Alexandria Real Estate Equities Inc (ARE) 2003 Q4 法說會逐字稿

Good day and welcome, everyone, to the Alexandria Real Estate Equities fourth quarter 2003 conference call. Today's call is being recorded.

At this time for opening remarks, I would like to turn the conference over to Ms. Rhonda Chiger.

Please go ahead.

Thank you and good afternoon, everyone.

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.

And now, I'd like to turn the call over to Joel Marcus.

Please go ahead.

Good afternoon, everybody, and welcome to our fourth quarter and yearend 2003 conference call.

I'm going to depart briefly from our standard review approach to the quarter and to the year for a moment and address the stock at ARE briefly.

And I want to start out by referring to a quote last week in an interview with Larry Ellison, who's Chairman and CEO of Oracle, as most of you, know, and he had stated in this interview that America's last bastion world-leading scientific prowess was life science research, chemistry, biology, life science computing, and he opined that these disciplines would have a more profound, positive influence on the US and the world economy over the next decade than the IT and computing industry did over the last decade. Kind of an interesting observation.

At Alexandria, we continue to be cautious about the economic environment but believe that with wise legislative and executive decisions, the government won't mess up this last bastion of our scientific prowess.

Let me talk a little bit about ARE stock. It has been a great stock to own. It is today the only pure play really in this unique and defensible niche which has been, and we think will continue to be as a company well positioned from both a business model and a platform for growth standpoint.

And I think, as I view the investor world, no matter what your investor style may be, value growth, etceteras, ARE should be considered as a core holding for its long-term total return and as an important, sensible, and conservative way to take advantage of the life science revolution which Larry Ellison spoke about.

For those long-term core holders of (ph) ARE who bought in May of 1997, almost seven years ago - it's hard to believe - and held through December 31, '03, the numbers are really kind of an astounding track record.

Compounded annual growth rate, assuming reinvestment of dividends was 23.52 percent and I don't know of many companies out there that are publicly traded today that can match that record. The S&P 500 on the same basis was up about 5.85 percent, the Russell 2000 about 7.53 percent, the NAREIT, all (ph) read index about 10.52 percent, and the office REIT index about 10.84 percent. Quite a credit to the company's performance.

And if you look at price depreciation along with that dividend reinvestment on the same comparisons, we were about 17.48 percent, the S&P about four percent, the Russell 2000 about six percent, NAREIT about (INAUDIBLE) equity index about three percent, and same for the office REIT index.

So under any metrics of performance, it was a great stock to own for the last seven years and I can say unqualifiedly, management and the board will continue to be net (ph) acquirers of the stock.

We're very pleased to announce our fourth quarter and yearend results, the operating and the financial performance that hopefully you've gotten from the press release this morning.

We believe that ARE can continue to grow prudently, consistently, and carefully with reasonable visibility through its internally generated operations even in a tough market that we think 2003 is. We think 2004 will continue to be in potentially 2005.

The stock price at yearend was near an all-time high and we were blessed (ph) with being a sector leader, both in growth rate, FFO multiples, dividend growth rate for last year and a very, very low payout ratio which positions us well for continued future dividend growth.

And I think one of the metrics that we here at Alexandria are most proud of is that from May 1997 through December 31st, '03, the total cumulative shareholder value created, meaning increase in equity value of the common stock, approximated $800 million. Really, a truly remarkable performance.

Let me talk about the pharmaceutical industry and the impact of the Medicare prescription drug legislation, which was, in essence, very good for the industry which passed late last year. One of the main major investment houses has projected that the legislation would add about 3.5 billion to US pharma sales in 2006 when coverage begins and that demand for drugs will continue to substantially increase.

And I think that's been one of the drivers of the capital markets lately and it will add net new millions of customers who will have (ph) buying administered regionally through both private insurance plans and pharmacy benefit managers.

The FDA, as I commented before, I think made great progress under the first year leadership of Mark McClellan, fighting a legal drug importation, and performance on approval (ph) times for NDAs with priority designation have substantially increased this year. Congressional recognition is a need to preserve and protect one of the last bastion we hope will continue.

Those of you who read President Bush's proposed fiscal year 2005 budget, the NIH budget is projected, or at least recommended to go up about two to three percent so that's relatively flat but good news off a large base.

The National Science Foundation up about four percent, bio defense appropriations about four percent, the FDA about eight percent, and this is all good news in a really tough budget deficit era. And Nanotech budget funding is recommended to go up 11 percent and we are proud that one of the preeminent leaders in this area is an ARE tenant.

Let me move now to earnings, future guidance, and dividend policy. We're very pleased to report $1.08 diluted for the fourth quarter and 4.23 per share diluted for '03, as a whole. As you know, you have seen the '04 and '05 guidance we gave this morning and our '04 guidance, we have backed it down to a range with the mid point of about $4.50 and that's about five cents reduced from the last guidance.

So that's about a penny and a quarter per quarter - a penny and a quarter per quarter from 4.55. We'll talk more about that throughout this call but one of the - and let me just say before I say any other comments, this represents about six-percent core growth this year assuming relatively minimal, external growth, and I think in this environment that's a awfully good number.

We continue to see a challenging environment. We are undertaking a variety of asset sales opportunistically given kind of a unique time in the market. The replacement of that income is challenging and timing of that certainly has caused us to look at this guidance carefully.

As you know, in August of '03, we sold a major asset where we lost $1 million of NOI supporter and it will take time to replace this despite some late year acquisitions. We concluded another sale of a non-core property in our suburban D.C. market in late '03 and we have another in that same market, a pure (ph) office property which is under a binding contract of sale (INAUDIBLE) closed this quarter.

As we said in the third quarter in November '03, we would give initial guidance for 2005 this quarter. We have delivered on what we said we would do.

We do have reasonably good visibility and we felt it important at this point to set a reasonable expectation for '05. Probably not many others are able to do that at this time and we hope that's viewed positively.

We've given guidance in a range of about 4.74 to 4.77 per diluted share for the year. All of the guidance we view, both '04 and '05, to be backend loaded and we view that as - or the guidance is again about six percent based on core growth.

And I think again that's an awfully good number given the (INAUDIBLE) of the economic world today. We do have a real concern about what could happen post-election, and until that's sorted out, we want to be conservative about our '05 thinking.

Dividend and policy during '03; as most you know, our board increased the common stock dividend an aggregate of 16 percent while we maintained a sector among the sector low dividend payout ratio. We ended the year about 53 percent.

So central locale ratio (ph) obviously provides a lot of room for future dividend growth, and if we're guiding to six percent core growth for this year or next year, the board, my guess, would be inclined to look at dividend increases, you know, somewhere at least in that range. So that's I think a very comforting feeling for those who are looking for total return.

The dividend currently is at 58 cents and they will visit that the first quarter, and again, with continuing positive FFO growth in kind of a choppy environment coupled with this low (INAUDIBLE) ratio, we think that that augurs well for our long-term core shareholders.

Fourth quarter '03 and year-ending 2003, just a couple of highlights. As will be discussed a little later, leasing has been driven by really critical, important relationships and Jim will talk about that. Pete will highlight same store growth. But I think if you look at our numbers for the year and the quarter, where we ended up, both GAP and cash, very, very respectable.

Don't want to mislead you but we leased - it was kind of a blowout leasing quarter but I wouldn't make any conclusions from that. We leased almost half the square footage. We leased the entire year in the fourth quarter.

When the fourth quarter really ends up only being about two months since November or Thanksgiving to Christmas it was kind of a downtime period. But again, it was really relationship driven less market driven and Jim's going to give some highlights. Everyone here worked extraordinarily hard to make this happen.

We signed 26 leases for about 366,000 square feet, and the total for the year was 66 leases for about 785,000 square feet.

As you know from the press release, (INAUDIBLE) 12 leases at 131,000 square feet for redeveloped, developed, or (INAUDIBLE). We had about 4.5 years, 14 leases, for 235,000 square feet, newer renewal at about six years, and we had good GAP rental rate increases but we'll give some guidance on that a little later.

Our roles (ph) coming up over the next two years this year, meaning '04, is about 12 percent of the portfolio, 600,000-plus square feet.

And again, we'll give some guidance on our view of that as well as '05 which ticked down to about half that; a little over 300,000 square feet or about six percent of the portfolio. As of 12/31/03, the lease term of the top 20 tenants is approximately eight years. Those tenants provide about 50 percent of the net effective rental rate from the portfolio. So that's excellent stability and no bad debts at yearend.

On the redevelopment pipeline, again, ticking down to about 360,000 square feet in active redevelopments from 390 last quarter.

Again, you'll continue to see that trail down due to slower economic environment. But the good news is, should future growth and the economy pick back up, we're well positioned with a shadow pipeline that we can convert (INAUDIBLE) approximating 400,000 square feet, so that's very, very good.

As you know, the redevelopment pipeline is generally a short-term drag on earnings but the long-term impact will be positive.

Well (ph), let me turn to development because that's an area of focus for all of us. We held steady at about 470-odd thousand square feet. Again, we believe it will trend down over the coming four quarters reflecting the current slow economic environment.

We do have a development (ph) - 95,000 square feet with I think a zero land (INAUDIBLE) in suburban D.C. that we are aggressively working to bring to the point of delivery and the delay in that asset has been from a number of reasons, but primarily the current issue is switching from a potential therapeutic kind of usage to a diagnostic usage, and it is with a current tenant who is expanding. This does have an impact on our quarterly numbers and we are working and watching that intensively.

In general, we're making steady progress, as you will hear, on leasing setup and bringing these development properties to their intended lab use.

Once again, the good news is, we have approximately approaching about 1.5 million square feet in our land bank (INAUDIBLE) very low and nominal land bases which can be developed over time if and when the market will allow us to do that.

For the first year, we've had pretty active, opportunistic dispositions focused, at least most recently in this quarter and the coming quarters, on non-core locations and pure office property. It's a good time to be a seller and we've been approached on some where we weren't even thinking of selling and we have made a decision to entertain prices that we think are solid in the market and others may follow over the coming quarters.

The key takeaway is that we lost about $1 million in '03 that arrived from one sale, and again in today's climate, it will take time to replace the income that we lose through sales but we won't lose our disciplined approach to underwriting and buying. That's kind of a preeminent focus of acquisitions. We did have three acquisitions late in the quarter and we continue again to remain very disciplined in how we view those things.

Let me move quickly, before I turn it over to Pete, to the balance sheet capital structure and some financial metrics. We did continue to have a very strong delevered balance sheet: 37 percent debt to total market GAP at quarter - at quarter and yearend and we will continue our strategy to narrow the variable rate debt exposure, which Pete's going to address.

We had stability in our operating margins. Actually, they kind of bumped up to among the highest levels of about 80.4 percent for the quarter and for yearend about 79.3 percent and Pete'll give some guidance in that area.

Our interest coverage is about all-time high at 4.23 for the quarter, 4.08 for the year, fixed charge, 34.01 for the quarter - again, very high - and 3.3 for the year. No current reserves to bad debts and our accounts receivable, as a percentage of rent from (ph) recoveries, are at an all-time low of about five percent.

I think one final comment before I ask Pete to make a number of comments would be that the company decided to adopt toward the end of last year kind of a public economic approach to a reaction to the war in Iraq and we have sought in each of our markets to adopt a family who has oftentimes most focused on people who have been called up as opposed to regular troops and to focus on helping, caring, and supporting the families, some of which really are amazingly sad stories where either the husband or the wife have been deployed overseas.

And I want to just where that with everybody who view that as a critically important public service of - you know, we've been benefited here in the company and we wanted to try to do something impactful to really pay back these soldiers.

So with that said - sorry for a little bit more longwinded approach to the quarter and the yearend - I'm going to ask Pete and then Jim their (INAUDIBLE) detailed comments.

Thank you, Joel.

I'll go through portfolio statistics and financial matter, drawing out some of the things in the press release and maybe give a little color.

With respect to our operating portfolio, the statistics for the operating portfolio for the quarter really reflects the stability of our operations. I think you can agree with that. The operating performance for the quarter was very strong. Vacancies that we have are primarily the low rent, non-lab space that we have in our portfolio.

The average occupancy, as of the end of the quarter, was 93.9 percent, but if you exclude the office property that's in our discontinued operations and will be sold later this month, it goes to 94.6 percent. So it picked up slightly, really, from the 94.2 percent as of 9/30/03.

The other vacancies we have are primarily non-lab space in the Pasadena and southeast markets, which are not as high rental rates markets for ARE. As we have discussed previously, the properties undergoing redevelopment are excluded from these statistics.

Joel mentioned that our operating margins were particularly high this quarter due to some special recoveries this quarter of about 80 percent, but I guide you to use the overall 2003 79.3 percent as a good run rate going forward.

One housekeeping item, because I'm asked frequently, the number of shares outstanding as of December 31. '03, was 19,264,000. That number now appears in the press release on page six. With respect to the same property portfolio, it was again very stable, as Joel mentioned. For the quarter of '03, it was up 1.9 percent on a GAP basis, 3.7 percent on a cash basis.

Virtually, all of the same property NOI increases were from increases in rental rates. The same property portfolio occupancy as of December 31st was 94.6 percent. That's compared to 94.4 percent for the year-ago period.

You'll notice in the same property statistics that operating expenses were down quite a bit during the quarter. That was due to non-recurring - well, that would be due to property tax reductions at certain properties in San Diego which are passed through to the tenants.

So you really see the decline or if there's an impact on revenue as well as operating expenses. My guidance for the same property portfolio for 2004 remains in the two-percent range. Slightly more of it will be from occupancy increases in the same property portfolio in 2004. As always, termination fees, if any, are excluded from our same property results.

Turning to the leasing activity statistics, I'll just provide a little color on those pages in our press release. As Joel mentioned, it was a very strong leasing quarter.

The change in the rental rates for the leases signed during the fourth quarter were particularly impacted by two leases, one of which is an 11-year lease for 77,000 square feet at a property in San Diego which had a negative 2.6-percent cash rate change and a positive 15.3-percent GAP rent change.

And the second one I'd like to pull out of there is a nine-year lease for a property in Massachusetts for 20,000 square feet which had a cash step-down of four percent but a GAP rent step-up of 14.5 percent.

Both of these transactions obviously were very strategic in nature due to the high quality of the tenants, our important, existing relationship with them, and the long-term nature of the leases. If you exclude these two transactions, just so you know about the rest of the leasings that we did, the cash basis rental rate declined for the fourth quarter which was based on a remaining 137,000 square feet with about a one percent and it was a plus 1.7 percent on a GAP basis. So a little bit of color on those transactions.

FAS 141; the company complies with this provision to FAS 141 and allocates the purchase price of real estate acquired to the various tangible and intangible assets involved in the transaction.

However, we've had no adjustments for above or below market leases that would impact FFO. So we haven't had to adjust for FFO for those type allocations.

A little color on the discontinued operations number. We continue to apply the provisions of FAS 144 with respect to discontinued operations.

As of the end of the year, we have one property in that portfolio. It's the office building in Maryland I mentioned earlier. It should be sold here by the end of February for approximately $5.6 million, representing a gain of about $1.8 million.

The property that was classified as held for sale at the end of last year, which was a non-core asset base in Maryland, was sold right before the end of the year, December 29th, for approximately $9 million at a $36,000-loss. The NOI, in connection with that property that should be eliminated from your models, is approximately $240,000 per quarter.

Now, Joel has asked me to comment a little bit on our debt strategy. As of December 31st, '03, our debt-to-market cap was about 37 percent. About 45 percent of it is represented by fixed rate debt and about 55 percent is variable rate debt. And as you can tell, it is substantially hedged. We continue to expect to continue to narrow our variable rate exposure as we close on fixed rate loans and watch the activities at the Fed.

Reviewing some of our discloses last quarter, but it actually closed this quarter, we closed on a $150-million unsecured term loan in November of 2003. It has a five-year term and it represented a 15-bases point reduction from borrowings under our prior revolver.

We also renewed and extended our prior revolver which has $444 million unsecured on it that has a new three-year term. So it runs to November of '06 with a one-year renewal at our option and that, too, is at a 15-bases point reduction from the prior line of credit. We're very proud of that transaction and we believe that it reflects our financial strength and does provide for flexibility for the years ahead.

You will note on page nine of our press release that we have fixed $50 million of the $150-million term loan to the entire five-year period. So that's a $50-million swap that goes out to October of 2008. A very important transaction for us. That, coupled with 200 million of swaps that we have in place with lattered (ph) maturities that run through June of 2006 are an important part of our debt structure that needs to be understood.

We have no significant near-term maturities. If you look on our maturity schedule, we have a 2005 maturity that's really a 2006 maturity due to an extension option that we have on that - on that loan and that appears page eight of the press release.

We really look at our debt on a duration type basis (INAUDIBLE) overall type basis looking at our fixed rate debt maturity and the swaps and we're comfortable with the overall duration of our portfolio.

Some have asked us about the interest rate on expiring debts, and on a combined basis, 2004 debt maturities have an average rate of about 7.5 percent, about seven percent in 2005, and about 5.5 percent in 2006. So there's some step-down rates that we're expecting over at least the next couple of years.

And as I mentioned at the outset of this little section, we do have an ongoing program to convert additional variable rate debt to secured fixed rate debt and expect to close on a loan in the 35 to $40-million range in the next few weeks. So we expect a percentage variable rate debt to decline for our company.

Let me turn now to our important redevelopment program. I made comments last quarter about our program as well as our accounting for it and I'm going to reiterate them here.

Our redevelopment program is an active pipeline of probably undergoing (ph) redevelopment and it continues to decline modestly. As you'll notice, the square footage under redevelopment did decline about 10/15 percent this quarter from last quarter.

The redevelopment of our properties does involve a permanent change in use and a conversion of the infrastructure to a lab office environment. It's integral to our model, as you might imagine.

The costs for these redevelopments are difficult to project in advance and are subject to mutually, agreeable programming between us, as landlord, and our tenant.

The complex and time consuming process involves a lab designed team and process. You need to look at chemistry versus biology use and the build-out components.

Our redevelopment process historically averaged in the 85 to $90-per square foot range. It's not a TI (ph) program. This is definitely a redevelopment program. It involves proactively taking the subject property off line. It's definitely dilutive (ph) in the short term, and so that should be kept in mind.

And under GAP for this type of process, capitalization of interest is required under FAS number 33 and 67. We capitalize interest during the period of time that's substantive activities that involve for the change in use and conversion are ongoing and it's discontinued when the project is substantially complete.

Interest is capitalized - I should just point out, interest is capitalized only on the costs associated with the square footage undergoing redevelopment. But to the extent we have a property, a portion of which is occupied or already developed, interest is not being capitalized on that portion. It's only on the - on the few undergoing redevelopment.

As in prior quarters, redevelopment properties are excluded from the same property portfolio. If they were included, we think they'd SKU the results just because of the significant change of use. But if they were included, the same property NOI increase would actually be about the same, about 2.2 percent on a GAP basis; a little bit more than that on a cap basis for the three-month period.

And as I mentioned earlier, redevelopments are fully excluded - fully excluded. The whole property is fully excluded from the operating portfolio in computing occupancy statistics. If they were included - the occupied portion was included, the average occupancy would actually increase by 94.3 percent to the 93.9 percent that we disclosed in this quarter's press release.

A couple of brief comments on the development side of just the ground-up development programs. Like the redevelopment program (INAUDIBLE) square footage undergoing development, it's expected to decline throughout the year in view of the soft market and as we deliver the lab space to tenants are completed.

The accounting principals that we apply, with respect to developments, are the same as with respect to redevelopments. It's required while activities are ongoing to bringing these out to their intended use and until the projects are substantially complete.

Let me turn now - just a few comments about NAV, or net asset valuation. We have, historically, not computed or commented on it, although I did make a few comments on it last quarter. NAV calculations, you know, are typically backward looking and don't consider the growth potential of a company like we have consistently had (ph), and will continue to have from our internal growth engines here. They don't consider the uniqueness of a company's business model and (ph) true franchise (ph) value, which we truly believe we have created here and we believe this differentiates us from many of the other REITs in this respect.

A meaningful NAV for a company like ours is difficult to compute, if not virtually impossible. I believe probably the more meaningful ones are more afford (ph) NAV basis, or perhaps on an AFFO basis, which would take into account our continuing low capital expenditures and high tenant retention ratio.

I notice that some observers have gone to a more of a going concern NAV for stable growing companies like ARE by applying a financial cap rate based on bond rates. That's quite an intellectual discussion maybe beyond me but I do believe something like that is more applicable when you have a company like ours that has more steady, consistent growth.

Turning now to my own comments about the guidance; again reiterating what Joel said, 2004 was 4.48-range - 4.48 to 4.51. He actually misstated 2005 by one cent so I'll correct that and he's shaking his head yes. The 2005 guidance is in the range of $4.73 to 4.76. So the number in the press release is the correct range that we intend to provide for 2005.

The lower guidance for 2004 is really a function of the timing of the dispositions that Joel spoke about and the potential for future disposition as well as a slightly slower - maybe not lower but slower external growth forecast. (INAUDIBLE) down slightly for '04.

The growth we do have cooked or baked into our numbers is largely internal and I think that's important to know. It's not highly reliant on external growth, or, for that matter, delivery of developments or redevelopments. We've taken a very conservative and measured view, as you might expect, based on our history with respect to the deliveries, the developments, and redevelopments in our numbers. So that's something to be kept in mind in evaluating and understanding our guidance.

And my last comment is a brief one. We are announcing here that we're going live during the first quarter of '04 on our Web site so look for it. It's www.labspace.com. That's lab space - L-A-B-S-A-C-E.

And with that, I guess I'll turn it to Jim Richardson, our President. Thank you.

Thank you, Pete.

I'm going to again, as we do most quarters, take you through our view of kind of the history and past-quarter performance on leasing front, give you some broad commentary on where we see markets, both generically, as it relates to office and R&D space, and then more specifically, relative to our core niche.

Many of the office companies have (ph) reported. Still, a lot of this is certainly not new news but our view, at least in the markets that we're involved with are involved in on daily bases, is that there's definitely been a clear increase in activity. This is reflected through market tours, building inspections, proposals generated. But generally speaking, there has clearly been pick-up almost across the board.

You're seeing occasional large transactions - by that, I mean greater than 50,000 square feet - sprinkled across the landscape and in more and more of these as we look at to 2004, I think are going to be the result of actual growth in capital expenditures to be made by companies in that direction as opposed to churning of space (ph) or companies relocating based on lease expiration solely.

That said, we've seen really availability in vacancy levels pretty much static. There's been some slight improvement in certain markets, but generally speaking, it seems that we've hit the bottom from that perspective. Because this activity's not yet translated into significant transactional volume, I don't believe there's been enough deal momentum yet to have a real impact on rents other than to really kind of stabilize them where they are. So, in essence, I guess our view is that, you know, a heartbeat has been detected and cautious optimism is truly warranted at this point.

As we kind of move into life science's sector, in our submarkets there, many of the themes from our past - from our conference calls in 2004 really apply here, although there certainly has been some incremental improvement. Joel talked about our leasing activity being very strong in the fourth quarter and he touched on one point which was timing related.

Although we certainly did some great stuff in the fourth quarter, a lot of that had been in the works for some time so some of that is timing related. Development (ph) is also reflective of more optimism and what looks to be some potentially improving capital markets in our sector.

Activity levels, however, are not consistent across all submarkets. There are variances which obviously indicate that certain dynamics, regional dynamics, and the drivers controlling those regions are more effective than others.

So I would not characterize what we've seen as a broad, disbursed sector improvement on the real estate side. You know, really, kind of bluntly speaking, some of these markets are pretty vital and some remain flat.

On an overall basis, what we're seeing on the life science side across the board in the markets we participate in is really modest improvement relative to tenant requirements and demand and rents seem to have generally stabilized across the board.

Before I move into rollover commentary, I wanted to kind of further dive into this comment that Joel made relative to our tenant focus.

We made some comments last quarter about the importance, as it relates to our leasing success, on our expansive network, our expertise, and our substantial experience in this sector, and most importantly, the focus we place on our tenants, and even more specifically, the targeted effort that we make towards building and growing relationships with those tenants that we deem to be of highest (ph) quality, and fourth quarter leasing success really was substantially the result of this particular focus.

Diving a little deeper into the numbers, more than 50 percent of the new and renewal leases were the result of four separate lease transactions, all with tenants with which we've been developing relationships with for quite some time in this focused manner.

And I think it's also important to note that each of those core tenants had very strong alternatives and elected to either stay, expand, or join the ARE portfolio.

Moving to 2004 rollovers, Joel indicated about 600,000 square feet scheduled to rollover in 2004. Roughly, two-thirds of that space is rolling over in the first half, the remainder in the second half. As we look at, broadly speaking, the overall status, about a third of the rollover space is either committed or were in serious negotiations in anticipating a successful commitment, 10 percent would flow into the redevelopment pipeline, with the remaining space being too early to call at this point. That too-early-to-call space, about 20 percent of that is actually office, warehouse space.

Bouncing back to the space that's rolling over in the first half, which, as I indicated, was about two-thirds of the total, about one-third of that we're either committed on or negotiating with existing users, but I do want to - want to note that we do have significant activity across the board on the remaining uncommitted space in that first half.

Also, kind of another little incremental analysis here: 70 percent of the uncommitted space is represented by four expiring leases with a weighted average lease rate of roughly half of the overall expiring rate. So the general take-home there is that, although there is a significant amount of first half roll, a lot of it is on really lower income generating space. So that really weighs (ph) more towards the backend.

And then, I guess, consistent with prior quarters, we see rental rate increases over 2004 in zero to five-percent range. So in conclusion, we see an environment unfolding here that gives cause for cautious optimism as we're kind of looking out through the crystal ball of 2004.

OK, I'd like to ask the Operator to open it for Q&A, if we could, please.

Yes, sir.

At this time, we will conduct a question-and-answer session. If you do have a question, please press star one on your touch-tone telephone.

Once again, ladies and gentlemen, star one for any questions. We'll pause for just a moment to assemble the roster.

And we'll take our first question from Gary Boston (ph) with Smith Barney.

Good morning or - good morning - good afternoon.

(INAUDIBLE) John.

Pete, on the guidance, I guess I just wanted to try to get a little more specificity in terms of what external factors are in the numbers in terms of - it doesn't look like anything on the development pipeline would probably have much of a bearing on the '04 numbers.

But in terms of, you know, expectations of acquisitions or net acquisitions net of the dispositions, can you give us any sort of clarification? That would be helpful.

Just in round numbers, external acquisitions had about $15 million a quarter, zero in the first quarter, then 15 million a quarter for two, three, and four.

OK.

And you're right on the development. The redevelopment generally - as a rule of thumb, you know, I've taken the delivery dates and added a lease a quarter to those for actual rent commencement. So, you know, in your own model, you can kind of chew through that.

Right. Are you seeing more competition on the acquisition front from either third parties, or from the tenants finance themselves to the (ph) low rate environment?

Gary (ph), I would say that - I'm sorry - John, I would not say there has been a market difference over the past 12 months. We generally - for assets that actually hit the market, there's clearly competition and it has an impact on cap rates. As you know, many of our acquisitions we kind of source under the radar screen. But generally speaking, I'd say that there has not been a significant uptick in competition.

In terms of the acquisitions that you made during the quarter, I know - I thought I saw that one of them was 100 percent leased - are any of the other ones sort of redevelopment?

No, they're all - they're all leased to single tenants and two of the three were existing tenant relationships.

OK.

So they're all fully leased.

And then my last question and I'll yield.

Pete, on the - on the development pipeline, the 474,000 square feet, is that all that is included in your properties under development on the balance sheet? Or do you put some of the redevelopment's capital into that for that line item?

The answer is no and no which is kind of an interesting combination. The properties under redevelopment in the - in the balance sheet includes the value of our (INAUDIBLE) cost basis for our land bank which is not (INAUDIBLE) schedule in our press release, OK?

Right.

But properties under redevelopment, we don't go through an allocation and move it back and forth on the balance sheet to property under development. So we don't do that. So properties under redevelopment remain in rental properties and we've always done it that way.

Right. And I know - I know that - and I think we've gone through this before - but I know that there's some difficulty given certain build-outs just to give a really fine point on the - on the total effective (ph) costs on the development pipeline. But do you have some ballpark in terms of what you think that's going to? I know what you spent for the year but . . .

No. We do (INAUDIBLE). About $85 a foot is a good average and actually, historically, its run that and that's still a good estimate in (ph) additional redevelopment costs.

No. I was talking about the pure ground-up development. Sorry.

Oh, it was 250 - yes a total - 255 I think I ran (ph) it recently.

Is the total expected cost of the pipeline?

Per square foot.

Great. Appreciate it. Thanks.

We'll go next to Tony Pallone with JP Morgan.

Hi, guys. It's actually Joe Nazio (ph) here talking for Tony.

Could you give a little color on expected yields on development, redevelopment, and also acquisitions?

Yes, we will not comment on yield. Sorry.

OK, in terms of pre-leasing of the three projects coming in service in '04, could you take about them? Specifically the product in Maryland?

Yes. Again, we are working with a full building user but it has a change in and it's a (ph) kind of multifaceted business that we're dealing with so I'm not sure - I think I commented on that in my prepared remarks. I'm not sure what else you want to know.

OK, you mentioned a little bit about each individual submarket that's not an overall I guess modest - over modest (INAUDIBLE) but a broad improvement over rich (ph) market. Where do you see the greatest risk of new supply for lab space away from (ph) the least amount of risk? Could you comment on that perhaps?

You know, Joe, most of the markets are really mature. They're in areas where there's very little land for future growth (INAUDIBLE) a pretty high barrier to entry. So, really, the concern that one would have about supply (ph) would be subleased space and, you know, broadly speaking, that has not been a huge factor that gives us great concern at this point.

So I don't - so relative - my comment before was really related to demand side and there just are - and it's not even across the board. Some markets are more vital right now than others on the demand side. Supply really hasn't fluctuated much.

OK, and then just two quick modeling questions. Could you talk about a lease term fee income (INAUDIBLE) straight-line rents in 4Q?

OK, our termination fees - I don't have it handy for the quarter - it was pretty modest. It was 700,000 for the year - for the whole year, down $2 million last year, and I think it was pretty steady throughout the year '03, and then straight-line rents running at 1.36 million. (INAUDIBLE) pretty flat there with the prior two quarters as well.

OK. Thank you.

Thanks.

We'll go next to Chris Hartman (ph) with WR Hambrecht.

Hi, guys.

Hey, there.

Hey, Chris.

Looking at the six-percent guidance for '05, just (INAUDIBLE) respective of your classification of core growth, from a breakdown basis is that sort of, let's say, two-thirds coming from your sort of in place (ph) rents escalations, etcetera, one third from delivery of redevelopment projects? And sort of, how do you build up that six percent?

Yes, I'm not sure I want to give that breakdown quite that way. But I think how we viewed it, Chris (ph), is, we view core growth that we could deliver those numbers without going out and really increasing the size of the portfolio. That's what I think we would call core growth from current operations, current redevelopment that's active, and if we needed to bring some forward, as I said in our shadow pipeline, as well as the same thing on development.

I don't know that I want to get overly specific on where it may come from because, frankly, sometimes, we may not know whether something may end up as a ground-up development or a redevelopment, and also, we do have more moving pieces than usual given kind of sales and hope-for replacement properties. But I viewed it as at the current square footage and the current redevelopment bank and land bank that we could deliver six-percent core growth at that level (ph) (INAUDIBLE).

Yes, that's fair. I just wanted to sort of figure out what was baked into that or not.

And so, in that number, the 50 million in acquisitions per quarter starting in the second quarter, Pete, that you mentioned . . .

Yes.

. . . would be only growth in the portfolio that's included in that six percent.

That's correct. The only thing we have to go outside of the company for is that modest level of acquisitions and even that, as you might figure, is really backend loaded because there's nothing (INAUDIBLE) in the first quarter.

And that's really, in a sense, replacement income for sales as well as not net new - net new analy (ph).

OK, and is that - taking that comment, can we assume that you're going to be selling - you plan to (INAUDIBLE) 30 million of property in '04 and sort of acquire 45? Is that sort of a fair net?

I'm not sure we can give you precise numbers at the moment.

Yes, the way I would look at it is, we built in the sale of the one asset and discontinued operations and we're continuing to replace for the sales that occurred last year. I think there's some modest amount of additional sales projected but nothing as high as 30 million, I would say.

Chris, the one thing as to why I'm kind of hesitant here is, we have, in fact, had an active discussion this morning where we have been approached by a third party on a property we were not thinking about selling at a price that it seems attractive and a lot of other factors that may go into it.

So whether that results in a sale, you know, now, later, or never, it's a little hard to say but we certainly are looking aggressively at, again, what I said, a few non-core locations in any way we can dispose of office properties. But beyond that, there may be some other things where people approach us and it seems like an opportunistic point in time but it's hard to give you, you know, reasonable assumptions.

OK, great. Well . . .

. . . to put out to the broad market beyond what we may think about internally.

OK, great. Thanks for the commentary on that.

You're welcome.

We'll go next to Keith Green (ph) with Boston American Asset Management.

Yes, I just had a couple of quick questions. By the way, it's Kent (ph), not Keith. Joel knows that.

I do indeed. Hi there (ph).

Hi. The land bank and, you know, the future development, where do you think it would be SKU'd geographically, if at all?

Well, actually, our land bank that is approaching about 1.5 million is really very well diversified and one of our goals is to make it diversified, or to keep it diversified in most of our core markets. So I would, you know, assume that relatively well disbursed. And the reason for that is because you can never know.

A market we may instinctively think ought to be stronger turns out to be weaker because of some strange, external factors. So our goal is to be, you know, really focused on all of our core markets. So there's not one that is overly dominant, or at least that we would want to be overly dominant.

And then - and then just a financial question. How close are you, if at all, at approaching the 90-percent payoff rule (ph), or REIT (ph)?

A good question, Kent. We're probably three to four years away. I'll say three or four years away so we're not close.

Thank you.

Thank you.

We'll go next to Frank Gramley (ph) with McDonald Investments.

Hey, guys.

Frank.

A question about the acquisitions. You wouldn't give yields but could you talk a bit about maybe where the dollar per square foot fell in line with maybe a replacement per square foot?

Yes, that is a component that we look at in every one of our acquisitions. I'm trying to see if I've got that in front of me here. On all three of these, I would say they're at or below replacement costs.

OK. Now, how about San Francisco? I mean, what are the lease terms? Are they relatively longer lease terms for the - especially the San Francisco assets?

Yes.

And with that, specifically for San Francisco, how does the dollar per square foot compare to market, just based upon the troubles that . . .

Yes. Well, without getting into a great level of detail, the market that this asset is in is - first of all, the type of asset it is, which is our niche, is a whole different product type obviously and it responds to a different market dynamic. But the market it's in is one of the strongest in the Bay area. That price on a per square foot basis is definitely below replacement costs and we've got a long-term lease on the asset.

OK, thanks. Looking at '05, the rent that's expiring is significantly higher than other years. Is that - is that - what does that do the (INAUDIBLE) space or . . .

Rent per foot.

Yes, that is always - and I think there's only 300,000 in 2005 to begin with so we have a much smaller sample but it is very lease-specific.

What do you think the roll will be in '05 based on a current in-place market rent?

What will our rents be in '05?

Yes, I mean, roll up, roll down?

Yes, it'd be - it'd be hard to say. I would have to go in and look lease by lease and we do that but it is way early in the game to be able to accurately project that. As we kind of get evolved through the year, I think it'll be easier to for me to give you a number that is meaningful.

OK, on the development portfolio, you've indicated that things have kind of slowed but you have a pretty big land bank. Are you seeing any anecdotal signs that people might be - that you might begin to expand your development pipeline starting a new construction?

Oh, you mean relative to demand? Yes, I would say we're not at that stage yet. I'm not cautiously optimistic, I think was the word I used. I wouldn't say bullish yet.

OK, and what is your occupancy expectations in '04 in your guidance?

I do expect - I didn't give that number, Frank (ph). It is - in my guidance for the same property, I do expect the occupancy of the same property pool to tick up slightly and it's - (INAUDIBLE) of the same property portfolio at two percent as a whole.

OK, and (INAUDIBLE) modeling. Can you give me capitalized interest for the quarter along with loans to amortization?

Capitalized interest for the quarter ran at about 3.7/3.7 million. And what was your second...

Loans to amortization.

Oh, gees. OK, hang on a second, Frank.

Good question and it is $610,000.

Thank you very much.

Thanks, Frank.

We'll go next to Ralph Block with Bay Isle Financial.

Hey, guys.

Hey, Ralph.

Yes, Joel, you mentioned early in the discussion that you were concerned about post-election issues, I think is how you put it. Could you expand on that a little bit what you're thinking about there?

Yes, I would think if - this is my own view - given the hard-fought victories that (INAUDIBLE) broad (ph) pharmaceutical industry benefited by this prescription drug plan legislation, which I think very few people gave it a chance of winning out in this very tight, you know, Senate kind of split, and it'd (INAUDIBLE) to, but I would think that if, for some reason, the house and/or the senate moved to a Democratic majority - and I'm not trying to give my personal political persuasion but just kind of philosophy - in '05, there could be a revisitation of that bill potentially, or, you know, other thoughts that might, you know, not be favorable for the industry.

That's kind of my caution until - it's kind of like what we said last year same time fourth quarter '02 and yearend '02 about the Iraqi conflict, that until something happens - this was pre-invasion - it was hard (ph) for a lot of tenants and other folks to make decisions.

I think that's a more macro - the one I'm speaking about now - but those have direct impacts on people. Certainly on big companies to a large extent in kind of how they think about their pipelines and their reinvestment and R&D. So that's kind of my big macro concern, I would say.

OK, and just sort of a follow-up there, Joel. Are you thinking, then, that this legislation that has passed could have a significant impact on leasing decisions by some of the large pharma companies?

Well, it's kind of a trickle-down effect. I mean, I think that the more that they're - you know, assuming that the forecasts are right, that sales are going to expand, user bases are, you know, accessed, drugs are going to expand, prices will moderate because they're a larger buying group, and so it's good for everybody by and large and it isn't drug price control, which I think nobody likes.

Remember, drugs are only eight percent or so of the healthcare budget so if people want to control drug prices, they're certainly going to go after doctors and hospitals and, you know, the 92 percent out there that represents a bigger part of the pie. But I think that, to the extent that the big guys see a more buoyant future, they're spending both on their pipelines and on collaboration certainly will increase.

OK, thanks.

You're welcome.

We'll go next to Brian Legg with Merrill Lynch.

Yes, hi.

Pete . . .

Hey, Brian.

Hey, guys.

Pete, can you talk about the 153 million of (INAUDIBLE) again? (INAUDIBLE) your breakout. Is it - how much of it is for your development and how much is it for redevelopment? I think you said that the original cost basis of the properties that are undergoing redevelopment don't get (INAUDIBLE) to this line item . . .

That is correct. So there's two components in the - in the property under development line item is our land bank and then those five properties; you know, ground-up developments that we have going on there.

OK, so none of the capital that you're spending on your properties in redevelopment is placed in the (INAUDIBLE)?

Right. We have never gone through the process of moving assets back and forth from, you know, rental properties or not. I mean, the issue there is really more of an accounting issue. You know, there's one asset, there's one building. Yes, you allocate the cost per capitalization of interest purposes, but for classification purpose on the balance sheet, we just leave it as a rental property till (ph) it's open and operating.

OK, and sort of along those lines, can you reconcile the - on your last page, you have 864,000 of leasing costs for the entire '03, but if you look at the releasing - the new and renewal space of 520,000 square feet, there was $6 TIs (ph) per foot and that adds up to $3 million. What's the difference between those two?

Yes. OK, we have this same problem with probably lots of office recap (ph). On the leasing activity page, that's shown on a perspective basis of commitments are shown when the lease is signed. So you were right. But analyze (ph) the metrics of that lease and the dollars you're putting into it whether or not the dollars go out.

The other schedule is shown on a cash basis. The intent of that schedule is to help an observer reconcile to our statement of cash flows, which actually shows the flow of cash. So, as with other REITs (ph), you know, it's dragging and dragged (ph) from a quarter to a year or more on a particular transaction.

OK, so that cap ex that you effectively sign leases this year but haven't commenced will get pushed into '04?

Correct, and it is - you've probably run into that with other companies but it's (ph) similar here (ph) . . .

And ours is probably perpetuated because we have a much longer build-out curve.

And (INAUDIBLE) my theory, too.

OK, and in general, can you just talk about the pushback of a couple of quarters in your development pipeline? Why is it across the board and not just a couple of your (ph) developments?

Yes, I think complications regarding more finicky tenant space requirements people (ph), there have been a variety of, oh, I think internal decisions by a number of companies and this is not unusual actually across the board.

Funding requirements - I mean, we're seeing - not with respect to development but with respect to subleasing situations we're working on, what a tenant wants seems to be somewhat dependent upon their funding and if they're going after, say, the bio warfare market for, say, smallpox detection, or prevention, or Anthrax, that's kind of one of the hotter areas so you see a whole different view of how they need build-out as if they were doing traditional R&D through traditional funding sources.

So we see - actually, this has been moving in this direction, I'd say, for the last four quarters that funding issues tend to dictate usage, design, and programming of, say, a lot more than they did because people are much more cost conscious and almost need to match sources and uses (INAUDIBLE). We're seeing this in the D.C. area in spades (ph), actually.

OK, and . . .

And particular the one that highlighted 95,000-plus, we have a number of other leases that are not developments, a little bit in redevelopment, and some that's leased and even some that's subleased where (ph) this exact issue becomes almost a controlling factor.

Is there - is there a good story to that, that if they're going to - if they're very specific in what they want that they're going to put in a lot of their own TIs (ph) in it, which means that they're more than likely not going to leave the space once their lease ends?

Absolutely. And, in fact, we've seen in that market in particular, which seems to be closer to the Washington power base (ph), a lot more money flowing around into this sector and people are - I mean, these tend to be longer-term commitments (INAUDIBLE) government and there's been some public announcements where, you know, large amounts of money have been given to a couple of companies.

The (INAUDIBLE) is, you know, I mean, if you're going to buy 100 million - 100 million doses of small pox vaccine or your going to try to produce, you know, large amounts of Anthrax detection kits or something, these are not short-term requirements; these are long-term requirements.

And along that line, I mean, can you - can you sort of estimate - if you're - if you're building these properties for $255 a foot for your total build-out, how much are the parents (ph) putting into these properties?

Yes, remember, that's average. I mean, you could have an informatic (ph) use that would be (INAUDIBLE) biology, generally less chemistry could be far more, or intensive uses for bio weapons could be even far more than that. So I would say, you know, the tenants are putting in a lot but it's so space specific. But a lot.

We were talking this morning - we had one discussion going on with actually a property where, Jim, the tenant said that they were going to put in . . .

168.

Yes. I mean, I think we are offering $15 and I think they're putting in north of 160.

OK.

I mean, I'm not saying use that as the general rule but that's kind of - and this was a matter that actually was just - the company involved just made a public announcement of a very large situation and so they have a very specific use for that facility and the dollars are large. So, you know, it's strange. Two years ago, this would not have been true at all, or even 18 months.

Yes, and you get - in all your leases, you're writing in that you get to keep that $160 of improvements, right?

Well, certainly that is the goal. I mean, whether, you know, five, 10, 15 years, that infrastructure would be useful to another tenant for a different use with some of the uses I'm describing don't know but we certainly are not trying to put our dollars into those special uses.

I think, Brian, you know, the product is pretty complicated so every one of these leases we carefully consider what we do want and what we don't want. So, you know, there may be $160-investment in one facility that we'd want every dollar to remain or maybe another situation where we'd want 20 percent of it to remain. So obviously, that's one of the primary focuses of the niche.

OK, great. Thank you.

You're welcome.

Thank you, Brian.

And with no further questions standing by, I'd like to turn the conference back to management for any additional or closing remarks.

OK, we simply want to thank everybody for taking their time this afternoon to join us and we appreciate your patience and time in listening, and certainly the questions, and we look forward to addressing you again on first quarter results probably sometime early May. Thanks very much.

This will conclude today's teleconference. We thank you for your participation and you may disconnect at this time.