BioMed Realty Trust, Inc. Q2 2008 Earnings Call Transcript

| About: BioMed Realty (BMR)

BioMed Realty Trust, Inc. (NYSE:BMR)

Q2 2008 Earnings Call Transcript

July 31, 2008 1:00 pm ET

Executives

Jon Klassen – VP, Legal and Assistant Secretary

Alan GoldChairman, President and CEO

Kent Griffin, Jr. – CFO

Matt McDevitt – EVP, Acquisitions and Leasing

Analysts

Bill Crow – Raymond James

Jordan Sadler – KeyBanc Capital Markets

John Guinee – Stifel Nicolaus

Chris Haley – Wachovia Securities

David Aubuchon – Robert W. Baird

Wilkes Graham – Friedman Billings Ramsey

Tayo Okusanya– UBS Securities

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 BioMed Realty Trust, Inc. Earnings Conference call. At this time, all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator instructions)

I would now like to turn the call over to Mr. Jon Klassen, Vice President, Legal. Please proceed, sir.

Jon Klassen

Thank you, Anton, 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.

These forward-looking statements are based on the company's current expectations and involve significant risks and uncertainties, some of which are beyond the control of the company and are subject to change based upon various factors. Actual results may differ materially from those expressed or implied by the forward-looking statements.

For a detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the press release issued yesterday and filed with the SEC on Form 8-K as well as the company’s other SEC filings, including its most recent annual report on Form 10-K and quarterly 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?

Alan Gold

Thank you, John, and thank you all for joining us today. With me again are Kent Griffin, our Chief Financial Officer, and Matt McDevitt, our Executive Vice President, Acquisition and Leasing.

First, we will review the results for the quarter after which we will open it up for Q&A. Now to begin, and in light of the general economic and credit market turmoil, I really want to emphasize three key takeaways from our very strong second quarter performance. First, we have had and still have an excellent business model. The life science industry has positive life – a positive long term factor supporting the continuing need for research which drives the need for our property, not just today but also in the future. In our long term, triple net leased structures provide us with relatively stable, steady and predictable cash flow stream.

Second, we have an excellent portfolio of well-located high quality properties. Our focused strategy of investing in the key life science market, our emphasis on premier properties with specific competitive characteristics give us a particularly unique advantage in a more challenging macroeconomic environment.

And lastly and most importantly, our experienced industry leading team of professionals continues to deliver. Our success in developing leases and operating our portfolio has continued to allow us to prosper through what has been a challenging financial market, which has lasted for over a year now.

In summary, we continue to create shareholders value by exploring and evaluating and executing on unique opportunities within the life science sector. As most of you are aware, BioMed’s focus in 2008 is squarely on leasing our portfolio and delivering our development project. The second quarter was an excellent quarter for both as we executed our plan consistent with or perhaps a tad ahead of our own expectations.

Our leasing program continues to deliver with over 327,000 square feet of gross leasing transactions for the quarter. Matt will discuss our leasing successes in more detail, but the highlight for the quarter was the 144,000 square feet lease with DayStar Technologies at the Pacific Research Center.

And on the development front, we are hitting major milestones across our entire development program. The highlight for the quarter was probably our Towne Centre Drive development where we completed core and skeleton structure in the second quarter and just last week celebrated a ribbon cutting ceremony with Illumina as they inaugurate their initial move in.

This project, one of our first ground up construction project as a public company was completely well ahead of schedule and well under budget, and allows Illumina to expand their presence on our San Diego campus to 193,000 square feet. We like to congratulate our development partners, which include Ferguson Pape Baldwin and Reno Contracting, as well as Illumina and our development team here at BioMed for a job well done.

We are also very proud of our continuing progress at the Center for Life Science Boston. This 703,000 square feet world-class research facility is perhaps the most ambitious laboratory project ever completed. But despite the enormous technical complexity of the project and the fact that we took the project over after construction had just begun, we were able to achieve temporary certificate of occupancy at the end of the first quarter, and then in the second quarter we were able to deliver portions of the space to each of our four current tenants, representing more than 241,000 square feet.

Based on our achievements thus far, we remain very confident that we will be able to deliver the balance of the leased space to these tenants by the end of the third quarter. And in addition, we will also complete the construction of core and shell build outs at 530 Fairview Avenue in Seattle, and two of the three buildings being developed at our land market ECU campus in New York, with those two buildings fully leased to a general pharmaceutical.

Now, before Kent’s review of the financial results for the quarter, I would turn the call over to Matt to expand on our leasing activity. Matt?

Matt McDevitt

Thanks, Alan.

Our gross leasing volume totaled more than 327,000 square feet, including 224,000 square feet of new leases and 103,000 square feet of renewals and extensions. The largest lease was, as already discussed, was at the Pacific Research Center with DayStar Technologies taking up approximately 144,000 square feet and bringing the campus to almost 25% leased at quarter end.

As a reminder, this represents the third sizable lease transaction in three consecutive quarters. Nonetheless, we don’t expect nor should investors expect that leasing will track quite so predictably quarter to quarter. But we are still very pleased to be on track, not just with PRC but really across the portfolio.

In addition to sustained leasing success at PRC, we are experiencing broad based leasing success across the portfolio. We signed our first lease at our John Hopkins Court redevelopment in San Diego, representing 21,000 square feet. And we leased approximately 17,000 square feet at our previously vacant Eisenhower Drive property in Pennsylvania. We’ve increased occupancy to a full 100% at our Sorrento Valley Property in San Diego and our Spring Mill property drive in Pennsylvania.

It is also important to consider early renewals and extensions and expansions, as we spend a considerable amount of time working with our tenants in order to address their space needs, long before scheduled lease expiration. Our success with early renewals has put us in position to have less than 1% of rents expiring in the remainder of 2008, and less than 3% of rents expiring in 2009.

In the second quarter, we executed more than 100,000 square feet of early renewals and extensions. This included an early extension of the 51,000 square feet lease with Novavax at our 9920 Belward Campus Drive Property in Rockville, Maryland. Originally scheduled to expire in 2013, we extended their lease for another four years out to 2017.

We also addressed in more near term 2009 lease expirations by extending our 47,000 square feet lease with Ambit Biosciences at our Sorrento Valley Boulevard property in San Diego, by more than five years to 2014.

Now looking forward, the impact of the broader economy is causing leasing transactions, particularly for large leases to take more time. That said, the limited availability of Class A lab space, the demand for research space is evidenced by the sustained general volume of property tours, LOI and lease negotiations and the competitive advantages for specific property type gives us confidence that we will continue to deliver results in our leasing program.

And with that, I will turn it over to Ken to walk through our second quarter financial results. Ken?

Kent Griffin, Jr.

Thanks, Matt.

As noted in yesterday’s press release, funds from operations for the quarter were $34.5 million or $0.47 per diluted share, up from $0.46 per diluted share in the prior quarter. Rental revenues for the first quarter increased to $54.2 million, representing a 7.1% increase over the prior quarter, and almost 10% increase year over year. The increase in rental revenues was driven largely by our initial deliveries of space at the Center for Life Science Boston and the Pacific Research Center.

Tenant recoveries were down modestly from the last quarter consistent with a modest decline in property operation expenses and real estate taxes. Accordingly, our operating expense recovery ratio was 86%, consistent with the prior quarter and general expectations.

G&A was $5.6 million for the quarter, down from the first quarter and below where we expected to be for the balance of 2008, but generally in line with our expectations for Q2. Same property results were strong highlighted by a 6.1% year over year increase in NOI on a cash basis. This was driven by increased leasing activity along with scheduled rent increases and to a lesser extent lower non-recoverable expenses.

Total interest incurred declined from approximately 21.6 million in the first quarter to 20.2 million in the second quarter. This decline was partly attributable to lower LIBOR rates, but primarily attributable to the pay down of a portion of our revolver from the proceeds of our common stock offering in April. Interest expenses increased about 1.7 million and capitalized interest decreased approximately 3.1 million largely affected by placing portions of the Center for Life Science Boston and the Pacific Research Center into service.

As previously disclosed on June 16, our Board of Directors declared a dividend of $0.335 per share on our common stock. Our payout ratio for the quarter was 71.2% and 85.3% of FFO and AFFO respectively. Now looking forward, as of the midway point in the year, we are narrowing our 2008 FFO estimates, raising the bottom end of the range by $0.02 resulting in a new range of $1.85 to $1.91 per diluted share. Our revised estimates reflect our strong financial performance during the first half of the year.

As we’ve done in prior years, we anticipate providing our initial 2009 FFO guidance in conjunction with our third quarter earnings release, which is currently scheduled for October 29. As a side note for 2009, in May, the FASB issued Staff Position FSP 141 regarding a change in the accounting for convertible debt instruments. While we haven’t finalized our assessment and the impact of adopting this accounting standard, we would expect it to generally increase our interest cost by roughly $0.01 per quarter. When we provide our 2009 guidance, we expect to include the estimated impact of adopting this new accounting standard.

Now looking at the portfolio. Since we gave our initial 2008 guidance nine months ago, we’ve executed roughly 1.1 million square feet of gross leasing transactions, including new leases totaling approximately 634,000 square feet and just over 500,000 square feet of renewals and early extensions. As a result, as of June 30th, we’ve already exceeded our year-end goals with respect to renewals and extensions. So, while our original target for new leasing may be extended, our aggregate gross leasing volumes including new leases, renewals and extensions remains on track. Our total operating portfolio which now includes 58 properties representing approximately 6.7 million square feet remains steady overall at 93.2% leased with 114 tenants. Our development portfolio of 6 properties was 51.8% leased and our redevelopment portfolio was 22.4% leased at quarter end up from 13% at the end of the prior quarter.

As Alan mentioned, we have extremely high quality well located properties, evidenced in part by the relatively new buildings in our portfolio. Roughly two thirds of our properties are less than ten years of age. As of June 30th, our leases had a weighted average lease term – remaining lease term of 9.1 years, and we have only 71,000 square feet rolling for the balance of 2008, excluding month-to-month leases. Our tenant profile remains consistent. Approximately 86% of our rents come from government entities, research institutions and public companies. Boston remains our largest market, representing 40% of annualized base rents, and our focus on Tier 2 and Tier 3 biotechs remains intact with 52% of our rents coming from these segments. Roughly 30% of our rents are coming from Tier 1 companies with roughly 3% of our rents from Tier 4 startups.

Now on to the balance sheet. The most significant event affecting the balance sheet during the quarter was the common stock offering we executed in April. As a reminder, we issued just over 6.1 million shares of common stock at $25.50 per share resulting in net proceeds of approximately 150 million. We utilized the net proceeds to pay down a portion of the outstanding balance on our revolver. And while we’ve always operated with what some would consider a conservative capital structure, we believe that the equity offering provided us with additional capacity to make future opportunistic investments as we continue to be optimistic about the opportunities that may arise from the current constraints in the credit market.

In addition, we paid down a 2 million mortgage maturity during the second quarter, and subsequent to quarter end we paid down a 17 million mortgage maturity. We now have no further mortgage maturities for the balance of 2008. Our debt to total capitalization ratio was 42% at the end of the quarter and we had approximately 387 million of capacity remaining on our revolver as well as approximately 66 million of capacity under our secured construction loan.

Looking forward on the financing front, we do expect credit costs for commercial real estate to increase. Our next scheduled maturity relates to our joint venture financing which is scheduled to mature in April of next year. Our portion of this obligation was approximately 72 million at the end of the quarter. We currently anticipate refinancing this obligation on or around year end albeit at a higher cost.

Our next maturity would be the construction loan at the Center for Life Science which is scheduled for November 2009. We have the right to extend this maturity for another year which would push the maturity out to November 2010. We will be monitoring the financing market in the latter half of the year and expect to put permanent financing in place on or around year end but also at a higher cost. Again, we have the option to defer the financing later into 2009, or even into 2010, and we will continue to monitor market positions. Aside from that, we have no maturities in 2009.

Again, we are fortunate to have a very comfortable capital position and we want to express our continued thanks and appreciation to all of our lenders and investors for their support and our continued success. Alan?

Alan Gold

Thanks, Kent.

And finally before I turn it over to questions, I want to again thank our team across the country for all their hard smart work and their continuing effort as we continue to build a premier 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) Your first question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Bill Crow – Raymond James

Okay. Good morning, guys.

Alan Gold

Good morning, Bill.

Bill Crow – Raymond James

Nice quarter. A couple of questions, Alan, of the seven markets, any that are showing relative weakness or relative strength?

Alan Gold

You now I think across the board, we are very – we’ve been very pleased with the condition of all of our markets. We’ve haven’t seen one that is any stronger or weaker than another. We continue to see consistent demand in activity in all of our markets.

Bill Crow – Raymond James

Okay. On the construction financing side of things, have you seen an increased reluctance on the part of banks and financial institutions to lend, not necessarily to yourselves who have the financial backing, but to other private developers, and what’s that doing to supply growth if anything as you look out over the next year or two years?

Kent Griffin, Jr.

Based on all of our discussion that we’ve had, we aren’t actively pursuing any financings today. We just don’t have anything that we need to do that with. But we are spending a lot of time with our banking partners and keeping our ear to the ground in terms of what’s occurring out there, and we do feel like that financings are more difficult. And you’ve probably heard this refrain across commercial real estate, but banks are limiting their capital commitments to their well capitalized reputable operators who they feel comfortable working with. And I think that is having some effect on smaller local market players who don’t have the definite wherewithal to keep their relationship intact and get the financing that they need to get.

In addition obviously, we talked about the fact that the cost of financing has increased. Equity requirements have increased and that in turn is somewhat self fulfilling in terms of allowing primarily the larger well capitalized borrowers to have access to capital. So, a long winded way of saying we do see and have anecdotally seen lot of evidence that the local market players are struggling to raise capital.

Bill Crow – Raymond James

Okay, thanks. And staying with you for one more question again, Kent, capitalized interest change that you discussed on the call earlier, is that a good run rate going forward at least until you have to start – you start capitalizing interest at Pacific Research Center?

Kent Griffin, Jr.

Unfortunately, it is going to be hard for us to have a good run rate probably for the next several quarters given that there will be a series of move into and series of portions of space moving out of the development and moving into the in service portfolio. So, this quarter is probably not a great run rate and you are not going to have a good run rate for several quarter, unfortunately.

Bill Crow – Raymond James

It will continue to decline as we think about it sequentially?

Kent Griffin, Jr.

That’s correct. Each quarter we would expect the capitalized portion to decline.

Bill Crow – Raymond James

Very good. Thanks, guys.

Kent Griffin, Jr.

Thanks, Bill.

Operator

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

Jordan Sadler – KeyBanc Capital Markets

Good morning.

Alan Gold

Good morning, Jordan.

Jordan Sadler – KeyBanc Capital Markets

I just wanted to just follow up on the leasing discussion. Kent I think you said – I wasn’t sure just relative to the original guidance, you talked about new leases doing I think 644,000 to date. Do you expect to hit that guidance still, the full guidance, I think it is a million feet in that bucket by the end of this year still, or you think that could stretch out a little longer?

Kent Griffin, Jr.

I think the new leasing could stretch out a little longer but we do think that the aggregate gross leasing is likely to end up where – in the ballpark. We are still expecting to be right around our target. So, at this point we are continuing to track right on pace in aggregate where we expect them to be.

Jordan Sadler – KeyBanc Capital Markets

Is that 1.2 million, just the –

Kent Griffin, Jr.

1.2 million was our new leasing target. We didn’t discuss the renewals and extensions. We had assumed roughly just under 400,000 which we had accomplished pretty quickly. And so all the additional new and renewals leasing that we’ve been hitting and expect to continue to hit is putting us over our market in that area.

Jordan Sadler – KeyBanc Capital Markets

Okay. Along sort of the same lines on the renewal side, have you started yet to take with discussions with one of your larger tenants, Vertex about renewals that are upcoming. I think you’ve got some time but they’ve got some big chunks rolling in 18 months or so, maybe two years?

Alan Gold

Yeah, Jordan. This is Alan. Vertex is a great company, and they appear to be making some really great progress on Telaprevir, their VX-950 drug, which is now in Phase III clinical trial. And if that drug achieves the clinical trial results that they are looking for, they are – quite possible that they will need more space. And there have been reports in the papers that Vertex is exploring options in Cambridge and Boston and elsewhere, and we just don’t have any specific comments on what Vertex will or wont do. They have their conference call later today at which point they might provide more specifics on their intentions.

Jordan Sadler – KeyBanc Capital Markets

Okay.

Alan Gold

But you know maybe perhaps I can just go through what we have with Vertex, the leases that we have. We roughly have 685,000 square feet leased to Vertex and as we disclosed in our supplemental at an average rent of just over $40 a square feet which we believe is significantly below market. And the most significant lease that we have with Vertex is at the 675 West Kendall Street property where we leased roughly 290,000 square feet and that has roughly ten years remaining. And our first lease expiration with Vertex is roughly 2 years away at 200 Sidney Street, just over 190,000 square feet which is well below market rent. And then the other 120,000 square feet matures in 2010 and 2012, again substantially below market rent.

Jordan Sadler – KeyBanc Capital Markets

Okay.

Alan Gold

Right?

Jordan Sadler – KeyBanc Capital Markets

Now, that’s helpful. Could you maybe separately outside of the renewal, just maybe talk about what you are seeing in terms of prospects, could you give us an update specifically on some of the larger developments, Center for Life Science and –

Alan Gold

Yeah, I will do that, but I’ll have Matt do that.

Jordan Sadler – KeyBanc Capital Markets

Okay.

Matt McDevitt

You know, we – in Boston overall, we are tracking about 2 million square feet of active prospect and that gets put about 1.5 million in Cambridge and about 500,000 square feet in Boston. And that 2 million makes up about 15 tenants roughly. So, we are – again, we are seeing pretty consistent activity.

Jordan Sadler – KeyBanc Capital Markets

And how has that changed versus let’s say last quarter or last year, that pipeline that you are tracking?

Matt McDevitt

It’s been very consistent really quarter by quarter. You know as we talked before, the deals are taking longer because these are the larger of the institutions that we deal with.

Alan Gold

I think they are also taking longer because I think just the general economy is just I think putting decision makers on their back foot. And they want to see what’s going to happen with the election, and they want to see what’s going to happen with the economy. I think those are the reasons for things taking a little bit longer than we anticipate, but we are still very excited about all the demand we see across the board.

Jordan Sadler – KeyBanc Capital Markets

Great. Thank you.

Alan Gold

Okay, thanks.

Operator

You next question comes from the line of John Guinee with Stifel Nicolaus. Please proceed with your question.

John Guinee – Stifel Nicolaus

Yeah. Kent, I guess probably, can you spend some time reconciling page 11 which has second generation CapEx of 3 to $500,000 a quarter and then how you look at your leasing program and capital costs on page 32?

Kent Griffin, Jr.

Sure. The short answer is that they don’t reconcile because they reflect – they represent different things. The schedules in the back represents the capital commitments, the TIs and leasing commissions that we obligate ourselves to concurrently signing those leases. So, it’s an attempt to provide color on the state of the leasing market and what kind of TIs and LCs are associated with generating those leases.

The schedule on page 11 here bring to reflect actual capital cost incurred during the current quarter. So, for an example, if we signed – let’s say we signed a lease in the second quarter and we had a $1 million of TIs associated with that particular lease, that would show up in this current schedule in the back next to the lease on a per square feet basis. We would reflect those dollars spend when we actually spend them. So, those dollars might be spent in Q3 or in Q4 or spread across both, and as those get spent in Q3 and Q4, you would see them ripple through into the second generation CapEx on page 11.

John Guinee – Stifel Nicolaus

So, all the capital expended under new leases section on page 32 is essentially being capitalized?

Kent Griffin, Jr.

Yes. Not necessarily in that quarter, it is only when you incur that cost.

John Guinee – Stifel Nicolaus

Yes, okay. Thank you very much.

Kent Griffin, Jr.

Thanks, John.

Operator

Your next question comes from the line of Chris Haley with Wachovia. Please proceed with your question.

Chris Haley – Wachovia Securities

Good morning to you. Alan, Kent, congratulations on very good performance year to date. The questions you’ve initially addressed concerns about Vertex. This building is not a – this project is not yet a financed project, so that certainly is a hurdle that needs to be achieved by this private developer. But I am interested in what would be a fair assumption that we should use if Vertex were to move out of their space which certainly is a possibility – we can wager about probability ratios, but one of the buildings if I recall from our visits is fully occupied by Vertex and another one is largely occupied, so it is not single tenant. What would you – how would you communicate to us the re-tenanting requirements of such a move out? Would it be a one, two year period, would you characterize that balding as a redevelopment asset then, or would it just be second generation re-tenanting cost?

Alan Gold

I think it’s – there are a variety of different spaces that their leases would be expiring in 2010 and beyond. And as an example, 200 Sidney is a leased asset or is an asset that is easily multi tenantable. And if they were to leave their project, there is very high quality built out laboratory space that is below market. Perhaps – generally I would say – generally say none of the assets would be going into a redevelopment type mode, they would all be in a re-leasing mode.

Chris Haley – Wachovia Securities

Okay. And for such buildings, would it, in terms of how you model your investments, whether they be full building tenants or they be partial building tenants, what will be a fair downtime assumption to use?

Alan Gold

I think that somewhere in the – it really would depend on where the market – what we’d consider the market is then. But we would get a significant amount of notice before the – before the place became available. If I were to be doing some modeling, I would probably model anywhere form the nine months to 15 months of downtime, and anywhere from $20 in leasing tenant improvement, and perhaps 15 to $18 in leasing commissions.

Chris Haley – Wachovia Securities

And do you know whether – I am sure you know – is there a notice period that Vertex holds on those leases that you would care to share with us?

Alan Gold

Well, I think if they were – if they were going to do another project and there really isn’t another 500,000 square feet built out, ready to go building anywhere in the Cambridge – and for that matter in the Boston area for laboratory test space. So, you are talking about a build to suit and a built to suit can take anywhere from 24 to 36 months. So, I think that’s the amount of notice we would get.

Chris Haley – Wachovia Securities

Okay, thank you for that. And then last question on the leasing economics, Matt or Kent, could you give us a sense as to – the disclosure you provide doesn’t necessarily offer apples to apples leasing concession numbers, but could you give a sense of where we are in terms of concession ratios, or where things look for the second quarter leasing activity versus where they trended in prior?

Matt McDevitt

The rental rates and concession activity has been pretty consistent, no change at least today that we can see from the leasing environment. The renewals as an example on average I think we were up 20% over the expiring rent on average for the renewals that we did.

Chris Haley – Wachovia Securities

On a cash basis?

Matt McDevitt

On a cash basis, so we are not at least today feeling a lot of pressure on that side.

Chris Haley – Wachovia Securities

When you think of the inducement to stay you are offering, capital inducements and improving leasing commissions, what do you think they represent of the average rent over the term?

Matt McDevitt

Well, it depends on how you define it, and this is an important distinction for a lab space versus office space. So, when your TIs are more in the $20 range, they are more consistent with what you’d see in an office leasing scenario. But we haven’t seen those, you can see what we did in the current quarter was more consistent with that level of TI work. What’s more important is that the TI work that we do on lab leases and that’s – we don’t –we don’t do it as an inducement, that’s real hard dollars that go into improving the property, and there is residual value, substantial residual value to that on the back end. So, we are seeing some interest from some tenants to try to increase that TI allowance for lab leases in part just as another form of capital because cash is so critical right now, but we haven’t felt – but it hasn’t been associated with say any more lower rent levels.

Chris Haley – Wachovia Securities

Thank you.

Matt McDevitt

Thanks, Chris.

Operator

Your next question comes from the line of David Aubuchon with Baird. Please proceed with your question.

David Aubuchon – Robert W. Baird

Thank you. Just a few more questions on Vertex, Alan, did you say the 191,000 square feet that expires in 2010 is the – that’s not at Kendall correct, that is in the other –

Alan Gold

That’s correct.

David Aubuchon – Robert W. Baird

That is in Sidney Street.

Alan Gold

That’s correct.

David Aubuchon – Robert W. Baird

Okay. And then the 290,000 square feet expiration, that’s the 675 Kendall?

Alan Gold

That’s correct.

David Aubuchon – Robert W. Baird

And why are there different lease expirations, are there literally five different leases, and are they in fact from building or is this –

Alan Gold

We have I believe five different buildings leased to Vertex, four in Cambridge and one in San Diego.

David Aubuchon – Robert W. Baird

Okay. And just given the rents, the average rent number that you disclosed on your top 10 tenant list, is it fair to say that is a appropriate number to use for each one of those leases or is that one that skews others?

Alan Gold

No, there is – yeah, certainly the major investment (inaudible) dollars are in the 675 West Kendall asset, which is the asset where we have the longest leased term.

David Aubuchon – Robert W. Baird

Right, okay. And remind me again, the numbers that you have, the rent numbers, are those gross or net?

Alan Gold

Triple net.

David Aubuchon – Robert W. Baird

Triple net, okay. Regarding the Towne Centre development, Illumina, and Kent, I think we talked about this before, but I think it had do something with the garage or just the interest rate cost you assumed in the development, but it started out at 33 million and, Alan, you mentioned it was significantly under budget, that 26 million in this later supplemental, is that – can you just talk about whether or not that was a project that exceeded your estimate or underwent [ph] your estimate by that much or what else is going on there?

Alan Gold

Well, we – everything really went our way with the development. Our team did a fantastic job. There were some big critical threshold points particularly when the buyout of this deal was done at a time when were able to actually achieve significant savings versus our original expectations. There was also a TI option that the tenant had, and this they elected not to take, which lowered – keeps our basis in the investment and in the asset lower. So, those things along with the fact that we did – were able to keep the project moving ahead and a little ahead of schedule reduced the carry – reduced the estimated carry cost. LIBOR rates came in obviously lower than expected, so all those things combined to really kind of have a home run in terms of beating the budget. I think that‘s certainly not something we would expect on every project.

David Aubuchon – Robert W. Baird

Okay. And then moving up to San Francisco (inaudible) having a redevelopment, do you have a 2012 estimated in service date. Can you just talk about what’s going on there, that property, it seems like it would be 152,000 square feet but I think it would take three to four years to have that build out and ready to go?

Alan Gold

Well, that’s a building, a project where when we bought it, we described it we were going to be demolishing the existing building and starting from scratch and building two new buildings on the site. We are going through the development process there, and we – it just takes that long to go through the process when you start from scratch. That’s what was always intended for that site. So, it’s really basically a piece of land there.

David Aubuchon – Robert W. Baird

Okay, do you have an idea how much you can build yet?

Alan Gold

From preliminary discussions with the city, we believe we can achieve very close to 260,000 square feet of space. Now, that includes the existing building already on the site.

David Aubuchon – Robert W. Baird

Okay. So (inaudible) 260 at the end of the day?

Alan Gold

Would be total at the end of the day.

David Aubuchon – Robert W. Baird

Yeah, okay. Looking at the rent roll, the average rent by market, Boston and D.C. are pretty similar and I think most people view life science market is the top one that leased in this market, also includes San Francisco. But when you look at your average rent that you get from that market, it is almost half Boston and D.C., is there a right way to look at why that difference exists and whether or not you can narrow the gap there in San Francisco?

Alan Gold

I think some of that relates to the low basis that we have at PRC and the correspondingly attractive rents that we are able to offer at Cambridge [ph]. So, it’s really large square footage position of our portfolio there. That’s probably the largest factor in that differential. And frankly rents in Austin or in Cambridge in particular are essentially higher that they are in the Bay Area.

David Aubuchon – Robert W. Baird

Right. I guess my question is why do you think exists?

Matt McDevitt

If you go in from an urban into a suburban location, one, you have a very urban location in the Cambridge Boston area and a suburban location out in PRC.

Kent Griffin, Jr.

A much tighter clustering effect in Cambridge. You actually have rents in Seattle are much higher than they do in Bay Area generally because you do have more urban intense clustering effect in Seattle, even though it is a smaller, obviously much smaller market than the Bay Area for life science.

David Aubuchon – Robert W. Baird

Okay. Last question is, Alan, do you have comments about the Amgen situation and whether or not that impacts demand on a positive or negative basis for life science in general?

Alan Gold

Are you speaking of Amgen or Genentech?

David Aubuchon – Robert W. Baird

Right, Amgen.

Alan Gold

Amgen, okay. I think that Amgen continues to be a unique situation. They’ve put on the market already a substantial amount of space in that market. They have had some positive news in the past and they will continue to have positive and negative news as they move forward . I don’t know whether or not they have more space that they can actually put on the market in the south San Francisco for sub lease, but if they do, it would have an negative impact on the South san Francisco Pacific sub market.

David Aubuchon – Robert W. Baird

Okay, thank you.

Alan Gold

Thanks, Dave.

Operator

Your next question comes from the line of Wilkes Graham with FBR. Please proceed with your question.

Wilkes Graham – Friedman Billings Ramsey

Hey, guys. Just have a couple of housekeeping questions first. Can you just explain again the accounting change with interest?

Kent Griffin, Jr.

Sure. The convertible notes, and this is a bias to anybody issuing convertible notes. Historically companies have accounted for the interest expenses based on the face rate of exchangeable notes in our case. So, as an example, on our notes, that rate is 4.5%. And this is a general discussion, the technical accounting would be a little different. But generally speaking, the approach will be to reassess what the implied interest rate would have been if you had taken the initial issuance amount and bifurcated that between a debt instrument and an option, an equity option which is effectively embedded in that financial instrument. So, if your interest rate cost is 6.5, or would have been 6.5% at that time, we would incur interest at that rate going forward instead of the stated rate of 4.5%.

Wilkes Graham – Friedman Billings Ramsey

Okay. And second question, do you guys have any plans or any interest on page 23 of breaking out the second table there and kind of extrapolating it into the first table where you are showing investment today and at least a high and low estimate of future cost by redevelopment assets?

Kent Griffin, Jr.

We haven’t done that, we used to do that, and we’ve gone back to aggregating it in part because there is a tremendous amount of variability on what that future cost will ultimately look like, particularly related to PRC, but in general with redevelopment assets, because the nature of the improvement work is in many cases subject to the actual build out requirements and the tenant improvement allowances that might be required. And so we think it is more important to look at it in aggregate from a capital need perspective because the actual dollar amount invested in each asset is – we are concerned that you imply a level of precision that may not be there, and –

Wilkes Graham – Friedman Billings Ramsey

Okay. How about just the investment to date by asset and leaving the future cost as an aggregate?

Kent Griffin, Jr.

You know we actually do disclose that in the K.

Wilkes Graham – Friedman Billings Ramsey

Right. And I guess the question is, can we get that on a quarterly basis, the update on the book value of each of those assets?

Kent Griffin, Jr.

That’s a fair question, we’ll certainly look at that.

Wilkes Graham – Friedman Billings Ramsey

Okay. And then last question, on PRC, can you just talk about – I know RMS came from a block or so away, but where they start and revamps came from and where geographically we’d understand San Francisco market you are receiving interest and any kind of color on the type of interest that you are getting, comments that prospective tenants are giving you as far as moving down to that portion on the east site of the (inaudible)?

Alan Gold

DayStar was basically on the other side of the Bay in the Santa Clara area and so was (inaudible) in the Mountain View area. And so we are seeing significant interest because of the lower cost attribute of PRC compared to what is being offered on the Peninsula side. In terms of just general demand in the R&D market, we are seeing – we are consistently seeing demand tracking in at 11 million to 12 million square feet range with demand from laboratory 1.4 – 1 million or 1.4 million. And as a matter of fact, in the last quarter, we’ve had over 650,000 of tours at PRC.

Wilkes Graham – Friedman Billings Ramsey

What was the number again?

Alan Gold

650,000 square feet

Wilkes Graham – Friedman Billings Ramsey

Okay, that’s helpful. And then just lastly I think you almost went to it earlier but can you just discuss any comments you have on Genetech?

Alan Gold

Yeah, I almost went to it, but I didn’t do that, no. I mean I think that there is always there is good news and bad news in these big transactions. And the good news with the Genetech situation is that there is obviously tremendous – continue to be tremendous interest in the – from the pharmaceutical industry in the interest into acquiring the biotechs because of their pipeline situation. And they are willing to pay up and they are paying significant dollar amounts, and those dollars are actually coming back into the industry and allowing new company formation. So, it is a very positive situation, that situation. Up there in the South San Francisco market, that’s going to probably create – that specific sub market is going to create some turmoil because when a company goes through that type of change, there is going to probably a pull back in terms of their expansion plan and their growth plans as they figure out what’s really happening within the company. So, that pull back is going to be I think going to be a little bit of a negative – create some negative pressure there in the South San Francisco market. I think it is a really positive thing. Whenever we see additional capital coming in to the industry, it’s just really good.

Wilkes Graham – Friedman Billings Ramsey

Okay. I appreciate it.

Alan Gold

Okay, thanks.

Operator

(Operator instructions) You next question comes from the line of Tayo Okusanya with UBS. Please proceed with your question.

Tayo Okusanya– UBS Securities

Hi. Yes, good afternoon. My question has actually been answered, but congratulations on another great quarter.

Alan Gold

Thanks, Tayo.

Operator

And there are no further questions at this time.

Alan Gold

With that, I’d like to thank everybody for joining us here today and conclude the call. Thank you all.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect.

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