q1 2008 Earnings Call Transcript May 1, 2008 1:00 PM ET
Operator
Good day ladies and gentlemen, and welcome to the first quarter 2008 BioMed Realty Trust, Inc. earnings conference call. My name is Amanda, and I will be your coordinator for today. (Operator instructions) I will now like to turn the presentation over to your host for today's call, Mr. Jon Klassen, the Vice President of Legal. Please proceed, sir.
Jon Klassen
Thank you Amanda, and welcome everyone. On the call today are Alan Gold, Chief Executive Officer; Kent Griffin, Chief Financial Officer; and Matt McDevitt , Executive Vice President, Acquisitions and Leasing. 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, and actual results may differ materially from those projected in the forward-looking statement. 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, risks associated with the availability in terms of financing and the use of debt to fund acquisitions and development and risks associated with the failure to manage effectively the company's growth and expansion into new markets or to integrate acquisitions and development 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 SEC, 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
Yes, thanks John. And thank you all for joining us here today. Obviously, we are very pleased to report to our shareholders another quarter of consistent operating results and strong execution across all parts of our business. Now on our last conference call, we spent considerable time going through the many highlights for 2007, and walking through our top 10 tenants. And we also spent a lot of time reviewing our capital position. And while it was important for us to do so at year-end, we will be a bit more brief in this first quarter call. After we discuss the quarter results, we will open it up for Q & A. And in short, the first quarter was very solid as our team continues to execute, deliver, and we are tracking right on plan.
Now first, I'd like to provide an update on our view of the life science industry. Now while we are – we are very much in tune to the state of the current credit markets and also very cautious about the outlook for the overall economy, the fundamental long-term factors that drive demand for life science research remain unchanged. Despite the volatile financial markets, biotech companies are continuing their research programs, targeting commercialization of a wide variety of treatments and therapies. In the public markets, results for the sector were mixed. While big pharm is down roughly 10% so far this year, the various biotech industries are generally flat-to -down modestly, more in line with the Dow or the S&P 500. The IPL [ph] environment has been considerably softer. I think, I believe only one biotech went public during the quarter, but there were a number of follow-on offerings during the first quarter, including the concurrent equity and convertible notes offering from our tenant Vertex which raised over $400 million.
On venture capital funding, venture capital funding in the first quarter was a solid $7.1 billion, generally consistent with where it has been in recent quarters but down some from the tremendous level of $7.8 billion raised in the fourth quarter of 2007. Importantly, VC funding for life science companies held firm from the fourth quarter levels and continues to dominate the landscape with $2.3 billion raised, more than 30% of all VC funding for the quarter. More importantly, partnering transactions continue to be an important source of capital for the sector. And in fact, perhaps the largest partnership transaction for the quarter was between two of our tenants, Genzyme Corp. and Isis Pharmaceuticals. These two formed a strategic alliance for Isis lipid-lowering treatment, which provided Isis Pharmaceuticals with $325 million in upfront stock purchase and licensing fees with development and regulatory milestone payments that could total or reach more than $1.1 billion (inaudible).
We congratulate both Genzyme and Isis for this exciting venture. This partnership highlights a point that we have made many times. The innovation and research of our tier two and tier three tenants is critical to the success of big pharma and big biotech, and really to the future of the life sciences industry as a whole. And as a result of the continued strength of the life science industry we continued to see sustained tenant interest in each of our core markets, which is a good point to segue over to Matt to talk about the continuing success we are having on the leasing front. Matt?
Matt McDevitt
Thanks John. Well, we are very pleased to see that the momentum we felt coming out of 2007, continued into 2008. In the first quarter, we executed nine transactions, totaling over 126,000 square feet of gross lease and volume. The most notable transaction of the quarter was our lease to Revance Therapeutics for 90,000 square feet at the Pacific Research Center. Revance is a growing drug delivery company focused on aesthetic medicine, and we are excited to have them join as our first life science tenant at PRC. This is a nice follow-up to our lease with RMS which we executed in Q4. And as you may recall, that lease validated the appeal of the campus to non-life science tenants, in that part of our underwriting.
This lease proves out our underwriting for the demands for life science space, and really demonstrates the broader appeal of the campus as Revance made the decision to relocate from a competing property in the Mountain View submarket to the life science cluster in Fremont, Newark. And as I hope most of you saw, last night, we are able to announce our third lease at PRC. The tenant DayStar Technologies is focused on the development, manufacturing, and marketing of photovoltaic products based on CIGS thin film semiconductor technology. They will be taking 140,000 square feet in building one, our manufacturing building. Over the past four months, our team has executed leases in three different labs, office R & D and manufacturing users, representing more than 330,000 square feet of leasing transactions, putting us well on our way towards achieving our goal of 500,000 square feet at PRC by the end of 2008.
Looking at our aggregate leasing objectives, since the third quarter, when we gave our 2008 guidance, we have now executed on more than 550,000 square feet of new leases, putting us on track towards meeting our aggregate leasing goal of 1.2 million square feet by year-end.
Now, on to the acquisition side. In general, the acquisition environment remains quiet. But we continue to see and evaluate a variety of interesting opportunities, and we are optimistic that with some patience, we could see some compelling opportunities down the road. We did make one small-scale investment in the quarter, where we invested approximately $4 million in a property adjacent to our 530 Fairview construction project. This 22,000 square foot property at 500 Fairview is currently 100% leased to the state of Washington through 2012. After which, we intend to demolish the existing structure and build a new 96,000 square foot laboratory facility.
The transaction is very similar to the Forbes Boulevard acquisition in South San Francisco that we executed last year, wherein we effectively acquired an income producing inventory for a development and redevelopment pipeline. The investment, albeit modest, certainly adds to our strong position in the very important South Lake Union market. And with that I'll turn it back over to Alan to walk over some other highlights of the quarter. Alan?
Alan Gold
Thanks, Matt. Our team continues to execute with great progress in our development and re-development programs. We have delivered two properties out of our redevelopment pipeline during the quarter. Our corporate headquarters here at Bernardo Center Drive in San Diego, which we are very happy to call our new home, and our Ardentech Court property in Fremont/Newark submarket of San Francisco which is also 100% leased. Now as expected we did add the Eccles Avenue property to our re-development pool. This is a long-term project up in the South San Francisco area that we expect will be more akin to a ground up construction once it's all said and done. We also contributed most, but not quite all of the remainder of the Elliot Avenue property in Seattle to the re-development pool.
We have one tenant there, a nanostring [ph], that will be moving out and into our 530 Fairview building when it is complete. On the development front, Town Center Drive, Landmark at Eastview, and 530 Fairview are progressing well with no significant changes since our last call a couple of months ago. The highlight of the quarter was really the Center for Life Science Boston. I'm very pleased to report that at the end of the first quarter we completed the core and shell work at the Center for Life Science Boston and received our temporary certificate of occupancy. This is really a tremendous milestone, not just for the project but also for BioMed. We have, of course, completed core and shell work on many projects before, but no previous life science project compares in this size and scope to the Center for Life Science Boston. The complexity of the center in addition to the fact that we took over shortly after construction had commenced really makes our success here that much more rewarding. It is a tremendous property and we believe will be a significant contributor to the research and development and discovery efforts of the Harvard medical community, for many decades to come.
I do want to thank our team, not just our development group at BioMed, but also William A. Berry, our general contractor; Tsoi/Kobus, our architect; and the literally hundreds of people that have been working to make this vision become a reality. Now with all that said there is still work to do, and we are now working very closely with our tenants to assist them in completing their tenant improvement work which will enable them to occupy the space and start their research at the center. We believe they will all be in position to take occupancy by the third quarter as we had previously discussed. And with that I'm going to turn the call over to Kent who will walk through our first quarter financial results. Kent?
Kent Griffin
Thanks Alan. As noted in yesterday's press release, FFO for the quarter was $31.3 million or $0.46 cents per diluted share. Despite the anticipated lease expirations at Elliot and Eccles, rental revenues for the quarter were $50.3 million, eclipsing the $50 million mark for a quarter for the first time. This represents a 1.4% increase over the prior quarter, and a 5.9% increase year over year. The year-over-year results increase were largely a function of acquisitions and additional leasing activity, partially offset by the anticipated lease expirations for our re-development pipeline.
Property operating expenses were up 21% sequentially, largely a function of the one-time adjustments in the fourth quarter that we discussed in our last call as well as some seasonally higher utility and maintenance costs. The increase in property operating expenses was largely offset by a similar increase in tenant recoveries, which were up 15% sequentially. As a consequence, our operating expense recovery ratio for the quarter was 86.7%, right in line with our expectations. G&A for the quarter was $6.2 million, also in line with our expectations, and same property results were strong again with cash NOI up 4.9%, supported by a nominal uptick in occupancy along with positive re-leasing spreads and higher operating expense recovery rates over the course of the year.
As previously disclosed, on March 14 our Board of Directors declared a common stock dividend of $0.335, representing an 8.1% increase, and our payout ratio is now 73.3% on an FFO basis and 84.6% on an AFFO basis. Now as a result of the recent equity offering which I'll discuss in a minute, we revised our 2008 FFO guidance. As noted in last night's press release, our FFO guidance for the year is now $1.83 to $1.91 per diluted share, which compares to our previous range of $1.86 to $1.96 per diluted share. This revised range reflects the dilution associated with the equity offering of roughly $0.04 cents and narrowing the range by $0.01 on both the top and bottom ends of the range. Now on to the portfolio. As of the end of the quarter, the company owned interest in 69 properties representing over $10.4 million rentable square feet.
Our operating portfolio accounted for 57 properties representing 6.6 million square feet and was 93.2% leased to 113 tenants. We have 1.9 million square feet in repositioning and redevelopment and another 1.9 million square feet of construction in progress. And behind that, we have a land bank that we believe can support the additional development of another 1.4 million square feet. As of March 31, our leases had a weighted average lease term of 9.3 years. And looking forward at our rollover schedule, we have only 85,000 square feet rolling for the balance of '08, which represents just over 1% of our leased square footage. The overall quality and caliber of our portfolio and our tenancy remains very strong and consistent with prior periods.
Geographically, Boston remains our largest market, representing 40% of annualized base rents. Consistent with our strategy, we continue to generate a majority of our rents, in fact 61% of our rents coming from tier 2 and tier 3 biotechs. Roughly 31% of rents are coming from tier 1 companies, and less than 3% of our rents come from tier 4 startups. And lastly, approximately 87% of our rents come from government entities, research institutions, and public companies, getting us excellent visibility into our income stream.
Now on to the balance sheet. During the quarter, there were not a lot of significant events, the most significant events really related to the joint venture. We obtained construction financing for the 650 East Kendall project, which we discussed in our last call, and we also extended the existing joint venture loan facility, which we also discussed on our last call. Now subsequent to the quarter end, we executed a common stock offering led by Raymond James, Morgan Stanley, and Wachovia where we issued just over 6.1 million shares of common stock at $25.50 per share, resulting in gross proceeds of approximately $156 million. We utilized the net proceeds to pay down a portion of the outstanding balance on a revolving credit facility. We are very pleased to have successfully completed and upsized the offering giving us greater financial flexibility as we execute our plan.
Now the decision to raise equity in a choppy market was not an easy one, particularly given that we did not need the capital immediately. But there were several factors that led us to the determination that raising common equity was in the best interest of the company and of our share holders. First, the general credit markets remain dysfunctional, particularly with respect to commercial real estate, and there is still no visibility as to when or really how that might stabilize. Accordingly, many forms of credit are not available or if they are available they are available at expensive levels that are not attractive. While the equity markets have not been very appealing on an absolute basis, on a relative basis it is perhaps less unattractive than other forms of capital at the present time.
Second, our commitment to a conservative capital structure has been a key guiding principle since we went public. I think we made this statement probably on every conference call we have done, and our ability to stay true to this strategy, even when the steps to doing so are painful or difficult have served us well in the past and are serving us very well today. And finally and perhaps most importantly, with most of our existing capacity earmarked for our development and re-development pipeline, we believe that additional equity capital provides us with a very firm foundation to pursue attractive investment opportunities that we believe are likely to prevent themselves as this liquidity conundrum continues. So at the end of the quarter, pro forma for the offering our debt to total capitalization ratio was 39.9%.
On a pro forma basis supplying the $150 million of net offering proceeds against our unsecured credit facility balance, we would have an adjusted line balance of approximately $160 million. When compared with our construction facility – when combined with our construction facility we have over $530 million of capacity compared to an estimated cost to complete of roughly $360 million for all of our development and re-development projects combined. And with just $20 million in debt maturities for the balance of the year, our liquidity position remains very comfortable. Again, we are fortunate to have a comfortable capital position, and we want to express our thanks and appreciation to all of our lenders and our investors for their support in our continued success.
And lastly, before I turn it back over to Alan, one quick note, we have improved our disclosure in the supplement to incorporate additional leasing data related to our construction projects, in a manner that's consistent with what we have historically disclosed for our operating portfolio and re-development projects. And so I would encourage our listeners to review those schedules. Thanks, Alan.
Alan Gold
Thank you. All right. And before I turn it over for questions, I want to again thank our team across the country for all their hard, smart work 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 up for any questions the audience might have.
Question-and-Answer Session
Operator
(Operator instructions) Your first question comes from the line of Paul Puryear with Raymond James. Please proceed, sir.
Paul Puryear – Raymond James
Hey, good morning, guys.
Kent Griffin
Good morning, Paul.
Alan Gold
Good morning, Paul.
Paul Puryear – Raymond James
Say, Alan, I take it from your introductory comments that the life science funding in the public market has been impacted somewhat. But not so for VC funding is that accurate? And I guess, as part of that answer, at what point would the economy affect VC funding? Or do you think it will, maybe to the extent that it did in 2001?
Alan Gold
Yes. Well, I think that the public funding for follow on offerings has been pretty consistent over the last year or so. The IPO window has been relatively closed for several quarters for the life science sector. And really that hasn't really changed in – for a long period of time. So, I think that we are seeing a very consistent market out there. And what we did acknowledge is that, the VC funding did – was lower than it was in the fourth quarter, but still relatively healthy. And I don't think that the credit crisis that is out there, is really what would affect VC funding. I think that when VCs don't see the ability for an exit strategy and there are tremendous exit strategies now not only with the tremendous mergers and acquisitions but also the partnering transactions that are occurring, that keeps their interest and shows them where they can increase their value or make returns for their VC investments. So I think that's really the key. And I think we continue to believe that that will continue to be available to the life science industry given the lack of pipeline, drug pipeline, many of the big pharmas have, and the expiring blockbuster drugs that are occurring over the next couple of years.
Paul Puryear – Raymond James
Thanks. That helps. And then one more question in Seattle, is the leasing living up to your expectation? And will the Fairview building be 100% leased? I take it that you are going to transfer a tenant there from another building?
Matt McDevitt
The leasing expectation – the activity we are seeing there is living up to our expectations, it is a relatively small market and we have been able to capture a lot of activity there at Fairview. Fairview is not expected to deliver until the second quarter, and we have already leased one floor. We have additional activity there. We don't believe at this time or at this point that we have said that we are going to be 100% leased at completion of the shell and core. But we do believe, we'll achieve stabilization in the – I think the second quarter of '09, as the project comes out of the development pipeline. We are still very positive on the Seattle life science market. We still believe that there is – we still see demand in the market in the 200,000 to 300,000 square feet of activity, but with very little new supply coming on the market.
Paul Puryear – Raymond James
Okay. Thanks.
Alan Gold
Thanks Paul.
Operator
Your next question comes from the line of Chris Haley with Wachovia, please proceed.
Chris Haley – Wachovia Securities
Yes, hi.
Matt McDevitt
Hi, Chris.
Chris Haley – Wachovia Securities
Thanks for taking my question. On the – I do actually have a question on one of the markets, Boston particularly. There have been some comments from some of the office landlords how tight the market is, yet our conversations with locals suggest that there hasn't been much leasing activity at all in the life science side, and there is a fair amount of product coming on. One of the – I know you provided comments on your tenants last quarter, which was very, very helpful. Could you give us your sense on the Boston market and what might be holding back some of the tenants that are in the market?
Matt McDevitt
I don't know really what other than perhaps the general malaise that the greater economy might be putting on to the tenants and the CEOs making decisions for leasing activity. That may be the main reason. What we are seeing is that we have seen is that there is a lot of activity a lot of tire kicking out there for life science product, which is different than the office market, because as you described it, there is a lot of office product coming online. But that's not the case for life science product. So, we've seen a lot of tire kicking. We haven't seen the commitments in anybody's space, let alone unfortunately in our space. But we do believe that the market is very tight, and that these companies are in the growth mode, and when they grow, there is – there are very few opportunities, and the only high quality opportunities that exist are our assets in those specific markets, in the Longwood Medical Area and in the Cambridge market. So I guess that we are very positive about the activity that we see out there, and we would certainly like to have seen a lease done by now. But as I say, we haven't seen leases done in any other location and they really can't because we have the only real available space.
Chris Haley – Wachovia Securities
Thank you. To follow up on Matt's comments on the leases at PRC, congratulations, and could you give us a sense as to where those – the economics of some of those deals? Whether it be where the net rents might be, the concessions might be, capital concessions might be, in relation to where you had started your expectations?
Alan Gold
Yes, I guess I can answer that. We have – I guess we’re not going to discuss individual lease terms, but I guess we can –
Matt McDevitt
You have to remember we do have confidentiality agreements.
Chris Haley – Wachovia Securities
Yes, I understand. My apologies if I—look, we would love the actual numbers, but I understand that but –
Alan Gold
But we can answer, I think we can say comfortably that, I think we can say that the leases that we've done today from the three leases that we have executed, meet our underwriting and our expectations for what we were trying to achieve from an economic perspective. And I guess we can go – we can also talk about what the – what we think market rents are in that Fremont/Newark submarkets.
Matt McDevitt
Right. Yes, I think we have been very clear that market rents for the office range in that $15 to $21 a square foot for office type rents and from the $30 to $33 for the laboratory type space, and for manufacturing space, range anywhere from $6 to $10 a foot. And, and which is where we underwritten the project when we acquired it, given the fact that we bought the project at such a low basis, give us the ability to achieve a very attractive returns, with those type of market rents.
Alan Gold
And I think we are – we believe we are on track, assuming we lease the rest of the project on the same economics that we've achieved thus far that we will be 9 to 10 range depending on the mix of leases being executed.
Chris Haley – Wachovia Securities
Okay. And just one specific follow-up on the San Francisco Bay area. Have you seen any changes to competitor leasing economics? Have some become more aggressive in terms of raising rents or reducing base rents or increasing or reducing capital concession packages for some of the product up in your South San Francisco locations?
Matt McDevitt
I think that that's a very good question, and it is hard to generalize across the entire Bay area because there are such diverse markets. But, in general, the market is very competitive out there. And that the increasing rents that we had seen in the past have definitely moderated and I think rents on a quarter-over-quarter basis have remained stable as opposed to increasing. Concessions in general for the office sector and R & D sector remain stable to perhaps some increasing. In that on the life science sector, depending on where you are, and which market you are in, concessions may have increased slightly, but not materially.
Chris Haley – Wachovia Securities
Thank you. Kent, last question. We have had two of the convert issuers over the last couple of years, issue pardon me – repurchase convertible debt that is currently out of the money, and they are including that in their FFO numbers. So I would argue that they are having their cake and they are eating it but the long run implications are a little different in terms of capital allocation. Do you give us your sense as to what you are hearing from corporate finance types about that type of strategy and maybe you could comment about what BioMed's strategy would be regarding that?
Kent Griffin
I think it's a good question. And it's an interesting opportunity that we have considered and looked at and obviously we have not made a determination that those economics were sufficient to pull the trigger on doing that to date. From our perspective, as we talked about when we did the convert, we viewed it as a very sort of appropriate cost effective approach to creating unsecured borrowings for an unrated REIT; we think it is a very attractive source of capital. So in order to repurchase those notes, you are effectively replacing that form of borrowing with another form of borrowing, and the tradeoff hasn't made sense to us today. But it's something that I think in certain, in some cases, and I think some of those notes have traded off more for some than for others, and so I think some REITs could be in a great position if those notes trade off to buy those – buy them at very attractive yields, if you want to look at it that way.
Chris Haley – Wachovia Securities
You don't include it in your guidance if you do it, thank you.
Kent Griffin
Sure.
Operator
Your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed.
Jordan Sadler – KeyBanc Capital Markets
Hi, good morning out there. The question is on the leasing activity. Matt gave a good description of what's going on and congratulations on PRC so far. I think he said you've done 550,000 square feet since the end of September of last year of the 1.2 million square feet of guidance for the full year. And just doing math obviously, a bunch of that, 60% -ish is coming from PRC. I'm just curious as to what maybe the other pieces may be and how they sort of break out and what your expectations are in terms of timing?
Kent Griffin
Sure. I can walk through that.
When we gave our original 1.2, I think we outlined that roughly 200,000 of that leasing related to the operating portfolio, and the other 1 million square feet was split evenly between PRC and the balance of our redevelopment and our construction projects. And so that's $500 each there. Of the leasing we have done to date, including I guess including last night's announcement on DayStar, we are about 47% through an aggregate, and if you break it down by pieces we are –we've got a little over 3/4 of the way through our operating leasing expectations. We are now roughly 2/3 of the way through the leasing of PRC and about a little over 10% on the development and re-development. So from our perspective, we are right on track. I wouldn't characterize it as way ahead or way behind. We are almost dead on where we expected to be at this point.
Jordan Sadler – KeyBanc Capital Markets
Okay. And the development and re-development chunks, those are – I assume the bigger pieces because the bigger vacancies would include most likely Center for Life Science, something there, by year-end, would that be correct?
Kent Griffin
There are pieces at Center for Life Science; it is an aggregate assumption versus individual projects. We are going to be reluctant to specify. We did do it for PRC because it was such a big project and because it's been such a large focus. But we need to hit 500,000 square feet of leasing in the re-development and development portfolio in total. Whether that comes at Johns Hopkins vs. PRC at the end of the day not, not necessarily the goal. The goal is to hit the leasing target in aggregate.
Jordan Sadler – KeyBanc Capital Markets
Okay.
Kent Griffin
But clearly, as Alan talked about we would like to get CFLS leases as soon as possible. It is a high rent district, and we’d like to get those rents paid.
Alan Gold
And as a little quick update there, I mean we do see activity from a multiple number of sources, focused on the Center for Life Science Boston. We remain very positive about Center for Life Science Boston, and our ability to achieve our goals not only in the Longwood medical area but also in Cambridge. And we will achieve our goals.
Jordan Sadler – KeyBanc Capital Markets
Are you marketing the top four floors as – to one tenant at this point? Or would you subdivide?
Kent Griffin
No, I think we are marketing the floors as available. Whether it's one floor or two floors or all four floors, there's actually four floors above plus one. We also have one floor on the second floor available. And they are all available. We are not holding one offer for another one.
Jordan Sadler – KeyBanc Capital Markets
Okay and then you mentioned in your commentary I think, Alan, the activity, I mean this was in response to Chris, the activity in Cambridge is still pretty decent as well. And I know that's a tight market and even tighter in terms of lab space but are the requirements sort of growing there or – I mean what is sort of the trend?
Alan Gold
Growing? Are the requirements growing? I guess I could ask you what you mean by that but let me just answer it this way and say that we are seeing 100,000 square foot, 80,000 square foot, we are seeing 20,000 square feet, we are seeing 50,000 square feet type of requirements in those respective locations.
Matt McDevitt
And I'll add, just our product type that we have there at (inaudible) Cambridge, one it's a first class building, so obviously, we are seeing the top echelon of the tenant base there. The smallest tenant we can really look at is about, somewhere about 23,000 feet, and the largest obviously being 300 plus.
Jordan Sadler – KeyBanc Capital Markets
Does the leasing guidance, Kent, I don't think that – that is not reflected in the 1.2 million square foot total guidance, is it for the JV?
Kent Griffin
Well, there is a, there's 1.2 million square feet of leasing to the extent we do additional leasing in the JV, like I said it could be in the JV and it could be outside of the JV. Now, the joint venture assets are actually just as important as the others to us in the way we manage our portfolio.
Jordan Sadler – KeyBanc Capital Markets
But the guidance of 1.2 million that includes whatever may fall within the JV?
Kent Griffin
Correct.
Jordan Sadler – KeyBanc Capital Markets
Oh it does okay. That's helpful. Lastly just on PRC the latest lease announced last night. With that manufacturing space that DayStar is taking and how much more manufacturing space do you have available if so?
Kent Griffin
Yes, I mean it – it is manufacturing space. They do have an options on the balance of the manufacturing that equates to about another hundred thousand square feet of manufacturing. And they have options also on the balance of the office space there at the building one. As you recall building one is a 300,000 – 305,000 square foot portion of the project.
Jordan Sadler – KeyBanc Capital Markets
Did you mention market rents for manufacturing space?
Alan Gold
Yes, we discussed that they range anywhere from the $6 to $10 a square foot.
Jordan Sadler – KeyBanc Capital Markets
Thank you.
Operator
Your next question comes are the line of Tayo Okusanya with UBS. Please proceed.
Tayo Okusanya – UBS
Hello? Hi, how are you, good afternoon. Quick question. Congratulations on the leases at PRC. I just wanted to get a sense in regards to, at this point, what are the opportunities out there. What we should be looking forward to in regards to potentially more new leases coming on, specifically demand you are seeing for the space. Whether you are starting to get more LOIs for people looking at the space?
Kent Griffin
We are really very pleased with the momentum that has been building, and been built there at PRC. As you can see we've done the lease for the – we've done a lease for the manufacturing product that we have. We have done a lease for the office sector; we have done a lease with a laboratory type tenant. We have been able to draw tenants from the Silicon Valley area; we have drawn tenants from the greater peninsula location. We have drawn tenants from the local market. So, the activity remains very strong, and we have the ability to lease to additional laboratory and office tenants in the park. And we continue to see strong demand and interest because we are providing what we believe is a very cost competitive space as compared to what's going on on the greater peninsula and further north.
Tayo Okusanya – UBS
Great. That's helpful. Second thing I mean over the past month or so, we have seen a lot of news from a bunch of biotech companies as well as pharma companies of all their different drugs failing trials, all failing to get FDA approval. Should we be reading something into that in regards to maybe FDA just being much stricter at this point in regards to drug approvals or is that all just coincidental?
Kent Griffin
Well, it is not necessarily coincidental. I think we've always described, when you are in a business where 8 out of 10 or 9 out of 10 of your attempts to achieve a drug approval fail, because of the nature of the technologies that you are in, you are going to get much more negative news than positive news. With that being said we don't think the FDA is getting more difficult in general. We think that maybe follow-on-or me-too type drugs for cholesterol indications and for other indications that aren't providing clear efficacy are getting greater scrutiny. We do believe that because of the historical issues with toxicity of certain drugs in a larger population, that any drug that has a chance to be widely disseminated throughout the population will receive a greater scrutiny. With that being said, there has been some very positive news; Progenics in our portfolio recently received product approval, and their first product approval for an anti-constipation drug for opiate-induced constipation. And we continue to see other tenants in our portfolio achieving very strong success in their trials. Including, Vertex, including Human Genome Sciences, and Regeneron. And Regeneron also, I just forgot about Regeneron’s recent drug approval. There's some very strong and positive news mixed in with the negative views out there.
Tayo Okusanya – UBS
Great. Just last question, you talked a little bit about market trends in San Francisco, Boston, and as well as Seattle. Could you talk about some of your other markets such as San Diego and in the D.C., Maryland area?
Kent Griffin
In Maryland, we are still 100% leased. The Maryland market itself continues to have some, I think, a positive trend. The NIH is continuing to grow in that market, leasing third-party space. There have been some new startups created in the Maryland market. So, I think that that's a generally positive situation. In San Diego, we see a very positive trend with significant numbers of new startup companies looking for space that the smaller type spaces in the markets are fast evaporating and leaving only large block spaces available.
Tayo Okusanya – UBS
But are rent trends in those markets, is the rate of growth also slower in all those markets as well or do they still remain strong?
Kent Griffin
I think rent trends across the markets, across all the markets have stabilized. They are not increasing. And, it's just, I think it has to go to the greater economic situation, people are very cautious, and it's going to be hard for landlords to push rents, until I think the greater economy changes.
Tayo Okusanya – UBS
Great. Thanks a lot, guys, great quarter.
Operator
Your next question comes from the line of John Guinee with Stifel Nicolaus. Please proceed.
Kent Griffin
Hi, John.
John Guinee – Stifel Nicolaus
John Guinee here, how are you? Nice job. A couple – a handful of a little housekeeping. First, did you provide book value for your re-development portfolio anywhere in your financials?
Kent Griffin
In our 10-K which isn't to date at this point, in the schedule three in the back you can look at the book value for each of our assets and you could certainly compare that to each of the assets. We actually, on the supplement we also show what our total investment is to date. In total, but we don't show it by asset.
John Guinee – Stifel Nicolaus
Okay. Just out of curiosity, do you have any idea what your basis is on PRC now? I think you paid about $230 million for it awhile ago?
Kent Griffin
I don't have that offhand but it is – it hasn't moved up materially because it was, as you know it was leased for the first in a while. And then, so all that has been added to it is our re-development – our modest re-development costs that we have incurred to date. That'll be going up over the course of Q1 and Q2 as we are completing that.
Matt McDevitt
When you are looking at numbers like $230 million don't forget that it also included a large land parcel where we can develop at minimum 400,000 square feet and potentially a greater amount there. So –
John Guinee – Stifel Nicolaus
Good point. Okay
Matt McDevitt
Keep that in mind when you are trying to do a basis analysis.
John Guinee – Stifel Nicolaus
Okay. Next question, on your land parcels development rights of about 1.3 or 1.4 million square feet, do you have a book value on that, and then are you expensing or capitalizing your carry costs associated with your land parcels?
Kent Griffin
It is a case-by-case basis in terms of whether we are capitalizing. In the cases where we are doing work to develop the land, then we are capitalizing. In the case where the land is basically holding steady in our land bank then we are expensing it.
John Guinee – Stifel Nicolaus
Is 50/50 a good assumption?
Kent Griffin
I would be reluctant to make a guess without looking it through. So let's – I would be happy to think about that or look through detail and get to you offline if you want to talk through it.
John Guinee – Stifel Nicolaus
Great. Okay. And then the last question on your leases page 32, 121,000 square feet of new leases, 137,000 in TIs plus 15 in leasing commissions; huge numbers obviously. I guess you are building out above a shell there but correct me if I'm wrong. And then what kind of return on cost are expecting with those kinds of TI dollars?
Kent Griffin
Well, the big driver there, of course, is of the 127,000 square feet of leasing, you know 90 of it is at the PRC. And so the TI – the TIs that are embedded in that lease assumption, as you know that is laboratory tenant so it's part of that higher TI allowance assumption, that's already baked into our assumptions for our re-development project. So I don't think you can look at just the yield on the TI, from our perspective, that TI is part of the total project cost. So the yield on that total project cost is in the 9 to 10 neighborhood as a whole.
John Guinee – Stifel Nicolaus
Okay. Thanks a lot.
Operator
(Operator instructions) your next question comes from the line of Dave Rodgers with RBC Capital Markets.
Dave Rodgers – RBC Capital Markets
Hi, Kent, last quarter I think you mentioned some amenity costs that would come on line with the first PRC lease. Will there be additional amenity costs that would hold back the yield on the additional two sign leases or would it all come on as one with the first lease.
Kent Griffin
The amenity building is part of the overall campus, so that would come online at the end of the second quarter or whenever we exactly complete our re-development activities, so does that answer your question?
Dave Rodgers – RBC Capital Markets
Yes it does. And the second question I had in terms of the tenant quality, are you seeing in that 13% I guess you quoted is not in your 87% of high quality credit, are you seeing any problems – any debt reserves that you've had to make or thought about making?
Kent Griffin
Just to be clear, 87% are public research institutions or government entities. I would categorize that as very strong tenants. I wouldn't categorize the balance of the 13% as lower – as weak tenants. The distinction is that we have some companies that are very healthy by tax or that are otherwise private. Only 3% are in the tier 4 bucket which is what maybe some folks could characterize as a fairly more volatile lower credit quality. So, 3% is the more appropriate bucket. So, just to clarify that. So, sorry, your question now?
Dave Rodgers – RBC Capital Markets
Have you seen any tenant credit quality issues to date?
Kent Griffin
No, we did terminate one tenant, very small tenant, 6,000 square foot tenant –
Matt McDevitt
7,000 square foot tenant in the San Diego property, struggling to raise capital and not consistent rent payer. So we did terminate that tenant. But that was a tier 4 type tenant. And I think our tenant quality of our portfolio is very high. The companies that we have in our portfolio have been able to consistently raise capital. So we are very– and the industry continues to perform very, very well.
Dave Rodgers – RBC Capital Markets
Final question, Kent, the debts for un-leased or re-development or you new development space I'm assuming that somewhat drove your decision to do equity. Is it that it is not available or is it that pricing is just not quite down to the level you'd like to see?
Kent Griffin
Well, I guess – we've financing in place between our credit facility and our construction facility to do what we need to do to fund all of our existing projects. It's the decision to – there were a number of factors of course – but I think it largely related to, wanting to have capacity and equity capacity, regardless of where the debt markets were. We always look at it sort of on a relative basis but regardless even if the debt markets were more attractive it might tempt us to use more debt for some period of time. But really we would not have a lot of equity capacity to support in our minds the next X of investments that we might make over the next couple of years. And so putting some equity in place on the balance sheet provides us with the flexibility and the capacity to do what we are going to want to do.
Dave Rodgers – RBC Capital Markets
Thank you.
Kent Griffin
Thanks, Dave.
Operator
Ladies and gentlemen that concludes the question and answer session of today's conference, and I'd like to turn it back to Alan Gold for closing remarks.
Alan Gold
Thank you. Thank you all for joining us here today. We look forward to another strong quarter, and we'll see you soon. Thank you.
Kent Griffin
Thanks everyone.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.
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