Alexandria Real Estate Equities Inc (ARE) 2003 Q3 法說會逐字稿

Good day and welcome everyone to the Alexandria Real Estate Equities third quarter of 2003 conference call. Today's call is being recorded. At this time for opening remarks and introductions I will turn the call over to Miss Rhonda Chiger. Please go ahead ma'am.

Thank you. Good afternoon and thank you for joining us today. This conference call contains forward-looking statements within the meaning of the Federal Securities laws. The company's actual results may differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's form 10-K annual report and other periodic reports filed with the Securities and Exchange Commission.

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

Thank you and welcome. Here today we have Jim Richardson and Pete Nelson and I want to start as I always do the third quarter call with just a few macro observations before we review the quarter and open it up to questions and answers.

From a low point in the second quarter, our markets remain pretty anemic but stable and Alexandria certainly has been a good place and hopefully will continue to be a good place to be in a tough macro environment.

Key stories for the year. As we look out over the next three to four quarters would be a couple. The bio-defense world is one that is garnering a substantial amount of funding and certainly one which we're focused on. We're expecting through September 30th, '04 approximately $2b in new funding.

I think the other key story that has been and will continue to be impactful on this sector is the visionary and strong leadership at the FDA headed by Mr. McClelland. I had a great honor and pleasure to spend some time with him about two weeks ago.

And for those of you who saw Nightline last night, he was interviewed by Ted Koppel and he identified probably one of the most important challenges for the industry for the coming year and that is the implication of prescription drugs. Last year, on testing 88% of prescription drugs which were imported into the United States and tested by the FDA were held to be unsafe. So there is a real tension between costs and safety.

It is also useful to note for '04 that big pharmas growth is projected to be about 9% while the generic industry is over 20%. Pretty interesting statistic.

Let's move to earnings guidance and dividend policy. We're pleased to report as you know from our press release $1.06 per share diluted FFO for the third quarter. Approximately 8% growth and again what we believe to be a continuing tough environment that we see staying well into '04. We had 11% revenue growth and 13% FFO growth.

On 2003 guidance we've reiterated our guidance at $4.23 per share, diluted FFO about 8% and EPS at $2.20.

For '04 again we have reiterated $4.55. Back end loaded approximately 8% with $2.70 per share EPS growth. We will give guidance for 2005 in our call in February when reporting fourth quarter and year end numbers for '03. So stay tuned for that.

As many of you know, the Board increased our dividend from $0.53 to $0.56 in the third quarter for an aggregate dividend increase this year of about 12%. The Board will consider this again in the first quarter and they may be likely predisposed to increase the dividend in the first quarter of '04 because of continuing solid FFO growth and our continuing low pay out ratio.

We had a solid third quarter. I am going to ask Pete Nelson to highlight a number of important areas. But fundamentally with the result of our core operating strength and our internal growth business model. Same store growth and Pete will have more to say about that. It came in very steady - 2.1% on GAAP and 2.9% on cash.

On the leasing side, Jim will have more to say about that in a couple of minutes. It was a respectable quarter. 12 leases for 147,000 square feet for new or renewal space with rental rates up about 20%. I wouldn't necessarily assume that's what it is always going to be and we will give some guidance on that. But we do have favorable low expiring rents in a number of spaces. We did sign eight additional leases for 65,000 square feet out of a redevelopment all for vacant space.

We're making solid progress, which Jim will highlight, on the balance of '03 - 254,000 square feet. And a chunk of that is mostly in our Seattle redevelopment site.

For 2004 we have about 11.5% rolls. 574,000 square feet will be a challenge but we think we can attack it in a very deliberate and methodical way and again Jim will give some guidance on that.

I think something we haven't mentioned before but I think it is important to note that the duration of our leases, the average lease term of our top 20 tenants is 7.7 years and for tenants paying over $1m in net effected rent is over 11 years. So I think that evidence is very, very solid stability overall in the portfolio.

On the redevelopment program and again Pete will have more to say on this in a moment, we had 390,000 square feet in active redevelopment out of 5.7 million square feet, trailing down to reflect what we believe will continue to be the slow economic environment. Our redevelopment program is in fact a short-term drag on earnings but there is long-term impact on growth and that's why we do it in additional to obviously meeting the needs of our clients.

On the development side we reported a steady 477,000 square foot pipeline. That should trend down over the next year again to reflect the slower environment.

On the acquisition side, because of our extraordinary network, we see virtually every opportunity before it is listed or before it becomes exposed to the market. And I think one of the things that is a hallmark of this company and certainly confirms our return on invested capital, we've never compromised our discipline, financial and operating of acquisitions. Our approach to that just to do a deal like most other buyers. We've not built the company and its consistent growth performance on the back of sloppy acquisitions.

For the third quarter balance sheet very strong capital structure. Again strong and flexible and key financial metrics remain very healthy. We have a very strong and de-levered balance sheet. 39% debt to total market cap. We will continue our aggressive strategy to fix debt in this favorable interest environment. Pete will have a lot to say about that.

Margins continue very stable at 79%. I think the hallmark of the company continues to be consistent predictable on reliable numbers. Our interest coverage ratio this quarter is 4.12 times, fixed charge at 3.3 times. No current reserves for bad debts from rental revenue and our accounts receivable as a percentage to rents and recoveries at virtually historic lows at about 4.5%.

Before I turn it over to Pete to comment on the operations for the quarter and then Jim for the leasing activities, I want to say again we believe that Alexandria is a very unique company with a unique niche, a non-commodity premium product and its business model continues to be an evidence that is a safe haven and a growth engine even in really tough times that we were earlier in.

So Pete would you take a few minutes and comment in depth on some of the operational aspects?

Sure. Thanks Joel. I'm just going to comment on a few things that we want to highlight this quarter. First, just reviewing our operating portfolio highlights, which are on page 10 of the press release with some of the statistics. We believe the statistics for our operating portfolio reflects the continuing stability of our operations.

Our average occupancy for the operating portfolio is 94.2%, which is the lowest it has ever been. But it is primarily due to non-lab vacancies in non-core markets like Pasadena and the South East and they're not typically the higher rental rate space or markets for us.

As I have mentioned before, properties undergoing redevelopment are excluded from these statistics and as Joel mentioned, operating margins were very steady during the quarter in the 79% range. This continues to be a good run rate on a going forward basis in your models.

Turning now to same property results, which are highlighted on page 11 of the press release, again very stable during the quarter. Third quarter '03 showed NOI up 2.1% on a GAAP basis, 2.9% on a cash basis. Virtually all of the same property NOI increase is from increases in rental rates. Some due to slight reductions in operating expenses and in fact you notice operating expenses quarter-over-quarter were down primarily due to a non-recurring item of one property in the comparison period a year ago.

Same property occupancy as of 9/30/03 is 95.4% compared to 95.9% for the year ago period. My guidance for same store for the remainder of '03 and for '04 is in the 2% range.

Some of you have asked and maybe even confused by the comparison to the prior quarter. More of a sequential view of the same property results. You can do it from the information we provided last quarter and this quarter. If you look at it that way actually the bottom line NOI looks like it went down. That's because of the way we look at the same property pool for redevelopment properties.

We had a property go into the redevelopment pipeline in the year ago period, so we've pulled it out of the comparison for this quarter same property results. If you do it on a same property basis quarter-over-quarter sequentially our NOI was up 1.7% on a GAAP basis and 1.6% on a cash basis--truly remarkable results in this quarter for sequential same store growth.

And again a reminder, as always no termination fees. Actually we had virtually no termination fees this quarter. But they're excluded from all the same property results.

Turning again now to the discontinued operations, just because they did impact this quarter with the sale. We have continued to apply the provisions of FAS144. The one property we had designated as discontinued operations at the end of last quarter was sold during this quarter, actually at the end of August. The sale price of $46.5m.

So in this transaction we booked a gain of $8,777,000. The sale was unique. It was pursuant to a purchase option granted to the tenant. A very unique situation and in fact the only one of those in our portfolio. The property was located in Eastern Massachusetts. It is the second property sold this year. We booked a small loss on a property that we sold in the first quarter of '03 this year.

With respect to the property sold this year, there will be a significant elimination of NOI of about $1m per quarter in connection with that asset. We're going to do a combination afford and reverse 1031 exchange for tax purposes in connection with that sale. So there is no significant tax impact anticipated.

I think just going through the bottom line, excluding the gains and excluding the loss on the extinguishment of debt that we had in the third quarter of '02, the increase in net income in the third quarter of '03 was up 11% over the third quarter of '02.

Joel has asked me to comment on our overall debt strategy and he did mention as of 9/30/03 our debt to market cap was about 39%. About 46% of our debt is fixed rate debt and about 54% is variable rate debt, which is substantially hedged. During this week we closed on a new $150m unsecured term loan with a five-year term. It represents a 15 basis point reduction in the pricing from our revolver, the variable rate, loan priced on Libor.

We also closed on a renewal an extension of our $440m unsecured line of credit. So that now has a new three year term. It extends out to November of '03 with a one year renewal option. That's over the loan. That too represents a 15 basis point reduction from the prior revolver.

We believe these transactions represent, or give us substantial financial strength and flexibility for many years ahead. We will be fixing a substantial portion of the $150m term loan with interest rate swap agreements for the entire five year period. So those of you who are familiar with our operation and use of interest rate swap agreements, we will be enhancing our interest rate swap agreement list there through some additional swaps that will extend for the entire five-year period of the term loan.

Just reviewing where we are as of 9/30, we have about $200m of our variable rate debt hedged at rates between 3.12% and 5.36%. Our variable rate debt as of 9/30 was about $356m.

As previously announced, in August we closed on a $30m fixed rate loan. That loan carries interest at our fixed rate of 6.36%. It is a 10 year loan, 30 year amortization and that's just part of our continuing program to convert additional variable rate debt to secured fixed rate debt.

Now, commenting on our important redevelopment program. It's a very important program. It adds value. It has always had a value and will continue to add value to our company in the years ahead. Our program involves the permanent change in use in conversion of the infrastructure of our buildings to a laboratory office environment integral to our business model.

Redevelopments, our current redevelopment pipeline is shown on page 16 of the press release. The cost for these redevelopments are difficult to project in advance. It is subject to a number of items - mutually agreeable programming with the tenants, lab design. Whether it is a chemistry lab or a biology lab and build out. This process is very complex and time consuming and requires the involvement of us and the tenant as well as many experts and consultants.

Just so you know, the redevelopment costs historically average around $85 per square foot. As Joel mentioned it does involve proactively taking the property off line. So as we place properties into our redevelopment pipeline, it is dilutive in the short-term.

New capitalized interest in accordance with GAAP is required under GAAP on the portion of the property undergoing redevelopment. It is capitalized during the time activities for the change in use and conversion are ongoing and it is discontinued when the project is substantially complete. So we apply the provisions of FAS34 and FAS67.

As I mentioned previously, the redevelopment properties are excluded from the same property portfolio. Some of you have asked well what if you did include them? For the three month period, same property NOI would be up 4% instead of the 2.1% on a GAAP basis and for the nine month period it would actually about 4% as well.

As I mentioned previously redevelopments are fully excluded from the operating portfolio in computing the statistics. If the occupied portion of the redevelopment because some of these properties some of them are partially undergoing redevelopment, we include the occupied portion of these projects in the occupancy statistics. The average occupancy of our portfolio would be higher - 94.6% compared to 94.2%. So we just exclude the whole property from our same properties as well as our operating portfolio.

Then, lastly, I'm just going to comment very briefly on NAV. Those of you who know me and know the company know that we've never computed it and typically don't comment on it but we feel compelled to do so at this time.

We don't comment on it because they're typically backward looking and do not consider the company's growth potential and the properties growth potential. That's an important distinction for us because as you can tell by our operations, we are continuing to grow which is different and many reasons. So the NAV calculation typically doesn't consider that difference.

We typically also don't consider the uniqueness of our business model and true franchise value, which we believe is a true differentiating factor in our business. A meaningful NAV is difficult to compute for most companies. But we believe that it is virtually impossible for us due to the number of the value-added programs, some of which I have mentioned just here. Our development or redevelopment pipeline.

I believe that the only somewhat meaningful way to do it for us is on a forward NAV basis, which considers the value potential of our development and redevelopment pipeline. But even still it is difficult to do. As I mentioned some of the projections are even difficult for us to do.

So with that comment I'll turn it back over to Joel and Jim here.

Thanks Pete. I am going to start with some commentary on the general market conditions that we see. I'll start broadly in the regional and sub-markets that we're in and focus on the office R&D sector and then narrow it down to our specific life sciences niche. We've really seen little substantive change over the past six to nine months really essentially all of 2003 in the markets that we're involved in.

Generally speaking, rents appear to have leveled out except in a more tech-heavy sub-market where we still continue to see quarter-by-quarter reductions, albeit at maybe a slower pace.

Overall, vacancies also appear to have generally leveled off in kind of a broad statement and tenant demand continues to be very sporadic. There's a lot of noise in the market relative to upticks in activity or possibly the initiation of a recovery.

However on a day-to-day basis this doesn't really seem to match up with our experience, at least in the markets that we participate in. I don't think any of this is really new news to anybody that's focused in the sector. So I would say broadly speaking overall the general level of inertia that we've observed over the past several quarters seems to have continued. There are signs of life, broker activity and/or optimism appears to be increasing. The overall resurgence in the economy is creating a level of optimism we haven't heard in some time. Whether it translates ultimately into job growth remains to be seen.

One of the key anecdotal metrics from our perspective is especially the markets that we're in being somewhat tech heavy, at least some of them is the downsizing announcements that we see on a weekly basis and those really have seemed to taper off. Really, resulting in maybe more higher upticking in the broad markets than we've seen in the past year or so.

As I move into the life sciences sector, I realize for those that have listened to our calls over the last several years, this sounds a little bit like a broken record, but I'll go through it again anyway. Really, generally speaking, I think these comments mimic what we've observed over the past year. We are seeing long decision making time frames on the user side, substantial amount of prudence and caution being exercised by the companies within this sector resulting in shorter lease terms. And really, more of a just-in-time philosophy as it relates to space commitments.

Historically, this has not been the way that users in this niche have grown. But it really has been a fundamental shift and at least for now the way they're looking at making space commitments.

The pressure on rents really has subsided on a broad national scale. There are certainly still sub-markets where there is susceptibility to further pressure due to sub-lease related supply issues. But that is really case by case, sub-market by sub-market.

We would say that demand has not increased or decreased in a measurable way over the past three months. It is still relatively sporadic and very directly tied to successful funding events or activities.

So what we see out here on the horizon and the environment we're participating in is a continuing challenging set of issues, which in our mind just reinforces further the importance of the Alexandria value proposition. Our expertise are deep and substantial.

Experience in this niche. The unparalleled network that Joel mentioned and we put in place on a daily basis, focusing very specifically on our set of users and even more specifically on the ones that we value most highly. And really kind of stepping back a much more fundamentally long-term perspective as it relates to growing our franchise in our business. All resulting in very selectively pursuing specific users that fit within our overall planning horizon. We continue to be pretty successful in converting those relationships into users and tenants of the portfolio.

Let me shift now into some thoughts and projections relative to our rollover situation. As Joel indicated, we've got about 250,000 square feet remaining in 2003. Of that square footage approximately a third of it is either committed and leased or we're negotiating anticipating such a commitment with the balance of the space either in the marketing realm of going into redevelopment.

Of the uncommitted space, which is roughly 150,000 square feet, about half of that space is either non-core office product or month-to-month base that Joel referenced earlier. Even getting more specific in detail, the remaining 50% is represented by a single building that it is in a office lab market with below average office lab rate. So it really has an insignificant impact on our overall performance.

Relative to the non-core office space we may review the possibility of the disposition of some of that non-core office product in the future.

We are projecting for 2003 pretty modest rental increases on the space that is rolling over flat to 5%.

Moving to 2004, again roughly 570,000 square feet of space will be rolling over, segregating that between first half second half - 46% rolled in the first half with 54% in the back end.

Currently as we see the future, we are earmarking about 30% of that space as being either committed and leased or in the process of negotiation anticipating commitment. Of that remaining 70%, roughly 10% will flow to the redevelopment pipeline with the balance 60% being too early in the process to be able to forecast.

Additional little piece of that, the uncommitted space, about 17% of it is non-core office or office warehouse space. We project rental increases for 2004 rollovers at approximately 5%. I do want to note that given the challenging and uncertain market conditions that we do take a pretty conservative stance relative to doing these projections on a quarterly basis.

And with that I'll turn it back over to Joel.

If the Conference Moderator would open it up for questions we'd be happy to field those.

Thank you. (Operator’s instructions)

Our first question comes from Brian Legg of Merrill Lynch.

Yes just real quick. Pete, how do you get to the 2% NOI growth for '04 if the margin on 11% leases rolling over is only 5%?

A little bit of conservatism on the part of my friend Mr. Richardson here. I believe as leases roll we will continue to be able to reduce operating expenses or the use of our lease form through the reduction of leases. We saw throughout this year actually if you look at our operating side on you do see a little bit of that.

Okay and for the 95,000 square foot building that you sold during the quarter, can you sort of give color, just the history on the building again? Was that something you developed or was that an old original portfolio building?

No, we bought the building in 1998. Never hit the market. It was a purchase from an investment group. We kicked out an existing tenant, brought in another tenant. But in negotiating that lease it was clear that an important quit protocol was an option to purchase five years out.

Okay and then can you talk about your development pipeline in growth order? Can you talk about your land bank if things start to improve? Can you talk about your buildable square footage and your cost basis on the land bank?

Yes we're very cautious, as you know Brian. Development in this niche is an extraordinarily long-term process and looking out you know some 24-36 months or more. We do have a land bank that approaches 1.5 million square feet that we own and that we pretty much fully entitled at fairly low or nominal basis in many respects. But I think we're not viewing that as something that would be immediately developable based on what we see the market about at least the next 12 months.

So how much could you build beyond the core? If you get some--?

1.5 million square feet.

I understand the 1.5 million, but what's a realistic that they could fall in behind the 477,000 square feet?

It would all be dependent on what we perceived as growth of clients in the portfolio, or those that we would want to join the portfolio. It would be almost impossible to say.

Okay and last question. Can you talk about supply of competing lab, office products in your market and also I have been reading about how municipalities are trying to essentially recruit firms to come to their areas because of the high paying bio-tech jobs? Are you seeing any out migration from your core markets?

Let me comment on the latter part and I'll ask Jim to comment on the former part. Well some years ago IDEC Pharmaceuticals, which is a big bio-tech company, is one of our anchor tenants down in San Diego. And a number of years ago when they looked to expand their presence substantially, they ended up moving some of their manufacturing up to Oceanside and expanding elsewhere in San Diego.

But I believe the State of Texas and it could have even been the city of Austin potentially - forgot exactly where it was - offered to give them unlimited acreage free of cost and threw a lot of incentives at them. There are a lot of States --- there was a USA Day-to-Day article on that this week that talked about tobacco tax money and a lot of incentives.

A lot of the States are trying to encourage activity. But it's not a big enough sector. I mean Pfizer has been picking up and moving their research operations or their fundamental operations from [Gratin] somewhere else. They may go out and have outposts for research and other kinds of activities but they're not wholesale getting out of their core fundamental operational base. And that's true of most companies.

So my guess is most of these efforts will be minimally successful. There will be a few that potentially could be successful but not many. Let me ask Jim to comment further on that, or certainly your first question.

Yes, Brian, I've been involved in watching this potential thing over the past several decades and I have yet to see it succeed in any significant way. There is so much more to developing a presence in a cluster than money. These companies are looking for a whole different set of support mechanisms beyond just capital and it's hard to find them beyond the main clusters that they're already in. So I think it will continue. And as Joel said, I think that sporadically you will see some success but in a pretty modest way.

Addressing your first question, as with kind of my prior comments, not significant amount of change relative to competitive supply market by market over the past quarter. The thing that we continue to keep our eyes on as I kind of mentioned is sub-lease space. As companies consolidate and/or move, the leave behind space is really important to track and I think that is the area that we're most focused on as we look at rental growth and/or deterioration.

But generally speaking, there really hasn't been a fundamental shift since the last time we chatted.

So sub-lease space hasn't grown? And are you still at an overall vacancy in the market of 10%?

I'd say that very broadly speaking, 10% and under is a good national average. No, not growing in a meaningful way, but certainly moving around market to market.

And Pete, just one last question. I assume that the fix out of your $150m term loan is included in the guidance for '04 correct?

Correct.

Thank you.

Our next question comes from Dave Aubuchon of AG Edwards.

Thanks. Pete what was the straight line rent for the entire portfolio during the quarter?

Hang on one second Dave, I have it here. For the quarter, about $1.4m.

Joel if I look at on the redevelop, the leasing activity in the redeveloped space, you kind of mentioned that the $85 cost in redevelopment. What is like a total aggregate cost for that space? Just trying to get to what would be a net effective return on the leases that you're signing to that space.

You're talking about during the quarter?

Yes, just as an example. You know you had the cash lease rent was $24.12 and you had $6.55 a square foot. I'm just curious, what if you look at that space in that way you haven't -- okay we spent $200 a square foot on this space.

Yes I have been and will continue to be reluctant on any specific space to give that kind of detail. But I would say that again it depends on whether it is kind of a life biology lab, a clinical lab or a heavy chemistry lab. It's fairly different as far as a cost and investment.

I think you can assume that our lease rates try to return to us our benchmark yields on our efforts and we're looking at trying to achieve those. I don't think we typically enter into leases where we can't realize those returns. I think that's all I feel comfortable in saying.

Okay and your benchmark yields again on the redevelopment development is typically in the low to mid teens?

Well, I would say low double-digit.

Okay. And then secondly, is there any take away from the increase in generic spending that you mentioned over pharma? Any near-term implications that that trend continues?

Well I think the implication is that the generic pharma industry is going to become a bigger and more important part of the pharmaceutical landscape in the future. I think that's real clear. And is that good or bad? I think it is good in many respects because I think it will help control costs more because none of us want government control on pricing. Well most of us don't.

On the other hand, it also will provide a mechanism where drugs come off and that they can truly be marketed in a very cost-effective fashion. I think on the flip side, it is critical that novel break through patented products receive patent protection and premium price protection but with greater buying power. Pricing can be negotiated more favorably for user groups.

So that's kind of a hope. You know if you were listening to McClelland last night, that's clearly where the FDA is focused as well as Congress. Warren Hatch, another person who has led a lot of the pharmaceutical legislation I think has that identical view.

Thank you.

You're welcome.

As a reminder, star '1' to ask a question and we will go to Tony Pallone of JP Morgan.

Hi. I have three questions. Number one, can you give us an update on your leasing prospects for the 95,000 square foot development that comes on line in 4Q?

Yes. All we can say is that we are working with an existing client and we hope to finalize that in the fourth quarter.

Okay. Number two, looking out on your exploration schedule to 2005, the expiring rent spikes a bit. If those were to come due today where would those be relative to market?

That's a hard question to answer because that involves going market to market and lease to lease or building to building. But I would say the average is $21.61 for 2004. Are you asking about 2004?

No I'm sorry 2005. It spiked up to $28.

I'm sorry $28.41. I would say just eyeballing this I would say the barrier is probably above market. But everything else I would say seems to be not too out of whack. I don't know Jim, your view on that.

Yes Tony what we do when we make these projections is we go lease by lease and then aggregate because we have relatively few leases in the general scheme of things. We can do that.

2005 is a way out and so it is a little more difficult to do that accurately. But I would concur with Joel's comments. As I look here not knowing, I have out the top of my head the specific leases that are rolling over, I would say that with the exception of the barrier everything here looks really close to market.

Okay. Then third question just finally, next year it looks like one year preferreds could become called or be called. Any thoughts on what you do there?

Well I would say that comes up in kind of the June time frame. The coupon rate of the [E series A] perpetual is 9.5%. So I think if you're an economist you could probably assume that we have given careful thought to that proposition.

Okay, thanks.

You're welcome.

Our next question comes from Ralph Block of Bay Isle Financial.

Hi guys.

Good morning.

Do you think there might be any opportunities to lease space to companies that might otherwise want to own their own buildings in a less uncertain environment? In other words could there be a new layer of tenants that you haven't been addressing before?

Yes Ralph I would say if there was, it would be a very nominal opportunity. Historically the companies in this niche, there's a real clear line of demarcation. Big pharmaceutical companies want to own their facilities. Most companies, unless they are at that level that Joel was talking about with IDEC, until they graduate to that level, they don't want to own.

So, occasionally there is a company or an individual who has a particular desire to own his real estate. But that is absolutely not the norm. So there is not a great opportunity to convert. There's not a lot of these companies that already own or want to own to begin with.

Okay. And has there been any signs that maybe an increase in demand might come from a little easier funding for some start ups or public companies that need additional capital?

Yes. Let me comment. The year has been actually a stellar year from FDA approval standpoint. There have been a couple of companies that have gone public. But maybe the last half empty or quarter empty guide. But I view that the kind of what has been a kind of a freak in a window. This is just focused on the bio-tech sector. I think it is really not much of a window at all.

There are few companies that have gone public. But there are fairly modest valuations and modest amounts of capital being raised, substantially all of which is being put into their clinical pipeline development.

So I don't really see kind of the boom or the buoyancy that we saw back in like 1999, 2000.

Okay. Thanks.

You're welcome. Thank you.

This concludes our time for question and answer. I'll turn it back over to you Mr. Marcus.

Okay. If there are any other questions we wouldn't mind taking them?

Sir, one moment please. We do have a follow up question from Brian Legg of Merrill Lynch.

Pete, I assume that if you do redeem your preferred in '04 you haven't factored it into your guidance as a topic D42 charge correct?

Yes. I have not considered that yet in my guidance. There will be a topic D42 item in the second quarter of '04 if we do redeem our preferred stock. I will give further guidance on that next quarter.

Okay, thank you.

If there are no other questions, I'd like to thank everybody for joining us and look forward to earnings release in the early part of February of '04. Thanks so much.

This concludes today's conference call. You may disconnect at any time. Your participation is greatly appreciated. Thank you.