Alexandria Real Estate Equities Inc (ARE) 2004 Q1 法說會逐字稿

Good day and welcome, everyone, to the Alexandria Real Estate Equities first-quarter 2004 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Rhonda Cheiger (ph). Please go ahead.

Thank you and good afternoon. 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 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'd like to turn the call over to Joel Marcus. Please go ahead.

Thank you, Rhonda, and good afternoon, everybody. Welcome to our first-quarter conference call. With me, Jim Richardson, President, Pete Nelson, Senior Vice President and Chief Financial Officer, and Dean (indiscernible), Vice President of Accounting and Finance.

As I do each quarter, let me start off by making a variety of introductory comments. We did have a solid first quarter with FFO per diluted share up about 6 percent, which evidences a solid core growth in what we consider to be a continuing, challenging economic environment.

As Jim will talk about, it was a solid pleasing quarter. We did continue our sales program of pure office and non-core properties with one sale closed in the quarter. We have continued fixing debt with long-term fixed-rate debts on favorable terms and conditions, which Pete will chat about and also our ability to continue to minimize our variable-rate debt exposure, which Pete will also comment on.

The Board has continued to increase dividends with our very low payout ratio. I will make a couple of comments on that in a few moments.

This May, 2004, marks our seventh anniversary as a public company; we did become public in May of '97, and we are proud that we have produced a consistent, predictable and reliable earnings performance and operations -- and operations every quarter since we became public. I think something else that has been a hallmark of the Company -- we've had one of the most consistent quarterly same-store growth rates of any of our REIT peers out there, so we're very proud of those excellent accomplishments over the last seven years. 2004 also marks the Company's 10th anniversary since our founding back in January, 1994.

A couple of other broad comments and one that struck me is I can't help but to echo some of the analogous sentiments to those expressed by John Bucksbaum (ph), CEO of General Growth, in his first-quarter conference call, which I read a little bit about. For those of you who know the Company and those of you who don't, ARE is a truly unique Company with an outstanding track record, which we've demonstrated every quarter since we became public back in May of '97. Our entity value speaks to much more than the assets on the balance sheet; we have clearly and unequivocally demonstrated a unique roadmap for growth for all investment styles and have certainly, positively distinguished ourselves from the rest of our peer group. We've had a strong track record, again, of consistency and predictability in our operations, growth and earnings and we intend to maintain the (indiscernible) space leadership position which we hold today.

We believe that our branded franchise are powerful and impactful to our differentiated life science niche and tenants. I think, if you look back at the total return performance, which I commented on last quarter, again, total return since our IPO is about greater than 403 percent, versus the broad NAREIT index at 193.5 percent and our compounded annual growth rate since our IPO through the end of the '03 year is 23.5 percent versus the broad NAREIT index at 10.5 percent. Not many companies, I think, can claim that kind of a performance and we're very proud of it.

Our markets are relatively stable but still a challenging environment; Jim will comment on that. My own personal view is that, the third quarter and fourth quarter, I believe there are significant macro capital market risks evidenced by the handover June 30th to some Iraqi sovereignty entity or nurse or interim government, the Olympics coming up in August, two national conventions and then the November elections, so my guess is post-second quarter, we are in for a rocky third and fourth quarter and we will pay particular attention to that.

We have seen relatively strong activity in the biodefense-related sector, and it's useful to note that on the drawing boards and moving forward is one of the most ambitious and far-reaching U.S. research projects since the World War II Manhattan Project or the Apollo moon effort. It involves more than 12 government agencies that are managing work by thousands of scientists at hundreds of institutions and labs across the nation. My own belief is that this whole effort will likely have a very important and positive impact on our business in a variety of ways, some of which we will comment on here this afternoon.

Moving now to earnings guidance and dividend policy, as you know, our FFO per diluted share is $1.10 this quarter, again driven by a solid and differentiated business model and really a strong core growth reporting for this quarter.

Guidance -- we've tried to narrow the guidance focused at the low end of the range -- 4.46 per diluted share for 2004, which is about 5.5 percent core growth rate, which we believe still is a very solid growth rate in this environment, and for 2005, $4.73 per diluted share, about 6 percent growth. Let make go back and correct -- that was 4.48 per share for 2004 and 4.73 per diluted share for 2005, about 6 percent growth for 2005.

You'll continue to see some asset sales as you saw this quarter where we sold a pure office building in the Suburban D.C. market. It's hard to say; we are unsure of the timing of reinvested proceeds. We are continuing to utilize our very judicious and careful screening for assets that we do choose to acquire for external growth. We won't let up on our approach that we have used historically, and Jim will probably comment a little bit on that. Those are -- I think those issues become important to the Company and again he will try to comment on some of the factors there.

We are seeing, again, a continuing, challenging macroeconomic environment, certainly with the political and terrorist impact risks that I think are probably as large as they've ever been as we enter into the third and fourth quarter. This isn't really company-specific; it really is really macro-oriented.

On the dividend side of things, after an aggregate increase of 16 percent in 2003, the Board again raised the dividend for the first quarter, which was paid in April, from 58 cents to 60 cents, which really is based on positive core growth and one of the industry's lowest payout ratios of 54 percent at the end of this quarter, which certainly gives us room to continue to potentially increase dividend payout.

For the first quarter, moving to operating and financial performance, we did close one sale at a gain. Pete will have a variety of comments on same-store growth, which was about 2.7 percent on a GAAP basis. Leasing, which again Jim will comment on -- we started the year with 2.3 percent lease expirations; we're down to about 7.3 percent, 23 leases signed for almost 300,000 square feet. We feel good about that. Thirteen leases for renewed or re-leased space, as you can see from the press release, were about 162,000 square feet with a good GAAP rental rate increase, and ten leases for about 133,000 square feet out of redevelopment, etc., with so pretty good lease durations on those.

If you look in our top 20 tenants, which essentially garner about 50 percent of our net effective rent, the average lease durations at the end of the first quarter, about 8.5 years. This provides ARE with, I think, reliable and consistent cash flow, so this is certainly a positive aspect of the report.

On redevelopment, let me share with you an emerging trend I think we're seeing, and that is due in part to both capital flows in addition to a variety of other factors, together with the annual appropriations for this biodefense initiative that I talked about. We are seeing smaller-sized incremental growth and expansion opportunities for small and medium-sized lab needs. I think this is -- another trend that's really coupled with this is, many of these requirements are focused on commercializable scientific efforts where there are multiple parties collaborating, so this creates a more complex and more interactive type of trend than we've seen I think in years past.

As a result, you'll continue to see a measured decrease in our development pipeline, which cycle runs about 24 to 36 months in a measured increase. In our redevelopment pipeline, as you know, it has popped up from about 359,000 square feet at the end of the fourth quarter to about 496,000 this quarter. This will run across our markets to provide small and medium-sized lab space availability with better turnaround time. We will continue to aggressively pursue the activities necessary to bring those redevelopment spaces and assets to their intended lab use, generally a cycle of some 12 to 24 months. As you know, this does have a current drag on current earnings but will positively impact future growth.

We have an additional 400,000 square feet-plus of potential redevelopable space in our redevelopment bank.

On the development side, again, the development is trending down about 370,000-odd square feet this quarter. During the first quarter, we made a major decision regarding our 95,000 square-foot development in Suburban D.C. to move from a single-tenant to a multi-tenant configuration for many of the reasons previously discussed. That is now aggressively moving forward.

External growth -- again, I will let Jim comment on what we see out there and comment on some of the considerations.

Moving to the balance sheet, capital structure and some key financial metrics, we continued a very strong and deleveraged balance sheet at the end of the first quarter, 35 percent debt-to-total market cap. Again, our aggressive strategy to fix and hedge debt -- and again, Pete will address that in detail. We continued with strong and consistent operating margins, 79.3 percent, exactly the same as the fourth quarter, and we had extremely strong coverage ratios of 4.2 times interest coverage and 3.4 times fixed-charge, which are very, very strong. We have no current reserves for bad debts on account of rental revenues.

So with that having been said, let me ask Pete to comment in detail more on some of the financial and operational aspects.

Thank you, Joel. I'm going to talk about some matters of financial and accounting significance as well as amplify on some of the points that you mentioned here.

Looking at the operating portfolio, let me just highlight a few of the statistics. We believe that the statistics reflect the overall stability of our operations. The vacancies are relatively modest and tend to be in low-rent markets, primarily with non-lab space. The average occupancy as of the end of the first quarter was 93.2 percent for our opening portfolio; that compares to 93.9 percent as of the end of the year. The vacancies that skew the average are primarily non-lab space in Pasadena as well as the Southeast, and these are not high rental-rate markets for our company. As always, properties undergoing redevelopment are excluded from these statistics.

As Joel mentioned, operating margins were 79.3 percent for quarter, same as that for the full year of 2003. Going forward, we're looking at about 79 percent as a good run-rate for our company.

One housekeeping item and it is in our press release on Page 5 -- we have 19,378,000 shares outstanding as of 3-31-04.

On a same-property basis, looking at the same-property pool, we feel that the results for the quarter were very positive and consistent, very consistent with prior quarters and prior years as well. For the first quarter of '04, we were up 2.7 percent on a GAAP basis, 1.2 percent on a cash basis. Virtually all of the same-property NOI increases is from increases in rental rates. The occupancy of the same property pool as of March 31 was 95.4 percent, compared to 95.5 percent for the year-ago period.

This quarter, really for the first time, we have an unusual relationship between GAAP and cash same-property results. Usually it is the reverse, where cash growth is a little higher than GAAP growth. This is due primarily to a single, long-term lease to the FDA at a property in the San Francisco market. Some of you may remember this; it's been around since pre-IPO. It had major step-down in rents during this quarter from $529,000 a quarter to $187,000 per quarter. The lease existed when we bought the property in 1996 and runs to 2014. Obviously, it was considered in the purchase price at that time. This will continue to drag down the cash same-store rents in the next few quarters, although it's not really indicative of any trend in rental rates in that market or in any other market.

Operating expenses for the same property pool were down for the quarter due to property tax reductions that are passed on through the tenants for certain San Diego properties, as well as decreased repairs and maintenance expenses at certain properties, which also experienced a corresponding decrease in recoveries.

Guidance for the same-property pool for '04, my guidance remains in the 2 percent range on a GAAP basis, although we anticipate slightly more of it in this year will come for occupancy growth as opposed to the rental rate growth we achieved in the past. As always, termination fees are not included in the same-property results.

I will just comment briefly on FAS 141. The Company complies with the provisions of FAS 141 and allocates purchase price of real estate acquired to the various tangible and intangible assets acquired. However, there are no adjustments for -- there have been no adjustments for above or below-market leases that would require an impact to FFO.

With respect to discontinued operations, we continue to apply the provisions of FAS 144. There were no changes in the properties that are components of discontinued operations during the quarter. The office property in Maryland that was in that pool as of December 31, '03 was sold in February of '04 at a gain of about $1.6 million. That is included in the discontinued operations line item on our income statement. The NOI eliminated by this sale was not particularly material in doing your modeling, no adjustments there. We will continue to see dispositions of noncore assets from time to time in 2004 and into 2005.

With respect to our debt strategy, as Joel mentioned, as of March 31, we had a debt to market cap of about 35 percent. About 46 percent of that debt was fixed-rate debt and about 54 percent of it was variable-rate debt substantially hedged, as most of you know. We will continue to narrow our modest variable-rate debt exposure as we close more fixed-rate loans and watch the activities at the Fed. As of March 31, '04, we had $50 million of our $150 million term loan that we had closed in the fourth quarter of '03, and that's fixed for the entire five-year period through the use of interest rate swaps. I would just direct you to Page Eight of the press release.

Then of the $200 million -- we have an additional $200 million of our line of credit, which had an outstanding balance of 213 million as of March 31, '04. That's hedged at rates between 3.12 percent and 5.36 percent at laddered maturities running through June of '06. Importantly, we hedged another $50 million; this was in April of 2004, we entered into another set of interest rate swap agreements to hedge another $50 million of our term loan exposure through April, 2008. So just to kind of take a step back and look at where we are today, we have $363 million of variable rate debt as of March 31, '04 and 300 million is now hedged, leaving only 63 million unhedged.

As mentioned in the press release, we did close on a $38 million fixed-rate secured loan during the quarter. It has an interest rate of 5.8 percent, a maturity date of 2016 and a 28-year amortization. We tend to look at our debt more on a duration basis; that -- pulling in the variable-rate debt with hedge contracts against them. We are very comfortable with our position. We have no significant, near-term maturities -- 2005 maturity that you see on the schedule there on Page Seven of the press release is really a 2006 maturity, since we can extend it for a year. As you know and as I've said previously, we do have our continuing program to convert variable-rate debt to secured, fixed-rate debt.

Speaking now about our redevelopment program, Joel made a few comments about it. I want to review the accounting for redevelopment, since it's important in some -- it is confusing. Our redevelopment program involves a permanent change in use of our properties and conversion of the infrastructure. The process involves planning, design, redevelopment of the infrastructure and related improvements. We are continually addressing changes at these properties, based on needs of the market and those of prospective tenants for biology use of the space, a chemistry use, and things of that sort.

As you know, those of you who have followed us for years, this redevelopment program is integral to our business model. You also know that the costs for these redevelopments are difficult to project in advance for the reasons I stated, and it's subject to mutually agreeable programming. It's a complex and time-consuming process and involves both design and buildout.

Our redevelopment costs have historically averaged in the 75 to $95 per square foot range. Looking at the redevelopment pipeline right now, it's about 75 to $80 per square foot on average. It involves proactively taking a property off-line that's otherwise leasable. As a result, it's dilutive in the short-term. When it goes into the pipeline, we are required to capitalized interest under GAAP, which is FAS Number 34 and FAS Number 67. Interest is capitalized during the time that the activities are undertaken to prepare the asset for its intended use. Then it's discontinued when the project is substantially complete. It's capitalized only on the square footage undergoing redevelopment; sometimes this is confusing when you look at our redevelopment pipeline. That column that shows the square footage undergoing redevelopment, that's the column and that's the space for which interest is capitalized, not on the entire building; the occupied portion is kept as operating and not capitalized interest on.

As I mentioned when I was speaking about the same-property portfolio, due to the complexity, we do take them out of same-property portfolio. If they were included, same property NOI would be about the same for the three-month period, about 2.2 percent for a GAAP basis.

Redevelopments are fully excluded from the operating statistics as well. This has a tendency of weighting down the average occupancy of the portfolio. If the properties were included, the average occupancy would be about 93.7 percent, as opposed to 93.2 percent.

As Joel mentioned, we have a somewhat-higher level of redevelopments this quarter and in the future due to the types of users that we are now focusing on and changes in the marketplace.

Briefly, with respect to the development program, the square footage undergoing development, as Joel mentioned, is expected to decline throughout the year and into next year, as we continue to deliver lab space. Again, accounting principles, with respect to capitalization of interest, apply here, like they do for redevelopment; it's required while activities are ongoing to bring the asset to its intended use and until the projects are substantially complete. It can be a very long process for our property type and while we address a variety changes along the way, based on tenant needs.

With respect to NAB, Joel stole a little bit of my thunder. I had talked about it in prior quarters and we have not commented on it prior to that actually at all, but as you can tell, we feel a little bit more compelled to do so at this time. As I said previously, ARE is not a collection of assets. Our growth and a substantial portion of our value is derived from non-financial metrics -- our unique business model, our franchise value, our people, our networking skills, things that Joel had mentioned -- brand recognition. These factors have distinguished us and will continue to distinguish us from other REITs and real estate organizations.

We encourage observers of the Company to back away from this limited metric. NAB calculations are typically backward-looking on historical results and do not consider the growth potential, even though we have a history of growth, the growth potential that we expect to continue to have and we've given guidance on and most meaningfully, the internal growth that we've experienced.

A meaningful NAB is difficult to compute for most companies and REITs but is virtually impossible to us due to the value-added programs. In the past, I've encouraged a more forward NAB approach to ARE, which considers the additional value of our development and redevelopment programs. But even this approach, which is even difficult to do, only considers this one additional aspect of the Company and not the many others that I mentioned.

Turning now briefly to FFO and EPS guidance, I'd like to just clarify. Joel mentioned we've gone to a single-point estimate 4.48 on diluted FFO per share on 2004 and 4.73 for 2005. Consistent with our policy, we don't really comment on the individual detailed disruptions going into our guidance. In fact, we obviously run our own models under multiple scenarios, many of which could result in the same -- come up with the same results. But the guidance reflects the end result that we are comfortable with the single-point estimate that we're comfortable with. I'm available after the call (indiscernible) some of you working on individual models, just to comment on what might or not work.

As you could see, we've gone to the single-point estimate; it should be probably slightly back-end loaded for 2004, for those of you looking at a quarterly projection for the Company.

With respect to EPS guidance or net income per share guidance, we've revised it to a single-point estimate of $2.45 for 2004 and $2.82 for 2005. You will notice that this guidance doesn't always move in concert with the FFO guidance; it's impacted by depreciation expense, which is a tough projection item for us -- which we adjust due to our expectations of in-service dates for developments and redevelopments and specific dates of dispositions or acquisitions. We adjust these quarterly as we get better visibility of those items.

Then lastly, I'd like to announce that we've taken our Web site up; it's at www.labspace.com. It's a beautiful Web site. I think you'll notice it will be evolving over the months and years to come, but we do hope you find it useful in your work.

With that said, I'd like to turn it over to Jim Richardson, President of the Company, to comment -- (technical difficulty) -- property operations and other topics.

Thanks, Pete. I will start, as usual, with some broad market commentary and then narrow down to specifically our niche in our submarkets.

Generally speaking, in the submarkets that ARE is involved in on the office and R&D sector, which are really the most relevant components of those submarkets that indirectly affect us, we've seen a general trend of improvement continuing. This is reflected through the generally observed market activity and transaction volume. That said, it still remains choppy; some regions and submarkets are clearly responding more quickly and vibrantly than others. I think many of the office companies have reported that trend as well.

We still have seen no discernible upwards impact on rents. However, I think, clearly, the downward movement or pressure seemingly has desisted, again within our submarkets in these sectors.

We have seen evidence of a recovery of sorts with a number of larger transactions that are happening in these submarkets, more so out of expansion than just mere relocation or shuffling of the chairs. This may or may not jump-start a recovery on a submarket-by-submarket basis but it certainly tends towards the positive.

So, we would say that, generally speaking, all signs remain positive. We see solid, positive job growth forecasted in most of the submarkets that we are operating in. As I mentioned before, general activity levels are up and that's promising, although I would not characterize them in any circumstance as robust.

The sublease space overhang is continuing to decline, which is obviously a positive sign, ultimately, for rent growth and stabilization. So, we remain cautious in out outlook but continue to be hopeful as we see this movement across each of the submarkets that we are in.

Let me shift over to the Life Sciences sector. We had a another solid quarter of leasing, as Joel mentioned in his preliminary remarks, and it really was balanced fairly evenly across all of our regions, which we believe to be a good sign. That said, generally across these markets, strength of recovery and/or activity is varied -- not necessarily as reflected in our success metrics from a leasing perspective but just as we see markets kind of evolving. I think it probably is obvious and logical but submarkets that have more diversity relative to the industry segments within the Life Sciences, the broad Life Sciences industry, are generally faring better than the more focused regions, for example, those that are predominantly big pharmaceutical or biotech-only related; those markets seem to be more susceptible to inconsistent demand.

So, I would say that the theme from previous quarters remains pretty consistent -- modest demand in most of our markets, although incrementally improving, no further rent deterioration. However, the comments that Joel made may be more macro, but specifically within our industry, the uncertainty related to capital markets definitely continues and results in continued caution of our tenant base, or the tenants that occupy our property types, relative to long-term leasing commitments or, for that matter, significant leasing commitments, which is consistent with some of Joel's comments.

Before jumping into some of the rollover projections, I just want to kind of briefly touch upon the external growth via acquisition world that we're seeing today. We had some solid activity in the fourth quarter. We did not announce any acquisitions here in first quarter. However, our effort continues on a very organized, comprehensive and diligent basis. There certainly are other players interested in our market niche. However, we see, I see our primary challenge focusing on those opportunities that are -- ensure really and compelling value for us over the long-term. So it's not by lack of a dearth of opportunities that our acquisitions continue to be very strategic and honed; we're just very sensitive to ensuring that we are disciplined in maintaining our focus on opportunities that truly are going to drive value for the Company.

So with that said, we do anticipate continued and incremental external growth via acquisitions, going forward.

Leasing, first quarter -- Joel touched on a lot of this, so I will go through it fairly quickly. Another solid quarter, about 300,000 square feet when excluding month-to-month leases, pretty evenly balanced between renewals and extensions as opposed to vacant, redeveloped or development space. Eleven percent rent growth on renewed and extended leases is certainly a good characteristic and determinant, moving forward.

Importantly, we think that the leasing activity continuing in the second quarter is, through a combination of extensions and renewals, will be consistent with what we've seen over the last couple of quarters. However, I would say it's important and interesting to note, following up on Joel's comment, that a lot of that activity really is with smaller and mid-sized transactions, which certainly enables us to focus our expertise on analyzing these prospective tenants and efficiently processing these transactions.

Moving into 2004 rollovers, 350,000 square feet roughly for the balance of 2004, 40 percent of that rolls over in the second quarter with the remaining balance, 60 percent, in the second half of '04. As we look at where we stand on these specific rollovers today, more than 50 percent of those rollovers scheduled for the balance of 2004 are either committed or we are anticipating getting that space committed. About 15 percent will probably flow into the redevelopment pipeline with the remaining 30 percent too early to tell.

On the vacant space, we have, as Pete mentioned, about 330,000 square feet, a fairly modest amount of vacant inventory. In that space category, about 40 percent of that space is either leased or in negotiation. It's also -- I kind of want to put a little more color on Pete's comment. About 30 percent of that remaining space is office space, and as we look at the weighted market average rate for the uncommitted space, it is significantly lower than that for our overall portfolio, so it doesn't have a tremendously negative impact.

Looking again at 2004 and our rent projections last quarter, I projected rent increases for 2004 on rollovers to range between 0 and 5 percent for the year. I would say our expectations continue to be in this range.

So, concluding, the general market dynamic of uncertainty still continues to exist and because of that, we do not believe that there will be a rapid or significant recovery; it will kind of continue the way that it has over the last four or five quarters. We remain very focused and persistent in our leasing efforts for very obvious reasons, and we are comfortable and confident that, at the Company level, we are experiencing and our performance continues to be very steady, as we are leasing up this pipeline at incrementally improving economics.

Okay, we would like the call to be opened up for Q&A at this point.

Thank you. Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Brian Legg with Merrill Lynch.

Joel, can you talk about -- when I look at the amount of square footage that expired in the quarter and compare that to what you actually leased, renewed or leased, there's some pretty wide spread. Five hundred thousand expired and you only leased 160,000 square feet. Now, I know about 170,000 went into the redevelopment program, but can you talk about just the characteristics of the leases that expired this quarter?

I'm going to ask Jim to comment on that.

I think, Brian, you're asking about the difference between the rollover amounts in the first quarter versus second quarter?

No, I'm looking at what rolled over this past quarter. You had about 500,000 square feet, or 38 leases of expirations and you only renewed or re-leased 162,000 square feet.

The difference would be properties going into the redevelopment pipeline, which you can see some new properties coming into the redevelopment pipeline. And then we did take a vacancy at a property in Maryland, and that's the one that we just mentioned.

Right, yes, we have a property in Maryland that just recently rolled over at the end of the quarter that we've taking into the operative portfolio vacant segment -- (multiple speakers).

That was about 75,000 square feet, Brian.

Okay. That doesn't go into your redevelopment program?

That's correct.

There may be something ongoing, which we will announce with respect to that property next quarter.

Was this an office property or was this a lab office property?

It's kind of a combination, Brian. It's got some lab in it but it's a combination office, lab and warehouse property, kind of sits alone in a noncore market, submarket.

Can you just describe the asset that you did sell? It sounds like that was primarily an office asset. You said that you had a $1.6 million gain. I would assume that is after deducting accumulated depreciation. What was your gain or loss after adding back accumulated depreciation and the total sales price here?

We will check on that for you but it was a -- you may want to comment.

While Pete's looking that up, Brian, it was a multi-tenant building, three-story facility that we just didn't see the opportunity to really strategically employ there any longer. We had bought it quite a while ago with a single-tenant user in there and that tenant expired -- that leased expired, tenant rolled out and we just chose not to redevelop it.

Accumulated depreciation on it was about 550,000, so a little over $1 million of gain on original cost.

Just to add to what Jim said, a redevelopment of that building for our use would have been both very challenging and not cost-effective. It just didn't fit.

It was this original property, or did you acquire this recently?

Oh no, quite a number of years ago and it has been office ever since we acquired. The location is actually quite good.

Can you talk about the pushback on the expected stabilization dates of your developments and some of your redevelopment properties? Also touch upon -- it looks like 100,000 square feet was leased in Seattle.

Let me comment overall and then I may have Pete comment on Seattle. Overall, the issue that I think if you listen to the comments that I made, Brian, and those that Jim made as well, it's pretty clear that virtually all of the development work we are doing -- and we have actually pretty good activity on virtually every location -- is moving irrevocably into a multi-tenant configuration for a variety of types of users, several of which have important relationships to the biodefense world. That's something that I'm not sure I could have predicted even a quarter or two ago.

I made specific mention of the Suburban D.C. 95,000 square foot. We are very far along on the efforts to lease that to a single tenant but because of a variety of biodefense appropriation issues and strategic relationships, that tenant has, coming to bear, we can no longer proceed on a single-tenant basis and we have to multi-tenant the building. That's just where we are headed.

So, we have changed the programming, changed the permitting and that all started to take place within the last 30 days.

Pete, you may want to comment on Seattle.

I will just comment briefly on our presentation of the Seattle property and our properties under development table and then I'll kick it over to Jim to comment a little bit on the lease there. I think we delivered a couple of tenants but most of it was related to a 100,000 square foot lease on that building in Seattle. We decided to continue to reflect the property since this was kind of a discrete portion of the building that we deliver to this tenant while we continue to complete our development of the remainder of the building, really, during the first quarter of '04. It's a long-term lease to an institution up in Seattle. The length of the lease, Jim?

It was 10-year. Just to reaffirm Pete's comment, this building is very well-located in kind of the emerging corridor in Southlake Union. As a result, there has been a high level of interest and activity and we were fortunate enough to put together a transaction with a premier institutional user, nonprofit institutional user in that marketplace.

Then next is your Ziegen (ph) building? (multiple speakers).

(Multiple Speakers) -- same neighborhood.

Just the last question, just house cleaning items -- Pete, what were capitalized interest and straight line rents?

Capitalized interest for the quarter was 3.8 million, virtually the same as the last quarter, Brian.

(Multiple Speakers) -- dipped down a little bit.

Yes, and straight line rant adjustment was odd this quarter, partly due to that item that I spent so much time talking about in the same-property portfolio. It was 3.2 million and so, if you think about it, on that FDA lease, I mentioned the straight line rent adjustment is now going to go up, so our straight line rent adjustment is going to run at a higher rate, although this is an above-standard rate in the first quarter of '04.

Jonathan Litt from Smith Barney.

Good afternoon, it's Gary and Jon. Joel, in your comments about moving towards sort of a more multi-tenant strategy on it sounds like both redevelopment and development, do you think that working with smaller tenants is going to speed up the sort of turn time on things that come in and out of the redevelopment pipeline?

Let me maybe recharacterize that. Don't assume they are smaller tenants. The tenant that we are talking about, say, in the Suburban D.C. market is not a small tenant but it has incremental needs that are based on a set of relationships that are necessary in order to produce what the Homeland Security Department, DOD, etc., want done. I mean, this is an example. So therefore, its needs are incremental but it is not a small tenant.

I guess I meant maybe smaller lease sizes.

Yes. They are absolutely because you are delivering a discrete space with the a discrete program.

So, I guess that gets back to my question. Because you're dealing with smaller chunks of space, do you think that speeds up how quickly you sort of push things through redevelopment?

Jon, I think it's case-by-case. I think it's really case-by-case because a large transaction -- we have to re-improve the infrastructure, redevelop all of the infrastructure. Oftentimes, there's a simultaneous negotiation of a transaction, but size doesn't necessarily determine how quickly it's going to happen or not. Oftentimes, actually smaller tenants take longer.

Right. Is there anything about the sort programming and the biodefense sort of projects that they are working on that changes how they think about lease term? Is it sort of a finite life project so they only need to be in there for five years, three years, whatever, or is it still the more traditional things that you're seeing?

I think I would characterize it as medium-term, although when you are dealing with government requirements, which we do have a few, they might be potentially long-term, or they might be long-term but annually cancelable, based on appropriations. So they could be kind of all over the board. I'm not sure there's any way to generalize.

But the sort of cancellation policy would only really be in the case of a direct lease with the government, not with one of their -- (Multiple Speakers) -- contractors?

That's correct.

I would say also, to add onto that, irrespective of whether they have a government connection or not, these companies are -- I think I've remarked on this previously. The lease terms have shortened up to some extent as the size of the leases have also become smaller.

As you look out to your '05 expirations, should we expect another 10, 15 percent of the space that is rolling out to head into redevelopment?

Yes, I don't know that we can -- Jim is going to check on that for you. I'm not sure we can generalize, because these are all both sub-market specific and space specific as opposed to kind of a generic property type where you could generalize. Here, you can't do that but he's going to eyeball '05 quickly and maybe give you some visceral reaction. Bear with us one moment.

I would say, just looking at it very quickly, that, first of all, we have a modest amount of rollover in '05. I would say that, on my first glance, there's not a significant amount that would slow in the redevelopment.

Just the last question for me -- Pete, in terms of your guidance -- and I know it's just a single point at this point -- but can you give us a sense of what your thoughts are in regard to acquisitions versus dispositions, given that you already have one disposition in the year?

I have not projected any dispositions but with respect to acquisitions, there is a modest level of acquisitions, as I mentioned, kind of tying into the comments I made back -- slightly back-end loaded really into the fourth quarter of '04. But I'm not going to comment on the number of acquisitions for '04 or '05 for that matter.

Kent Green (ph) from Boston American Asset Management.

Yes, Joel, just a little more elaboration on the smaller Homeland Security -- what kind of returns are you getting on these particular projects? I assume that the returns are pretty good.

Kent, As you know, we don't give publicly internal returns that we get on our -- whether it be acquisition, development or redevelopment. Suffice it to say, these are important and I would say impactful returns from the redevelopment pipeline, and they certainly provide the Company with important future growth over the coming quarters. So, it is important and significant but I don't want to really comment beyond that.

Will this go on for -- (multiple speakers) -- number of years?

Indefinitely, for sure, unless we see some dramatic change. I think the redevelopment pipeline -- I'm not saying any given property will, but the concept of the pipeline -- given actually what we see as -- seems like a fundamental shift in what we're seeing out in the markets -- we certainly want to be positioned to take advantage of that.

In my general comments, I hope I emphasized the importance of this whole funding source and area. I mean, just watching the news, you get a sense of what the country is faced with; there was going to be a large chemical bomb, truck bomb, several of them exploded in Amman, Jordan, at some point. They were able to -- the Jordanian security service was able to kind of foil that attempt. The government in all these agencies and a variety of other departments, etc., is very, very worried and -- I mean, you hear it every day about both chemical, radioactive and biological agents being brought into this country and used against civilian and/or military targets.

So, I could not under or overemphasize, I should say, the speed and the focus that broadly the government is having in this area, and it's pretty dramatic. I mean, I can give you another just kind of a typical example. I was meeting with one of our companies, which is focused in a therapeutic area and has, a its scientific founder, a recent Nobel Prize winner. They have dramatically deemphasized the therapeutic program in favor of a certain set of vaccines for the biodefense industry because the funding is so overwhelmingly large and they have the talent, the background and the capability to get into this area rather rapidly. So, it's not an isolated case; it seems like it's a pretty important movement across the country.

Is this opening up the doors of several prestigious tenants for future business? (multiple speakers) -- coming into this group?

I'm sorry, the last word?

New types of companies coming into this group?

I think the answer is yes, both current tenants. The one in D.C. is one that is a current tenant that I described a little bit about their changing needs, but I would say yes, it is both existing and new that definitely we see some very significant opportunities, and maybe unfortunately, because it's sad to imagine that that's where the wealth and treasure of this country would be focused, but that is the world we are living in and there's no short-term solutions to these things.

Frank Greywitt from KeyBanc Capital Markets.

Moving back to the redevelopment pipeline, last quarter, it appeared that you were less bullish in actually thinking that the pipeline was going to contract rather than expand. Now, it seems quite the opposite. Has this been just a couple-months development?

I would say it has been -- that is an exactly correct characterization, Frank. I would say, the movement has been afoot now certainly over the last couple of quarters, but I think we have not seen the dramatic shift until, I would say, early in this year. In a way, that is beyond what I would have imagined.

I think the other thing that's important about the Company is we are, I think, well positioned to take advantage of this. I think one of the great things is, as opposed to a larger, lumbering organization, luckily we are entrepreneurial enough and I think flexible enough to be able to take advantage of these opportunities. That's what we're planning to do.

When our tenants come -- I was on a lease negotiation morning that is focused in this absolutely identical area where we had a tenant come to us, not an existing tenant, a nonprofit institute focused on biological vaccines. That's just what is -- the movement is very dramatic.

Okay, kind of near-term, as you are reprogramming some of the buildings -- I don't know if it's just the D.C. building or if there is more than half -- will it be impacting what you pro forma-ed for yields, significantly?

Well, I think it's too early to tell; I think it's too early to make that statement. I think the answer is it could be a positive because the infrastructure needs could be more robust, but I'm not sure;. It's too early to tell you that.

Okay. As some of these projects have been pushed back, are you approaching the need to start expensing any of the interest for these projects before they are delivered?

I'm going to ask Pete to comment on the accounting side, but let me be very specific on the 95,000 square foot Suburban D.C. building. That effort is a complete reversal in everything we've done in that building to date, so we are completely changing the interior configuration, how we're planning the interest infrastructure and the interior, etc., so it's almost like starting, unfortunately, a new effort afoot. That's true in every single development that you see there -- not that we've switched all of them, but more than one that is true in a fairly dramatic fashion. Pete will comment on the accounting impact.

The short answer is, we are not getting near the end of that period in any material way. We look at it quarterly; we apply the rules very strictly. When activities cease, we look at the property and what's going on with the property. If required, we do stop. Somebody has asked me in the past, have you ever stopped them? We stopped on a number of occasions.

But looking forward, between now and the end of '04, I'm not looking at any material impact of the ceasing of the capital of interest. In '05, although we've given guidance, I think we've given some fairly conservative guidance in this way, but we'd have to really wait and see in '05 what leasing activity is going on with respect to a property and then what activities are going on with respect to the individual redevelopment.

Another question I have regarding this new tenant profile, the smaller tenant --.

Not necessarily smaller tenant but -- (Multiple Speakers) -- smaller space. The tenant sometimes can be rather significant.

Are you seeing any difference in the way they are approaching the leasing of your developments? In the past, it's kind of -- they don't have -- you've indicated that they just kind of lease it once it's completed. Are they more pre-leasing these developments?

I don't think we have ever said they lease it when it's completed. I think what happens is you move down kind of a concurrent path of leasing and design, programming, permitting at the same time, so they are fairly elongated, complex -- because of the nature of the space -- multiple tracks. Jim could maybe give you some further color on that.

I think that's right. I can't really add anything. I think, beyond what Joel described, that's exactly the right way to characterize it.

Okay. The 300,000 square feet in Seattle, is that included in your first-quarter leasing statistics?

It's on a lease activity page; it's in there.

Okay. Two more -- were there any one-time items such as lease term fees in the quarter?

There's virtually no lease termination fees in the quarter, like $4,000 or something like that.

Do you have loan-fee amortization?

You do ask that question; I do have it here this time -- $550,000 for the quarter, Frank.

Tony Paolone from J.P. Morgan.

Most of my questions have been answered, but more specifically on the development program, Joel, how do you see the yields or budgeted yields or the actual yields coming in, relative to budget, now that some of the dates have been pushed back, as well as the use has changed a bit?

I'm going to ask Jim to maybe give you some thoughts on that, but I would say, in many of these locations, we have owned the land for a long time; generally, they are on sites where we've allocated to the bases of a property or properties (inaudible) all developed, so previously developed. So, in many cases, we have a normal or a zero land basis. So if you think about yields, if we assume a current value for the land, the yields are still rather robust and significant. But Jim can maybe comment with a different view -- (multiple speakers) -- maybe a more expanded view.

I think all that we're seeing happening, Tony, is an extension of the receipt of those yields. I think, as I indicated in my comments, we really haven't seen any continued depreciation in rents. Investments that we're making in the buildings are pretty consistent, so it has just really been an extension of the time to get to those yields as opposed to a depreciation of the yields themselves.

So you don't think there has than any diminution in just -- let's throw out a number, say a 15 percent yield going to 13 or anything like that?

It's also case-by-case. I think that might happen in one market and be counterbalanced in another one with a different dynamic, so -- but I'd say across the board, there hasn't been a diminution to that level.

I would add one footnote, Tony. That is, as I mentioned to Kent, because of the need for maybe more robust infrastructure by a variety of users who are focused on this fairly important and emerging area and what they're doing and how they are doing it, it may work the other way. I think it's way too early to tell, but it could in fact enhance yields as opposed to reduce them.

In terms of construction costs, if you were to start a new development today under this sort of new format with the smaller-sized spaces, what would costs be, outside of land?

Well, Pete talked about the redevelopment conversion costs. Those numbers are actually now at the lower end of kind of our historical range. Just on kind of core and shelf (ph), if one were to do a development for an evolving niche like this, you're not going to see a real difference in the product that we produce because we have always kind of produced a first-class, high-quality, flexible shelf. I don't think we would see any real difference there.

Now, I'm putting aside construction costs increases that we have no control over, the price of steel, etc. That's just kind of industry-wide but relative to this format specifically, I don't think you see anything that would be dramatically different, certainly not more expensive.

So, is that to say -- I want to say historically, it's been in the 2 to 250 range? Am I close?

You mean relative to the cost to produce the finished product?

Just per square foot costs.

That would be in the range. I would say that -- towards the upper end of that range would probably be consistent with what we've seen.

That would get you to the new type of space that you would want to have at this point, outside of the land costs?

Right, but maybe not fully improved for all the bells and whistles that some people may need, so keep that in mind.

Tony Paolone Okay. Then just one last question on this 100,000 square foot lease, Pete -- when in the quarter did that kick in?

It did not -- yes, we just went off-line here -- towards the end of January, this quarter.

Thank you.

Greg Eisen from Safeco Asset Management.

Good afternoon. Going back to this question of the newer type of demands of tenants in your redevelopment pipeline or your development pipeline, the smaller spaces and discrete needs, as I think about the Homeland Security missions related to some of these projects, do these tenants, by definition, when they go in for that type of project, come under a level of government security needs that are different from what you were previously dealing with with a standard biopharma-type tenant? Do they have needs on that level which are kind of above and beyond what you would normally be dealing with before 9/11?

In the sense of interior, or are you talking about exterior security? I'm not sure I'm --.

Interior and exterior -- (multiple speakers) -- building needs that require a level of data security or -- (multiple speakers) -- proofing or anything.

Yes, most of the tenants that we have, or many of them -- we do have some very important, very high-level security government tenants right now we have been operating with for years in years, you know, and those that had very high levels, both interior and exterior, whatever it is. Most pharmaceutical-type uses, anybody dealing with proprietary technology generally have pretty extraordinary security measures, both internally and externally. You may not necessarily visibly see it, but I think, in general, I wouldn't expect it to be of a grade substantially higher than that but there are cases where it may be. But I wouldn't say, as a general rule, it's something significantly higher.

In that regard, does their customer, the U.S. government, require their landlord, Alexandria, to be inspected and tested before being acceptable, before they go in and authorize them to take space from you?

Not that we've seen at this point. I mean, we do have that for the FDA for many, many spaces. We have not seen it for kind of a Defense mission, although the tenant themselves kind of bet those issues directly as opposed to having a third party come in, because they know what the requirements are.

Okay. I'm trying to understand, trying to build a picture in my head of whether or not I should expect development and redevelopment costs per square foot to be greater as a result of these types of needs.

They may be modestly but then the return on that would -- assuming going back to I think a couple of questions -- there would be, I would think, an enhanced return on those, you know, extra investments. But sometimes, I mean, again, it depends on the nature of the entity. Some of these entities are rather large and might just choose to do all their own improvement. So it kind of depends -- you know, enhanced improvements.

I understand, which brings me to another question. Being that you are looking at maybe smaller lease sizes, smaller spaces that require redeveloping in a different way that you were before, is it reasonable to expect that you might take properties out of the pipeline when leases end that may have been redeveloped in the past and then redevelop them now a second time for a new set of tenants with new needs? (multiple speakers) -- happen over and over again.

If the infrastructure is there, the basic platform infrastructure, I think the answer would be no.

The question you're getting at, Greg, is if we had a -- for example, 100,000 square-foot facility that had been redeveloped for a single tenant and then it rolled over and the market was clearly for four or five tenants, in that instance, possibly yes, if that's the question you're asking. I don't see a lot of those on the horizon, but that would be conceivable.

I see. If it means splitting up those smaller spaces, then yes, but that's kind an as-needed basis.

That's right, and that would be because the infrastructure would need to be redesigned and redeployed in a different fashion.

Right, and it's possible -- again, it's pretty specific but if somebody -- if we had general biology lab use or an informatics or automation use and we went to a heavy chemistry or beyond that kind of a heavy vaccine kind of use, clearly that would be -- have to be redeveloped, because it would be a substantial change in improvement.

I see. Okay, and if I could ask a financial question? Your preferred stock Series A is callable June 14th of this year.

Correct.

I understand the statement you made about offering costs in press release, but given that is a 9.5 percent coupon, that seems pretty expensive stuff versus what you could use in your line of credit, so it is reasonable to expect that will get called. Is the interest rate spread between that and your line of credit implicit in the guidance that you've issued?

Let me just make one comment. That is public information and we will talk back again on the guidance. We cannot take out this preferred stock with a draw on our line of credit -- that the terms of the preferred stock requires a capital offering or issuance of capital stock of some form. The proceeds of that could be used to pay down the offering. So, that's public information, but I'm not going to comment on assumptions we've made in the guidance because kind of like I said, under various scenarios, we get to the single-point guidance that we gave here this quarter.

I understand. I just couldn't help but ask (LAUGHTER).

That was good question, a very good question.

This does conclude our question-and-answer session today. I'd like to turn the call back over to our speakers for any additional comments.

Okay, I want to thank you for listening into the first-quarter call and we will look forward to the second-quarter call in probably late July or early August. Thanks so much.

This does conclude our conference for today. We do thank you for your participation, and you may now disconnect.