Alexandria Real Estate Equities Inc (ARE) 2004 Q4 法說會逐字稿

Welcome to the Alexandria Real Estate Equities fourth quarter 2004 conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Ms. Rhonda Chiger. Please go ahead ma'am.

Thank you. Good afternoon and thank you for joining us. This conference call contains forward-looking statements, including earnings guidance, 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 annual report on Form 10-K and other filings with the Securities and Exchange Commission.

Now I would like to turn the call over to Joel Marcus. Please go ahead.

Hello, everybody, and welcome to the fourth quarter and 2004 year-ended conference call. With me today are Jim Richardson, Dean Shigenaga and Pete Nelson. Before we get into a review of the quarter and the year-end, I wanted to, as I always try to do, give a number of macro observations, comments broadly on the 2004 performance and comments on 2005.

2004, as most of you know, was an economic transition year, where real estate operating fundamentals finally begin to firm for the first time that we've seen since the 2001 bubble burst. We at Alexandria are very proud of our fourth-quarter results and, certainly, for the full-year '04, on an operating and financial performance.

And we're very gratified with our stock price ending the year at almost $75 a share. And we're very pleased also that our compounded annual growth rate with dividends reinvested approximated 24.8 percent -- really and astounding number since our IPO in May of '97 -- and 18.9 percent without dividends reinvested -- again, IPO through the end of '04 really a great credit to our team, and a really strong 8-year public track record coming up on this May.

Another, I think, very wonderful statistic would be the cumulative shareholder value created for common shareholders; again, IPO through the end of '04 is almost $1.2 billion. So we feel like we've done a very good job of managing precious debt and equity capital and really creating capital. And much of what you will hear this morning will be about really the Company's ability to create value, as opposed to just buy things at some kind of a stabilized value, or maintain itself just where it is treading water. That's really not the profile of Alexandria, as you know, and you'll see more about.

Our total market cap at year-end was 2.85 billion, and we are very pleased with our fourth-quarter results, which grew FFO on a diluted per-share basis of a little over 9 percent, and for the year 4 percent after the D-42 charge and about 6.3 percent before. The dividend grew 14 percent during the year on top of, I believe, a 16 percent growth rate in '03. So, we very pleased with that, and we still have one of the sector's lowest payout ratios, allowing us to continue to grow the dividend in future quarters and years.

Again, same-store growth -- we are, I believe, the only office and/or industrial company to have exhibited positive same-store growth every quarter since we came public some 30 quarters ago, and our operating margins at year-end, again, maintained themselves at a very strong run rate. And our debt to total market cap at year-end was a very conservative 41 percent. So, if you look at the broad metrics of the Company, the Company's in phenomenally good shape and poised for substantial future growth.

We continue to have very strong geographic diversity in our operating assets; very strong tenant sector diversity, outstanding quality and location of assets; and, certainly, a great management team throughout all of our operations. This in essence really translates to what we believe, and I think our shareholders believe, will be high-quality, visible, stable and long-term cash flow.

Jim will talk in depth about our continuing enhancement, expansion of our premiere franchise in each of our life science cluster markets. And he will talk about a -- really a significant acquisition at Mission Bay, which we announced early in January, the kickoff. And Us I say, he'll talk more about that's fairly important set of transactions.

We have a very strong active redevelopment and development pipeline, and I will spend a good deal of time on that in a few minutes, and relative the significance of that, as well as our banks in each of those categories. And again the bottom-line here is these will help ensure future growth at the Company. Dean will talk briefly about the amended and expanded line of credit which we closed in the fourth quarter and announced in December.

2004 was a very pivotal and significant year for the life science industry. With George Bush in the White House and the Republicans in charge of both houses, the federal government is not going to be -- are not going to wage an ideological war against the pharmaceutical industry. And the industry has essentially gotten a 4-year time horizon to really resolve a variety of key issues.

The Medicare Modernization Act which passed at the end of '03 and which I commented on last year in our year-end call, will likely not be revised to allow the government to actually negotiate direct prices, but I want to talk about what is likely to happen in the near term. The Centers for Medicare and Medicaid Services, better known as the CMS, is working hard to complete its rules and regs to implement the 2006 roll-out of the new prescription drug benefit law passed in late '03. And I think it's fair to say this will be the main event for this year and probably for the decade to come.

CMS won't be adopting Senator Kerry's proposal to require companies to sell to Medicare drugs at rock bottom prices such as are obtained by the VA. So this is certainly very positive news. And CMS, under Mark McClellan, who previously headed up the FDA and is who highly respected, is expected to exercise both direct and indirect leverage to get good pricing. But I think the key here is -- and this is going to be favorable to the industry, and really it will determine who are the winners and losers in the industry -- the key is reimbursement will now be linked not only to drugs and the drug's general profile, but really linked to outcomes data. And this is really Mark McClellan and his background. Being an economic guru, he is going to be focused on premium reimbursement for significant outcomes data.

The government will be -- in fact, CMS will be the biggest drug payor in the country. 40 million people are expected to be under its wing in '06, which is an astounding number, and 5 -- I'm sorry, $507 billion of expenditures are expected to be made during 2006 to 2013. So, I think it is fair to say that drug development must focus on both the FDA, which it has intensely over the past many years, but now equally importantly on CMS, assuming approval.

Companies which produce novel products which predict, prevent, detect, cure or contain, and which do not -- are not burdened by heavy overhead will be the big winners in the future, and that will portend a lot of the coming business models of this industry for the next decade.

Now, with respect to the FDA and safety, you all know about the Vioxx drug safety scandal. Drug safety will be a keen focus of both the Administration and Congress in '05, as well as the need to appoint a permanent FDA commissioner. What is likely to happen is better post-market surveillance of pharmaceutical marketing and integration of safety into the entire drug development continuum; better review of classes of drugs, such as the COX-2 inhibitors, from the outset; and probably the biggest news is, and the real role for both the academic industry and for the commercial side of the industry, is an effort to identify biomarkers that will characterize toxicity before drugs reach the market. This is likely to become in and of itself a huge industry. And also, it's likely that the FDA and or CMS might require that diagnostics be embedded with drugs as systems for detection of side effects. So, the face of the industry is changing, but, we think, in a very positive way.

With respect to drug importation, I think it's going to be kind of a non event this year. The task force created under the Medicare Modernization Act finalized its report, and essentially said that much of the savings from legalized drug reimportation, such as through Canada, would essentially go to intermediaries arranging both the transport and the sale of the drugs in the U.S., and the consumers would save little. Their estimates were of about a 1 to 2 percent overall savings of U.S. drug spending, and that would be offset by very costly efforts to ensure safety and administer the program. So, likely not much is going to happen.

Let me turn to -- for a moment to budget issues with regard to R&D spending. The NIH budget this year is about 27.9 billion. This coming -- I should say last year. This year, through 9/30/05, it's up about 2.7 percent to 28.65 billion. And President Bush has proposed an '06 fiscal year budget of -- or starting October 1st going through September 30 '06, up 28.85 billion, up 0.7 percent. So you might say wow, that is not much; but the news is positive. Since the 2 percent cut was feared and across the board, as you know, any government agency which has positive funding as opposed to the budgetary cuts in today's deficit spending environment is looked at as a positive.

Life science funding overall should be positive, because the focus on drug safety, toxicology, FDA administrative reform, vaccine supply, issues and bio defense will keep the sector, I think, pretty healthy. The FDA budget proposed is supposed to be up 4.4 percent. The NSF, National Science Foundation, up 2.4 percent; and Bio Shield, which experienced a 283 percent rise this year -- '06 budget hasn't been fully bedded, but it's likely to go up significantly to well over $5 billion.

As you know, Proposition 71 in California past $3 billion committed to a variety of broad-range stem cell research over 10 years. And this is not so focused on embryonic stem cells. but really a broad range of stem cell research should be very positive for the markets in California; and in fact, many states have followed suit and are putting on their ballot initiatives funding sources.

Okay. Now, let me turn to the quarter and year-end earnings guidance and dividend policy. Again, we're pleased to report both the quarter and the year which we reported today. I want to give you a little bit of background on our '05 guidance. We have reaffirmed guidance at 4.78 on a per diluted share -- probably back-end weighted -- which calls for 6 percent growth during '05. And we will give '06 guidance at our first-quarter conference call come May when we report first-quarter earnings and we'll probably update '05 once we have really been able to evaluate and fully assess the impact of a variety of acquisitions we made this year, many of which are not fully stabilized or involved -- and some of which are involved in the redevelopment process. And in fact those have been a drag on current earnings a bit, and certainly have dragged down some of the occupancy numbers as Dean will report a bit.

So, expect both a very thorough update to '05 and a guidance issuance of '06 in May, but we are comfortable with our current guidance of 4.78 as we stand here today -- again, 6 percent growth for '05. We still feel that the macroeconomic factors are challenging given the budget deficits, etcetera, and Jim will talk about our markets. Certainly in a rising interest rate environment, and we are currently evaluating the potential for sale of up to 8 noncore assets in a variety of our markets. And this is under active evaluation. So, a lot is going on at the Company.

With respect to dividends, Alexandria's board increased our dividend aggregate amount of 14 percent this year, on top of a significant raise in '03. And again, we continue to have a very low dividend payout ratio of 56.7 percent, providing future room for dividend growth.

Getting into the quarter and the year-end specifically in an operating and financial matter. I think that numbers for the quarter were again driven by our unique roadmap for growth with multiple platforms, as Jim will comment on, and based on a very strong and fundamental core operating model that we have continued now, entering into -- soon to enter into our eighth years as a public company.

Same-store growth -- and Dean will give more guidance on this. Our GAAP numbers were up for the quarter 1.8 percent, cash 1.5 percent. And I think what's interesting to note is -- and it is noted in a footnote -- one lease with the Food and Drug Administration -- were that not in these numbers, our cash same-store growth for the fourth quarter would have been almost 3 percent. And this is a lease that we have had in the portfolio since the IPO which had literally a 2-to-1 cash over GAAP ramp for the first number of years, and then kind of switched. So now the cash rent is lower than the GAAP rent by a significant margin. So that is the impact on those numbers. And for '04, as a whole, GAAP at 2.2 percent, cash at 1.9. And again, if we backed out the FDA lease, cash same-store for the year would have been 3.3 percent -- truly an excellent performance.

Moving to leasing. Again, Jim will have a lot to say about this area. The fourth quarter was a decent quarter. It was not a blowout like last year, but it was, I think, a successful quarter. And certainly overall, 2004 was a great year for leasing, where we leased more than 1.1 million square feet with a roughly 9 percent increase on a GAAP rent basis. When we give 2006 guidance in May of '05, we will comment in detail on 2006 rolls -- about 13.6 percent of the portfolio. And Jim can give a little bit of thoughts on that in a short while.

Occupancy slipped a bit, primarily due to acquisitions. But that should recover in the long-term. Increase should take hold in '05 and on into '06. For those long-term shareholders of Alexandria who continue to have excellent longevity of our leases and are top 20 tenants. As of 12/31/04, approximately eight years, 43 percent of the rent on the top 20 tenants make up the portfolio and provide an excellent and stable cash flow -- no bad debts, once again, as of 12/31/04.

Let me turn to our redevelopment program, which is misunderstood by a number of commentators and even a number of investors. Let me try to set the record straight here. Probably we were not as conservative as we should have been back a number of years ago when we started to put together our pipeline as in the supplemental. Typically unless it's an unusual situation, most redevelopments take upwards of 18 to 24 months, and in fact, some even longer when major virtually an entire gut of the building and major site work is going on -- literally like a development. So, from here on out essentially effective the next quarter we will make sure to use the traditional either 18 to 24 month time period for projected in service or estimated in service dates, and I want to make sure that nobody misunderstands that.

We did have a number of acquisitions made during the year which what into active redevelopment and some which are part of the future bank for future redevelopment. And that is important for future growth but some of that certainly is a current drag on earnings. This redevelopment pipeline right now is about 9 percent of total square footage of 7.5 million square feet. This will trend upwards somewhat over the coming quarters and years, based on what we see are future needs and opportunities in our markets. And again, we view this as one of the most important attributes and pieces of our core operating model.

Let me comment on a couple of specific transactions or situations in the redevelopment pipeline. One of the San Diego projects fits in one of the best markets in San Diego Submarket's University Town Center. It's a project we have put into active redevelopment basically to reskin the building and substantially redevelop the entire building into a multitenant platform. This is a very key submarket, and after a lot of work in the market and with respect to the design and the programming of the building, we decided to go forward with a fairly major project beyond that which we were undertaking.

One of the acquisitions we made recently is in (indiscernible) Pines; it sits in the redevelopment program. It is a total gut and reskin for, again, a multitenant facility, as well as major site work to go on on an adjacent development parcel, and again -- critical submarket. So we view both of these as great opportunities in the two best submarkets in San Diego. Also, we will hopefully be concluding the last phase of a significant redevelopment of a multi building project that was former headquarters for Google, in the San Francisco Bay area, which we should be able to deliver the last portion of it coming into of '05.

Similarly in Eastern Massachusetts we are doing something similar with a close-in project close to Cambridge, where we can be more aggressive in rents. We hope to deliver that, again, a complete gut, new skin, an entire redo of an old building -- now, hopefully, will be a state-of-the-art lab building to be completed sometime before the end of the year.

And we have two other significant projects in Suburban D.C. similarly to be delivered, one of which to be delivered later in '05 and another of which early to mid '06, where we're gutting new skin and a parking structure.

So, a lot is going on. This company views redevelopment and its mission as important to add significant value to assets that we either have purchased, that we are purchasing, rather than simply buy assets and simply manage a stabilized portfolio. We view that really creating value and adding a lot of effort to this particular aspect of our growth strategy is critical to the future of the Company.

And I think it's fair to say also some very, very good news as of 12/31/04. Our future untapped bank of space which could be redeveloped is approximately 625,000 square feet, and again, a substantial driver of future growth in the years to come.

Let me move to development. And again, I will give kind of a warning to commentators who have misunderstood the development pipeline and what it takes to develop these kind of properties. Typical in service dates should be 36 months from initiation is the standard, and we will begin to use this standard in the future as opposed to trying to be less conservative about that.

Understand that developments from initiation to ultimate development involve a great deal of effort along the way, through permitting, through planning programming, designing building, improving its along and complex process and we will try to give better clarity to that as we go forward.

We had three acquisitions, as Jim will talk about, in '04, involving the acquisition of almost 2 million square feet of developable entitlements. And again, we believe these will be key to the future growth of the Company both mid-term and long-term. We should have several completed developments delivered in mid '05 and early '06, and again, we will comment a little later on the kick-off of our first Mission Bay building of 165,000 square feet.

Something else that I think is very good news for the future of the Company, our land bank at 12/31/04, given we've worked very hard to put this into position for future growth as we determine when it's appropriate to drop down and initiate construction, approximates almost 4 million square feet today, which should provide the Company with just again a substantial platform for future growth. Certainly, like the redevelopment pipeline, a current drag on future earnings, but we feel very justified given what its potential is to expand our franchise and our operating strategy and efficiencies as we have demonstrated over the last 8 years. Jim will comment briefly on some of the acquisitions, and I have commented on our current evaluation for future dispositions.

Finally, turning to a couple of comments on balance sheet, capital structure and financial metrics. We continued year-end with a very strong and flexible balance sheet -- 41 percent debt to total market cap. We will be heavily focused on fixing fixed-rate debt over the coming quarters in this interest rate environment. Our operating margins steadied for the year at about 78.6 percent -- a phenomenal achievement. Our interest coverage ratios were strong at year-end -- about 4.5 times, and fixed charge at 3.1 times. Again, no bad debts at year-end, no reserve for debts from rental reserves. And our accounts receivable as a percentage of rents and recoveries again maintaining a very low amount of 5.2 percent.

Okay, just finishing up with a few final comments. Management and the Board are continuing to be met acquirers of common stock. We get asked that question a lot. And I would say that no matter what an investor's so-called investment file -- again, ARE should be considered as a core holding for long-term total return and growth with a -- I think, a unique strategy for growth for the future that, again, can be viewed over the last eight years with a great deal of pride and satisfaction. And then, I guess finally, the final item that I want to talk about is just a brief comment on operation outreach. I commented in last year's annual report in the shareholder's letter. We're proud at the end of '04 that we have adopted and provided crucial financial and other important support to more than ten families of activated National Guard or Reservist families in each of our markets, and we view this as really part of our solemn duty as good citizens of this country.

So, sorry for the lengthy review of the quarter and the year, but I'm going to turn it over to Jim to really highlight in-depth some of the real estate matters; and then he'll turn it over to Dean for better color on some of the financial and operating metrics.

Thanks Joel. I will start as usual with some broad market commentary narrowed down to our view of were we see the life science markets and then get into some specific detail about the Company's performance and the fourth quarter and throughout the course of 2004.

On a broad basis in the second half of 2004, we really saw general conditions in really the broad office and R&D sector continue steady incremental improvement in the submarkets that Alexandria participates in. As most of you know, the submarkets have a fairly heavy technology orientation; however, it's also characterized by a high level of industry diversity, as well as durability of the regional economies that the submarkets reside in. So what had been for several years a kind of challenging indirect dynamic, has certainly turned, although in a subtle manner. And the indirect impact is definitely positive in most of the submarkets that we are in.

As we transition to life science markets, really a continuation of the prior trends and themes that I have expressed in the calls in the second half of 2004. There is a definite increase in the sense of urgency for companies looking to acquire new space. We have for the first time in a number of years multiple users competing for space. Transaction sizes are clearly larger and have been larger in 2004 than in the prior several years. And at the year-end, there was definitely a measurable pickup in activity levels, even in some of the software submarkets that we are in.

So as we look out into 2005, I think we are going to see rents continue to firm up. This will translate into modest increases generally, with what I call a step function, which is increases exceeding -- well exceeding the rate of inflation in certain submarkets. Vacancy and real supply will be down -- will continue to move downward in most markets, and at the end of the day kind of the broad translation is that the playing field is really evening out, or has evened out in many instances, and is continuing to move in that direction relative to landlord/tenant interactions.

And I think the rationale or basis for this forecast or projection is really as much about improving real estate markets as it is about the capital markets. There has been throughout the course of this what I will call modest downturn very measured and generally muted supply in growth. Most of the sublease space of any significance has substantially burned off, and most of the submarkets that are most desired are also the most mature. They're generally built out, inhibiting and barricading future supply growth.

As we kind of look out, we are always trying to make sure we are looking at a pretty broad horizon in assessing our projections and developing our strategies. And the kind of potential shocks that might one might see to the system is what ensues and what evolves out of what is going on in Big Pharma -- Joel talked a little bit about that. But it really -- from our vantage point on the real estate side, any potential changes in this generally positive outlook would have more to do with what is going on in the broad health-care industry as opposed to the real estate markets that we are in.

I want to talk some about core growth and kind of moving further along the line of some of the themes that Joel developed some of and the things we have talked about in prior earnings calls. You know, a real important component of our value proposition is this unique road map for growth that utilizes a variety of platforms that we have talked about many times before. Our ability to access embedded growth in our stabilized operating portfolio, consistent, good trending and lease roll-overs, redevelopment opportunities that Joel expended on rather significantly, the development pipeline, or land bank, that has grown not only tactically and strategically, but significantly over the past year, and then as always, kind of stabilized acquisitions.

And toward that end, I just thought what I would do is quickly review 2004 activities that really further exhibit the Company's strategic and tactical development in each of these critical areas. Throughout 2004, we concluded 21 transactions, encompassing over 1.5 million square feet of existing buildings, 2 million square feet of entitled development land through 13 transactions that involved stabilized properties, 5 transactions involving redevelopment product, 3 development properties, and 3 transactions that also have existing excess development capacity. And a number of the stabilized transactions, as Joel indicated, had some level of vacancy that will be reflected in numbers as we look at the short-term at the very least.

And I think it's also important to note this growth was really very broad. Significant transactions in 2004 were concluded in every one of the Company's core markets. And I thought what I would do is kind of highlight again one particular market as it relates to that. Our enhancement of the Bay Area franchise in 2004 was really done through, clearly, strategic land acquisitions which supported -- which will support over 2 million square feet in two of the, clearly, most important valuable life science clusters in the country -- Mission Bay that we've talked about surrounding UCSF, and then South San Francisco, which is really in the heart of a continually burgeoning industry core anchored by Genentech. These important commitments by the Company are going to provide growth for years and years to come.

Joel mentioned that we recently launched formally our Mission Bay activities in early January. We announced the intention to develop a multistory building immediately adjacent to UCSF's Genentech Hall, which is its primary research building. And our intention here is to accommodate a wide variety of users that are complementary to the diverse activities that are currently ongoing and will be ongoing at the Mission Bay, campus, and we have generated a tremendous amount of preliminary interest from a broad base of users hear, both for our existing -- for the building that we have announced as well as the other parcels that we have at various stages of development.

We really do view the land holdings in the Bay area to be enormously valuable, and distinctive, relative to the Company's ability to extend our lead position as the provider of world-class space for world-class science, but while also really reinforcing an unparalleled growth engine.

I'm just going to touch very briefly on the redevelopment activities, because Joel spent quite a bit of time on them. We really do continue to view this as unique a tool that serves an important component of our tenant base. It delivers flexibility and seats future growth. And as I mentioned earlier, we completed 5 transactions that ultimately will be slated for redevelopment, all of which are located in strategic in-fill core cluster locations, and also -- each of them are at different stages in the cycle, allowing for a steady transition in and out of the redevelopment pipeline.

So, we really believe that our ability to execute on a broad and substantial level provides evidence of -- and this is we believe really important -- depth of the COMPANY'S corporate and regional operations, an unparalleled network within our unique market niche, access to capital and strength of balance sheet. And clearly, an ability to craft and implement a strategy based on a real vision, and ultimately we just have a continued relentless pursuit of true excellence and providing these facilities and services to the life sciences industry.

So the net of all of that, in 2004 we significantly strengthened our franchise in Massachusetts and we reinforced a clear market leadership position in San Diego, the Mid-Atlantic, the Bay Area, and Seattle. And as we enter 2005, we're going to continue to diligently execute this strategy. And we're confident the status of this diverse pipeline will further strengthen the multiple planks of the platform that we talked about, and provide our shareholders with a truly durable and long-term growth opportunity.

With that, let me turn to leasing. In the fourth quarter as Joel said we had a good general quarter relative to leasing activity -- not a blockbuster. But as I indicated in the third-quarter call, timing of transactions has a lot to do with it. But nonetheless, the finish to the year exceeded over 1 million square feet in activity, and there was good activity in the quarter in every one of the company's eight regions. Three-quarters of the activity was on the East Coast; again, most of that probably relates to timing rather than any market dynamic. About 60/40 split between renewals and extensions versus previously vacant or redeveloped space, which evidences continued steady progress and general market stability. And through the first 45 days of this new year, activity, as I mentioned earlier, has really continued to be strong and broad.

Over the course of the year in 2004 -- it was a successful year from virtually any perspective at what generally would be really characterized as pretty uncertain and a time -- a choppy environment. Total activity exceeding 1,100,000 square feet exceeded our 2003 year levels by nearly 50 percent on a per square foot basis and 20 percent relative to the number of completed transactions, which that data clearly supports the general market sense that we have and have expressed throughout the year that activity was improving. And importantly, that transactions sizes were also increasing.

I think it's also important to note that the overall activity spread across all the regions with the highest concentrations in our largest markets -- particular emphasis in the Mid-Atlantic, Seattle, and Bay Area regions. The split in activity between the two coasts was nearly 50-50 with a very slight advantage to the West Coast, and again, reinforcing our sense of what is going on in the market. The average size of the transaction increased nearly 25 percent on a year-over-year basis, with average lease terms of nearly six years further exhibiting the stability and proving dynamics that we are sensing.

I also wanted to come back to the rental rate increases on roll-over that Joel referenced before. Throughout 2004 we projected full-year rental rate increases to range between 5 and 10 percent and we hit the upper middle part of that range at 8.7 percent. So all things considered, we were pleased with the progress across the board in an improving but still challenging market environment. And we believe the performance further exhibits our stability, durability, and consistency, given the product quality, markets and broad tenant base that we have.

Let me turn to the future here for a moment. 2005 roll-overs -- we have shed slightly less than 500,000 square feet rolling over in 2005, and similar to my comments last quarter, that's split roughly 50-50 between the first and second half of the year and it's also relatively evenly distributed across all of the regions once you adjust out a month-to-month tenancies. As we look at her current projections right now, we believe that about 60 percent of the 2005 roll space is either committed or we're anticipating commitment, with very little space going into the redevelopment pipeline and the balance being a little bit too early to call at this point. What's also interesting is that 60 percent that's committed and/or anticipating to be committed shortly is also the same ratio for both the first and the second half, as you look at those rollovers. So we feel pretty good about those activity levels and those projections are encouraging. I think it also further reinforces the confidence that we have in the transparency of our projections and the stability of the portfolio.

Right now as we look out at rental growth projections, we're looking at similar to last year between zero and 0 and 10 percent on a full-year basis. 2005 I'm -- a little hesitant to get very specific about, but we will say that we certainly have significantly elevated level of roll-over with 880,000 square feet currently chronicled for 2006. On a very preliminary basis, it is reasonably encouraging approximately 25 percent we believe is either committed or we are anticipating renewal releasing with the balance of the space -- clearly, too early to project.

It's also important to note that about two-thirds of the roll-over is actually in the second half of '06. So given that, it is pretty difficult to project rental rate performance as far in advance, but, I think conservatively, we would anticipate the performance to be similar to those expectations I just expressed for 2005 between '0 and '10 percent.

Finally, on credit vacancy, about 4.8 a percent of the operating portfolio is vacant. Of that space, roughly 25 percent we've either now leased or are negotiating late-stage negotiations on. And to kind of reiterate quickly last quarter's comment's, much of the space is office or on a relative basis lower rent generating space, and has -- although clearly each square foot matters, it has minimal bottom-line impact.

So quickly, wrapping up and concluding here before I turn it over to Dean. 2004 was a challenging year from a variety of perspectives. We do believe that we've turned the corner. The broad markets are generally moving in a positive direction. Activity levels in our area of focus continued to improve throughout the year. We were able to, and I hope I was able to express this, significantly enhance a market position across most of the markets that we are in very broadly. And as we enter 2005, leasing momentum is really moving positively and economics are improving incrementally. So we are, as Joel expressed, very happy with the position of the Company and are poised for another year that we believe is going to be highly impactful.

With that, I will turn it over to Dean.

Thank you Jim. Greetings everyone. The fourth quarter was a strong quarter, characterized by solid overall growth. Our FFO was a $1.18 for the quarter and 4.41 for the year on a diluted basis. FFO for the year ended December 31, 2004 as you recall includes the preferred stock redemption charge of 10 cents per share diluted that was recorded in the second quarter of 2004. Excluding this charge, FFO per share diluted for the quarter and the year was up 9.3 percent and 6.4 percent over the same period for 2003.

As disclosed in our earnings release and as Joel has mentioned earlier, we had another quarter of positive same-property growth which I will discuss in detail in a moment. We have continued to execute and deliver on our unique business model for growth, providing our 30th consecutive quarter in growth of FFO per share diluted.

Let me begin with an overview of certain items that occurred in 2004. In the first quarter of 2004 we completed the sale of a 42,000 square foot office property in D.C. at a gain of approximately $1.9 million. As of year-end, no assets were classified as held for sale and we are continuing to evaluate the disposition of certain noncore assets.

In June of 2004 we elected to redeem our Series A preferred stock. And as I mentioned earlier, we recognized a preferred stock redemption charge of about $1.9 million, or 10 cents per share in the second quarter. In July, we redeemed our Series A preferred stock with proceeds from our Series C preferred stock offering that closed in June of '04.

In December of 2004, we announced our amended and restated unsecured revolving and term credit facilities. Banc of America Securities and Citigroup Global Markets served as joint lead arrangers. The amendment increased our commitments available under the revolver and term loan to 500 million and 250 million, respectively, up from 440 million and 150 million under the prior facility. The Company may in the future elect to increase commitments under the unsecured revolving credit facility by up to an additional $100 million. The credit facility and term loan mature in December of 2007 and December of 2009, respectively. Margins under the new facility and term loan have been reduced.

Our results for our operating portfolio continue to reflect the overall stability of our operations. Our operating performance for the fourth quarter and year were solid. Consistent with prior calls, our vacancies are relatively modest and tend to be in low-rent markets, primarily Pasadena and some of the Southeast. Vacancies, again, in these low-rent markets continue to skew vacancy and have a minor impact on our operating results when analyzed from the perspective of annualized net effective rent.

Occupancy for our operating portfolio at December 31, 2004 was 95.2 percent as compared to 93.9 percent at December 31, 2003. If we exclude operating properties acquired in 2004, occupancy for our operating portfolio at December 31, 2004 would be slightly higher at 95.3 percent. As a reminder, properties undergoing redevelopment are excluded from these statistics. If the occupied portion of our redevelopment properties were included, occupancy would actually be higher at 95.6 percent.

Moving on to margins. Our operating margins for our portfolio remain very solid at 78.3 percent for the current quarter and 78.6 percent for 2004. Tenant recoveries as a percentage of operating expenses has decreased slightly due to the addition of several gross leases that were added to our portfolio from recently acquired operating properties. Of course, our plan is to convert these gross leases to triple net leases upon renewal.

As a reminder, on page 17 of our press release we highlight that 91 percent of our leases are what we refer to as quadruple net leases that provide for the recapture of certain capital expenditures. Looking forward, operating margins of 78 percent should be a good run rate into 2005.

I just want to briefly comment on other income. The basket of other income consists of among other things storage and parking income, service fees, investment and interest income. On a prospective basis, the run rate should run between 750,000 and 1.25 million per quarter.

Now moving on to our same-property results, our same-property results have been truly remarkable with positive same property growth in each and every quarter since our IPO in 1997. Same-property revenues less operating expenses for the quarter increased 1.8 percent on a GAAP basis and 1.5 percent on a cash basis.

Increases in our same-property NOI comes primarily from increases in rental rates. Same property occupancy for the fourth quarter of 2004 and 2003 was 96.5 percent. As a reminder, last quarter we disclosed same-property occupancy for the third quarter of 2004 at 96.4 percent. As mentioned previously by Joel and noted on page 11 of our press release, same-property results for the quarter reflects GAAP NOI growth and exceeds cash NOI growth. This is due to a 1993 lease with the U.S. FDA that was in place when we acquired the property in 1996. Cash rents under this lease stepped down significantly each quarter beginning in January of 2004. Prior to this step-down, cash rents for the lease were significantly higher than GAAP rents.

Looking forward, our guidance for growth in same-property revenue less operating expenses remains in the 1.5 to 2 percent range. At this point, I would like to briefly mention that we do allocate the purchase price of real estate acquired in accordance with FAS 141. As such, the purchase price of real estate acquired is allocated to tangible and intangible assets acquired. And since adoption of FAS 141, there have been no significant adjustments for above or below market leases that would impact FFO.

Next, I would like to reiterate that we are comfortable with our overall debt strategy. As of December 31, 2004, our debt to total market cap was 41.7 percent. Now, this is based on a total market cap of over 2.8 billion as of December 31, 2004.

About 37 percent of our debt is fixed-rate debt and 63 percent variable-rate debt. As of year-end of the 750 million variable rate debt outstanding, 350 million was hedged. In the fourth quarter or December of 2004 we entered into two additional interest rate swap agreements for a total notional amount of $100 million. 50 million of which is effective at December 31, 2004, and 50 million of which becomes effective in January 2006.

Our hedging program -- including the swaps we executed in December -- will provide for 350 million of notional amounts in effect from year-end through June 30th of 2006 and 300 million in effect for July 2006 through December of 2006. Certain swaps will remain in effect through October of 2008. We will continue to hedge our exposure to variable rate debt in the future and in 2005, we are going to aggressively focus on converting variable rate debt to secured fixed rate debt.

Next I would like to briefly comment on our important redevelopment program. Our redevelopment program involves a permanent change in the use and conversion of the infrastructure. The process involves design, programming and redevelopment of infrastructure and related improvements. We are constantly monitoring the needs of the market and those of prospective tenants with respect to use. Our redevelopment process involves moving and operating property temporarily, while we actively convert the use of the property. This is clearly diluted in the near-term while we convert the property to a higher-value use.

Our redevelopment program adheres to the provisions under FAS 34 and 67, which requires capitalization of interest while activities are ongoing to prepare an asset for its intended use. Capitalization of interest is discontinued when the project is substantially complete. Interest is capitalized only as it relates to the portion of the property undergoing redevelopment. Our redevelopment program is integral to our business model. Our strategy is to identify and convert properties and strategic locations at very attractive yields. We benefit from the shorter to deliver space as compared to time to deliver space related to our ground-up development.

Our redevelopment program generally takes 9 to 24 months depending on the nature of redevelopment. The process is complex and time-consuming. The cost of redevelopments are difficult to project in advance, but may range between 75 and 100 per square foot. Our redevelopment properties are fully excluded from our same property portfolio. If they were included, this quarter the same property increase in revenues plus operating expenses would be about the same at 1.5 percent on a GAAP basis.

Redevelopments are also fully excluded from the operating portfolio in computing all of our operating metrics. If the occupied portion of our redevelopments were included, the average occupancy would actually be higher at 95.6 percent compared to 95.2 percent. As shown on page 10 of our press release.

Moving on to our development program, our development program involves selecting the property from our valuable land bank, all of which are located in strategic and irreplaceable locations. We then lean on our expertise to construct a first-class laboratory facility to attract outstanding targeted tenants or provide growth for existing tenants. The development process is complex and time-consuming. Our development program is generally a much longer process than our redevelopment process and may take 24 to 36 months to complete. Capitalization of interest is recorded in a manner similar to that previously described with our redevelopment program.

Now, briefly on net asset value. We feel compelled to comment on NAV. We do believe that Alexandria is a unique company and not just deflection of assets, but growth and therefore substantial a portion of our value is derived from the non-financial measures -- our distinctive business model, our franchise value, our people, our network and our reputation. These factors have distinguished us and will continue to distinguish us from other REITs.

Again, we encourage observers to understand the limitations of the metric. NAV calculations are typically backward-looking based on reported results, and do not fully consider the growth potential of the Company as we have consistently had and will continue to have through internal growth, and to some degree external growth.

A meaningful NAV is difficult to compute for most companies or REITs but virtually impossible to do for us due to the substantial current and future value of our value-added programs, including our development and redevelopment programs and the value of our life science franchise and its unique road map for growth. We do encourage observers who want to evaluate us on a NAV basis to fully consider the additional value of our development and redevelopment programs. But we would say even with this approach it only considers the one additional aspect of the Company and not the others. Briefly on our FFO payout ratio. Our FFO payout ratio for the fourth quarter was about 55.6 percent.

Next, I would like to provide a brief comment on our status of Section 404 of the Sarbanes-Oxley act. We believe that our internal controls over financial reporting have been designed and operated to provide reasonable assurance about the reliability of our financial reporting, and our process for preparing and fairly presenting financial statements in accordance with GAAP. Our evaluation also covers our controls over the preparation of our Form 10-K. We expect no issues with our financial or 404 audits.

Lastly, on FFO and EPS guidance, our guidance reflects an overall estimate with which we are comfortable and is based on various assumptions under multiple scenarios. There are a number of factors that can impact our performance significantly. As a reminder we do not comment on individual assumptions underlining our guidance. Our FFO guidance is being reaffirmed as Joel had mentioned at 4.78 for 2005, and should be back-end loaded. Our EPS guidance has been updated to 2.56 for 2005. Since we have occasionally been asked this question, I would like to mention that our common shares outstanding as of year-end was 19,594,418 shares.

With that said, I would like to turn it back over to Joel Marcus.

Thanks guys. And we will turn it -- sorry for the lengthy presentation, but given year-end and quarter-end, we thought it important -- turn it over to the operator for Q&A.

(OPERATOR INSTRUCTIONS). Jonathan Litt, Smith Barney.

I'm here with John Stewart. A question on your activity in the fourth quarter acquisition program -- almost 1 million square feet acquired. I was wondering if you could break that out between development and redevelopment opportunities and dollar amount invested? And if you could give us some sense of expected returns?

We will try to give you somewhat of a breakdown by area and -- on the returns side, I'm not sure we can be too helpful. But in Seattle, we had, I believe -- well -- do you want just fourth quarter?

Yes, the fourth quarter was obviously very active. Just a little more color on what you did during the fourth quarter?

Let me just kind of go randomly and then I'm going to --

Even if you could do it in the aggregate, aggregate amount of acquisitions, aggregate amount of redevelopment --?

Yes, we --

In dollars, if you can give any square footage.

We purchased property in the Bay Area for about $48 million; property in Seattle for about $3.5 million; property in Suburban D.C. for $15 million; property in Eastern Massachusetts for about $6 million; another property in the Maryland market for about 33 million; and the final property in the Maryland area for about 96 million; San Diego about 21 million and Seattle 29 million. Those are kind of roughly the makeup of the fourth-quarter acquisitions.

Out of the 330 million or so that you did in the quarter, how would that break out between just straight acquisitions, acquisitions with redevelopment opportunities? And I guess the land component maybe I know.

Virtually all of the Bay Area has -- it's stabilized, but it has a vacancy. The Maryland property stabilized, but with vacancy by and large and one to go into redevelopment over the next couple of years. San Diego, again, stabilized but with vacancy. And then one in Seattle that was purely stabilized. Virtually all of them half a reasonable element of vacancy or a couple of them have a redevelopment capability as well where there may be existing office or warehouse that does -- that is calculable for redevelopment.

When you say stabilized with vacancy, does that mean it's 95 percent leased? Or does that mean --

No; much less, John.

So maybe it's 60 percent leased and that other 40 percent you're going to take and stick into your redevelopment pool and it won't be in your operating statistics?

It depends on what the space is. If we don't put it into -- if we're not actively looking to redevelop it today, it will just be vacant office or warehouse. So that doesn't necessarily get put in until we are committed, change the use and put it actively into redevelopment. But it could vary between say 20 and 40 percent vacancy. It depends, but that's not untypical.

There was a fair amount of activity in the fourth quarter. Can you comment on your funding and how you see your balance sheet come year-end -- how you see your balance sheet come year-end?

Of '05?

Yes.

As Dean said, and as I kind of repeated, I think we have used our line pretty heavily. Because obviously when you have assets that aren't fully stabilized it oftentimes is hard to get fixed rate financing, permanent long-term financing. But as we sort through the various acquisitions and try to stabilize them to a larger extent, and some that we have that are existing that are in our unencumbered pool we plan to -- in fact, we're already working on a number of fixed-rate debt financings. So we're going to move some of that, obviously, from the line to the fixed side. And based on our year-end debt to total market cap at 41 percent, I think we are in good shape. But I think as the year progresses and based on our development pipeline, Mission Bay in particular and others that may go into that we would clearly looking at potential sources of funding in the construction lending area, or possibly tap maybe the preferred market or something like that.

So I think our goal is not to get -- to stay relatively delevered, and our goal has always been somewhere in that 40, 45 percent depending upon stock prices you know. And ratio -- coverage ratios and so forth -- we want to make sure that we're not pushing that. And I think we are comfortable where we are but we clearly will need additional debt and potential preferred capacity for some of the things we are going to put both in the pipeline and what is in the pipeline as well.

It clearly seems like there's a need for equity on your balance sheet as you continue your activity.

That is a correct statement.

And the yield -- if you just took a stabilized acquisition, I know that (indiscernible) even the redevelopments -- if you could split those two out, not specifically what you expect to get on a specific acquisition, but what would you give for ranges on each of those, so we know what is going on in terms of the acquisitions in the fourth quarter?

John, I would say overall the range on acquisitions I would say in the 8's -- mid 8's to the mid 9's IS probably not a bad range on redevelopment, maybe 100 basis points higher.

Is that 100 basis points higher going in or 100 basis points higher when you're done?

Stabilized. Right.

So what would it be going in? (Multiple speakers)

It could be 5 percent. And some of these things -- when Joel was commenting I was looking at one of the acquisitions we made; we bought a small building that shows up right now as 100 percent leased, but it also has leases that are rolling over in the next six to 12 months that we could extend, depending on how we see kind of the opportunity in that market condition (ph). If we extend, that investment will probably throw off something in the 7 to 8 percent range if we decided to exercise a right to access the space and redevelop it right away -- we could push the higher number. It Just kind of depends on where we see the opportunity. And, John, also let me say there are opportunities where the redevelopment -- where the yield at the front-end is much higher then what I described. But it's definitely short-term. And we know that going in.

On your balance sheet you list out rental properties and properties under development, but there's not a lot of color on the piece that -- I'm not sure if that property opportunity development includes the assets which are separated out for redevelopment but aren't currently under redevelopmet. And also, is there a way to separate out the message you have in land at this point?

It's Dean here. Let me address your first question on redevelopment properties. They are presented in rental properties net, and they have historically always been there. The real challenge is the dynamic as you can imagine of carving out a component of each property as it goes in and out of redevelopment, and moving it back and forth in buckets. So we, for simplicity, have left that category of assets under rental properties now. And I'm sorry -- can you repeat your --?

Can you give us an estimate of what you think is in there?

I don't know if I have that handy.

The second question -- well, let's see if we can find that out. The second question was value, John, of --?

Of the land that you own for future development. I think you said it was 4 million square feet of potential.

Actually, the exact number is, I think, 3.7 million square feet. We have not broken that out. That does fit in that number of properties, under --

This is Pete. Land bank is in properties under development, and so --

Much of it is pretty low basis.

So, in the 10-K it is broken out.

In the 10-K it will be broken out?

Yes, it is.

Because as I think as of the last filing, the basis in that was about -- (indiscernible) if I got this right now -- about 66 million. And you've have done a fair bit of acquisitions with Mission Bay.

It will dramatically increase.

Double?

It's Dean again. Properties under development -- it's been disclosed at 153 million as of December of '03 (multiple speakers) our filing and in our press release.

But that's different than your land. Your land you were saying is embedded in the rental property, or your land is embedded in the properties under development.

Correct; land is embedded in properties under development and in the 10-K there will be a footnote that breaks down properties under development between land and then the construction cost component of that. And you asked what is the revised estimate for the land, and we'll get it -- it will be in the 10-K, I should say. We have it right here.

But, obviously, the dollars on Mission Bay were somewhere north of $125 million, or maybe slightly less.

And then your redevelopment -- I think you had almost 500,000 square feet under redevelopment as of one of the more recent quarters. What is the approximate square footage of that program?

I'm sorry John; can you repeat that question?

The approximate square footage you have in your redevelopment program?

It's about 669,000, as shown on page 16.

And that's about 9 percent of the total portfolio.

That's the 9 percent.

Remember, what is being redeveloped in some cases could be full building or in some cases could actually be small amounts of the building.

Can you comment about the markets you're focusing on, and whether you're looking to or have gone outside the United States?

As I have -- well, I haven't mentioned -- we haven't mentioned formally in any press release, but ID Biomedical, a vaccine research, development and commercial company which has gained some degree of prominence given some of the problems in the vaccine supply to this country, announced I think earlier in January if I'm not mistaken that they were doing a sale-leaseback of two facilities, one of which is in Massachusetts which is a vaccine development facility and the other one is a building under construction in a suburb of Montreal, Québec, which is a state-of-the-art research facility for vaccines which should close over the next 30 to 45 days. So that is our first entry into the Canadian market. But those of you who know Québec or Canada broadly, Montreal possesses some of the best research, akin to kind of what you find in Boston or San Francisco. So we believe it's not a one-off transaction, but really will set the stage for a new market north of the border that we believe is an important scientific cluster market for us.

I have more questions but I will yield the floor.

Brian Legg, Merrill Lynch.

Joel, can you talk about the -- you talked about the 8 potential dispositions in '05. Can you talk about what that dollar amount might be? And given that you had a really active quarter on the acquisition front, what is the likelihood that you will still be a large net acquirer in '05?

It's funny, because maybe just taking you back to one step -- I don't think at the beginning of '05 we could have predicted the volume of acquisitions even close to what we saw. We try to operate through a very, as Jim said, very sophisticated and really personalized network that we have developed over the last two or three decades to really source these transactions, many of which don't really come to market in a broad sense. And things are opportunistic. We may not know today something we do three quarters from now, so it is somewhat hard to tell.

But of the buildings that we are actively considering, we have two in San Francisco, one in San Diego, two in Massachusetts, two in New Jersey and one in the Southeast. I don't have a number instantly handy that I could refer to that gives a total value, but it is somewhat significant. And I think what you see is a company undergoing a transition, as I think I described a quarter or so ago, from really a small cap company to more a medium cap company, which is going to have really significant growth through major development in its significant core cluster markets. And that really is what we've been positioning the Company intensively for over the last year or two, together with a robust redevelopment pipeline.

And what we're trying to do is prune those assets where we feel we have secondary locations or we have a multi-tenant situation where we've really maximized what we can get from the asset and where we don't have a premier AAA tenant. And I think each of the ones that I referred to -- although one is a credit tenant deal, the others are not. And where we would find -- well, two of them may be core -- and where we would find the opportunity to really prune the portfolio and continue our further growth really in a more -- more focused on the key locations.

I mean, if you look at San Diego for example -- San Diego really has four submarkets, two of which we think are great markets, Torrey Pines and University Town Center. The other two, we think -- although we have some assets in them -- are really much more marginal markets, Serrano Valley and Serrano Mesa. So, there are always opportunities for us to think about enhancing our franchise in the high-quality markets and thinking about either lessening or certainly de-focusing our efforts on the secondary. I mean, that's just one example of a secondary submarket.

Can you put a dollar amount around those potential eight non-core asset sales? And also, would the cap rates be below this -- sort of the 8 to 9 percent that you're looking at for acquisitions?

I think absolutely. And in virtually all cases these are -- well, there may be one or two that aren't -- but in most cases these are well stabilized assets that we feel we could go to market. Now, these take a lot of time and some of them won't come out from under CMBS loans where we acquired them for another year or so, so we have to kind of wait until those loans go away where we can kind of pick and choose. So some of that is holding us up on some things we would like to put to market almost immediately, but certainly we would see, honestly, a 100 to 200 basis point difference on the sales side. And again, we have very accretive uses for that capital, as John was just asking about balance sheet and capital for growth. We would view the capital here as being easily utilized by redevelopment and development, let alone any opportunistic acquisitions that we see.

Can you talk about the likely starts over the next 12 to 18 months, given that you do have this 3.7 million square foot land bank?

We haven't made any final decisions other than the 165,000 square feet at Mission Bay. We are, obviously, looking at one location in San Diego and one location in the Bay Area very carefully for signs of tenant opportunities. I don't know, Jim, if you want to give more color on those?

I think that's exactly right. We -- kind of consistent with my earlier comments, we're definitely seeing more activity, and the kind of activity that might warrant other starts similar to what we're doing in Mission Bay, that kind of quality of product. So I would not be surprised if we kick off several others this year, but I don't think we're at a point right now where we want to formally commit to anything other than what we have.

The last question for Dean. You talked about you will stop capitalizing once an asset is substantially complete. Can you define what substantially complete -- what that means? And also, are there any either developments or redevelopments that may push up against the deadline for when they'd be substantially complete before there's any leasing at those assets, so you'll be bringing on the formally capitalized interest but yet not have revenues to offset that?

Substantially complete as you can imagine involves -- the projects involve quite a bit of work throughout the process. It typically tails out with the completion of the project upon completion of the tenant improvements. But you begin throughout the process from a design -- if you're doing land you've got land related work, then you've got shell, and so on. So, you've get a very lengthy phase during construction that will tail out through the completion of the construction. Is that kind of --?

The other question -- are there any projects that might -- the leasing, you might be nearing the substantially complete definition on a redevelopment, yet you don't have leasings so that you might stop capitalizing interest before you actually start generating revenues?

I can answer that. I think the answer is we don't have anything instantly in the portfolio where we see we are on kind of a horizon, where we kind of meet that that wall. But it's clear that if we do, if and when we do in consultation with both the audit committee and our auditors, we will clearly stop capitalizing interest. And you'll see it as a vacant space or a vacant building. And probably the farthest along is one we have been working on through a variety of stops and starts with a number of different design changes from single to multi and back to single, and then uses from therapeutic to diagnostic, etcetera in Washington. But I think we are almost there in all respects, and hopefully that will come to fruition this quarter.

Tony Paolone, J.P. Morgan.

I just want to clarify a few things. In terms of all the land that you have on the balance sheet, is all of that being capitalized at this point, or is any of the land being held for development just held, and not sort of in process, if you will?

There's a mix, because we do have a few parcels that are smaller that are sitting without capitalization on them in the portfolio.

What about as it relates to Mission Bay land? Is interest going to be capitalized against that purchase?

That's correct.

That's correct. The Mission Bay is a very large project that involves several parcels all in different stages of qualifying construction activity. So yes, that is correct; it will qualify for interest capitalization.

Tony, as you know, much of that relates to a lot of entitlement work where you may not see the ground broken but there is a lot that's going on there; in fact, a huge amount of effort. So clearly, that would be involved with that development process, so to speak.

What was capitalized interest in the quarter, just to get that number?

It's right about 5 million.

Okay. Going back to the acquisitions in the fourth quarter, the 145 million that you bought -- can you give us just a rough -- just even a range of what the NOI coming off of those properties might be, just to get a feel for just how stabilized it is versus non, and to whether or not it even covers the cost of debt right now?

Tony, I think the total is the cash plus the assumed loans. So the number is higher than that if you look at page 2 of the press release. I don't think we have those numbers instantly handy, but we can try to get that to you. And when you say would they cover the loans --

What was the cost of 105 million assumed?

On the 105 million -- 105.9 million of secured debt, the average debt cost?

Yes.

Tony, going back to your question on the NOI -- we look at it and we've modeled it; it's positive, but I don't have the number with me right now, so I can get back to you.

And on the debt?

I mean, within -- when you include the debt on top of the NOI, what type of returns we're getting. I don't have the numbers handy.

Because there were a variety of specific loans on each property, none of which, though, were so askew from say broad product market?

That's correct.

So this is not something we anticipate debt premium, amortization, or anything like that?

Nothing significant. I think there is a small that premium that we did recognize at the end of the year related to one loan.

We can try to come back to you with specifics on that.

Just on the other income item that picked up in the quarter, your guidance for 750,000 to 1.25 million per quarter, picks up a little bit from where you had been running the past few quarters. Anything going on there?

I think it's a combination of increased storage and miscellaneous income. We have -- we are undoubtedly working on a number of things where we are likely to see some service fee income pickup. And also, we are trying to do a little pruning of our investment portfolio. So you will see some securities income as well. I think it's a combination of things. That's kind of a reasonable range, and it may vary quarter to quarter.

On the investment portfolio, $67 (ph) million on the balance sheet -- what kind of activity took place in the fourth quarter there, any redemptions or new investments, etcetera?

The primary component of that was marking the market of public securities. Very little new investment.

Any anticipated sales of those securities in '05?

Yes. I think you'll see kind of a continual ongoing amount of sales that will be part of that basket that we just described. I think nothing dramatic, though.

David Aubuchon, AG Edwards.

What is the term -- the average term on the secured notes you acquired during the quarter?

I'm not sure we have that detail but we can -- because there were quite a number of those -- but we can try to provide those to you, Dave. (multiple speakers) those things for modeling.

You mentioned, Joel, leasing in the quarter was good, not great, and certainly below the levels you saw -- previously in the year. Is that just related to seasonality or timing, or can we -- do we soon that maybe we've hit a bump in the road here in terms of the activity in the market?

I would characterize -- and then I'm going to ask Jim to comment. When I said it was good but not blow out, I meant by the sheer volume. But if you look at the rental rate increases and you look at, as Jim said, kind of the size and the comparison to previous years, for the year, I think this was the biggest year we had really in all metrics.

Exactly. I think I tried to address some of that. I think our leasing volume was up for the year 50 percent over prior year totals, and a lot of really was timing. A lot happened in the third quarter that just as easily could have fallen into the fourth quarter. So it was as much about timing as anything else. But the other metrics were very positive.

When you look at the statistics you guys provide by market, at least in terms of what's occupied, it appears that Boston or Eastern Massachusetts just appears to be way behind the others in terms of I guess just traction in terms of what you can get done there. Is that -- any particular reason for that market, or is it portfolio-specific, or can you elaborate on what is going on in that market versus the others?

Absolutely. And I think what Dean said, if you kind of listened to what he said it is revealing, that if you just look at the numbers as they sit on page 10 of the press release on occupancy, they aren't weighted on a net effective rental basis. So you don't get the real picture. Pasadena -- it's a single building, so therefore it is what it is. Eastern Mass. is weighted down really by some weakness in the Wuster (ph) submarket. And we have one lab building that sits empty in a submarket south of Boston that -- it's a one-off market; it's kind of a lab building that the tenant was a European pharma that was going to extend but decided not to, so we have been trying to lease that for sometime -- either sale or lease it -- that's one of the ones we would like to sale.

How big is that?

It's about 25,000 square feet. The rents are kind of low 20s. On an absolute basis, that weights that down substantially, but on a weighted average based on the rental, it really has very little impact. It's one-third the amount of rents that we're getting in some of our Cambridge properties, and that just is the market. That's a good example -- we can't redevelop it because it's already kind of the state-of-the-art building. There's nothing we can do to add to it generally, and it just sits there. Then Southeast, similarly, that's weighted down by an office building. We're actually waiting for the CMBS loan to mature so we can pull the office building out of our portfolio and sell it. And that is about 40 percent filled, so 60 percent vacant. And so that weights that number down. So I wouldn't draw any negative conclusions to the occupancy percentage by any means.

There appear to be a lot of redevelopment activity in the Cambridge area from other office owners who are not seeing the level of activity in the typical commercial office market; in other words, redeveloping their space to lab are. You seeing any impact from that?

Guess I think EOP has been one of the big ones who have. They have been relatively successful in their East Cambridge projects and they have signed some good tenants. Jim, you may want to comment on what you see the impact of that is in the market.

We don't have any significant exposure in Cambridge. I think broadly speaking it's more a commentary on the challenges in the office market in Cambridge. I think the lab market has -- actually the lab market in Cambridge has been softer than most around the country, ironically. And you are seeing some of that, but a lot of that you have to kind of continue and follow it all the way through to see what actually gets done. I do believe that EOP is going to do what they're talking about. But as we talked about numerous times on prior calls, there's a lot of situations -- there have been a lot of situations around the country where owners have positioned their buildings as lab ready shells or convertible, and they never get done for a variety of reasons. Cambridge is a more mature marketplace where people have more experience in this realm, and so I think it is more plausible, but it really doesn't have a direct negative impact on our holdings there. And ultimately I think it's just a response to the languishing office market.

It must mean you don't have a lot of lease roll-over exposure in that market in '05?

We do not.

Jim, when you see that you give a range of zero to 10 percent upside on rents, the leases that you're renewing, obviously zero percent is not very good at all considering (indiscernible) business. Do you expect more in the 5 to 10 percent range that you have previously given, in terms of guidance?

I think it's hard to say. Right now I would say it's -- we clearly believe it's in positive territory. And unfortunately with our portfolio, it is so much case-by-case and timing is everything, and we would rather be a little bit conservative than not. And so we see it in positive territory, but I would be reluctant to get overly aggressive here.

Last question. Joel, can you give a square footage range in terms of the assets that you're considering selling? I understand you can't give a dollar amount (multiple speakers)

Gee. It would have to be a couple hundred thousand square feet, certainly; probably close to maybe 500,000 would be a guess.

And these are the 6 to 8 assets that you're considering?

There are 8 that we would be looking at. And I think the total would be around 500,000 square foot.

Really, the last question is straight-line rent for the quarter?

It was 3,047,000, Dave.

Dave, let me answer your other question earlier about the average term of the debt assumed during the year. It looks like it is probably in about the five-year range on average. I mean, on the low-end just under four years; on the high-end, close to seven years.

And we'll try to get some numbers on the average costs, but we have to go back and really look at each transaction separately.

Philip Martin, Stifel Nicolaus.

Most everything has been answered here. But in terms of the fourth-quarter activity -- I know, Jim, you had mentioned that toward the end of the year, certainly, leasing activity is pretty darn solid; transaction size is increasing, etcetera. Number one -- and Joel, you might want to comment on this as well -- is this mainly because of a Bush win, etcetera, and it got people off the sidelines and feeling just obviously a little bit more comfortable on spending going forward, and just overall administration policy?

I will let Joel comment on that. I think it's difficult to pinpoint a specific dynamic. I think there's been a building kind of level of confidence over the past six months. I think the way companies are getting funded, kind of the way that the product cycle has kind of impacted company growth, the way boards are involved with companies now. A lot of that had not really been fully flushed out yet, and I think there is becoming a more clear view of how companies ought to be expanding at what stages of their growth. And I think that is as much a reflection of this is anything else. And Joel can comment --

On the activity that you are seeing is that, are they existing tenants looking to expand that are deciding to expand, or are these just new tenants, or is it an equal mix?

I don't know if it's an equal mix, but I'd say it's all of the above. Clearly, kind of companies that are at later stage in development are getting most of the attention in the capital markets, and those are the companies that are looking. But there's also earlier stage companies in certain markets that are -- that we are seeing kind of more robust activity. Again, I don't want to overemphasize this as being overly bullish; it just has been a good, positive incremental in increase. And I just think that there is a higher level of confidence broadly speaking that is encouraging companies to start making those decisions. And I don't know that I would personally say that that's all associated with the election out come.

Again, you know it's -- incrementally here it's gotten more positive over the last year, and certainly, now with more -- with more tenants out there with transaction sizes increasing, it's slowly building here.

But I think that's a great way to characterize it. I think a year ago we weren't as positive about getting to a point where things were kind of turning from kind of that downturn kind of to a stabilized overall view. And I think they have clearly done that. But I think is you have said and as Jim said, we're not out here doing cartwheels; if the market is hot, it really is not at that point. But it's certainly stable, and it's doing better than it has done for the last couple of years. And we are, I think, enthusiastic about that.

This is not 2000 repeated.

With regard to some of your weaker markets, or like a Cambridge, etcetera, what specific catalysts or things are you hoping to see over the next four to six months, to see if this is getting off the ground. Are you looking at anything that may not be obvious to us, etcetera, that you're looking to kind of --

Let me say one thing and then I'll ask Jim to comment. I think San Francisco made a dramatic turn this year, and that's another reason we focused a lot of our capital resources as I was answering John's question earlier on capital balance sheet capability, etcetera. We acquired almost 2 million square feet of developable land in the area in the two markets Jim described Mission -- Bay and South San Francisco. South San Francisco -- Genentech has been a huge acquirer both by acquisitions and leasing of space in that market, and that alone has really turned that market dramatically. And Genentech has had very good success with some of its products, and it operates from a platform that is far more efficient than you see with say a Merck today or something like that. So that alone has made a huge impact in that market. What else may turn in other markets? I don't know, Jim, you talk about that --

Another example of that with a whole different set of dynamics is Mission Bay, where just you have finally seen a true critical mass emerging with UCSF's transformation of that area and a municipal charter to attract the industry and really become a hobbit's just changed. Those are kind of the dynamics that we -- they're some of the dynamics we look at, when we're trying to project where to make investment and look at how we're going to do that we don't have lease rolling over there, but how those lease rollers are going to perform.

It is a little more opaque as you look at markets that have not turned yet, and the Massachusetts area I would be hard pressed to tell you what we think is going to happen there in the short-term to kind of turn things around. Historically there has been a lot of -- a high level of start up activity, transitioning rather quickly into development-level companies, and that has generally ceased in any significant way. It's hard to project what is going to turn that around at this point in that specific submarket. But I think you've hit the nail on the head in a sense that everyone of these markets has a different dynamic and set of drivers. Seattle, has its own set of drivers that have been pretty positive recently with kind of the heavy level of institutional involvement and university growth. So it really does vary.

Are there any markets -- I don't know the way to ask this question -- but, in terms of -- well, first the tenants in the leasing activity that you're seeing out there -- is the demand for that leasing from that leasing activity coming from more early-stage applications? Are tenants -- early-stage applications or more from a larger tenant base? I'm sure it's going to be a mix but I'm just trying to get a sense of what that mix is?

I wouldn't say it's early-stage at all almost anywhere. It really is driven by unique activity in that market. The Bay Area is driven a lot by Genentech and Amgen's recent acquisition and entrance into that market. Seattle, as Jim said, is really more of an institutional market. Seattle is kind of a mixed, diversified market that has been a relatively quiet market as of late. Boston is kind of a combination of biotech and institutional, and D.C. we have seen certainly those companies focused on the biodefense world, vaccine. The vaccine space seemed to be predominant, although there is certainly institutional activity in that market. It's really so local localized in each place but there's no way to generalize. But I would say there's a total dearth of start-ups really speaking compared to what their, were, say three or four years ago. And that is true because venture capital is focused on late stage product opportunities, not startups so much.

That is all the time we have for questions today. I would like to turn the conference over back to Mr. Marcus for any additional or closing remarks.

Thank you very much for joining us for the fourth-quarter and year-ended 2004 conference call. And we look forward to again the next call first quarter of '05 in May. And as I said, we will be giving guidance on 2006 at that time. Thank you again very much.

That does conclude today's teleconference.