Alexandria Real Estate Equities Inc (ARE) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the Alexandria Real Estate Equities Third Quarter 2005 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.

Thank you, and good afternoon. This conference call contains forward-looking statements including earnings guidance within the meaning of the federal securities laws. 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 our annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission. And now, I would like to turn the call over to Joel Marcus. Please go ahead.

Thank you, and thank you for joining us. Happy Halloween. We are very proud to announce our 33rd quarter in a row of an increase in FFO per share diluted this quarter, as you see from the press release, at $1.21. As we are in our 33rd quarter as a public company, we're also reporting the 33rd straight quarter of positive same store property results and positive rental rate growth on lease rolls. Really, a truly miraculous track record for the office sector and, frankly, for any publicly traded REIT. And we're very proud of that accomplishment.

It's a real testament to our first-in-class team and our roadmap -- unique roadmap for growth. And I think one of the hallmarks of the company clearly has been consistency, predictability and reliability. We're also one of the few REITs, I think, at this point, to have already given '06 guidance. I think our unique strategy and our roadmap for growth has produced, in addition to the items I just mentioned, consistent earnings growth near the top of the REIT sector; above average dividend growth; much higher occupancy than our office peers, by and large; unique expertise and experience at our value-added redevelopment and development pipelines; and a highly disciplined approach to investing our precious capital and not overpaying for acquisitions and achieving, in fact, high returns on invested capital. We think those are some of the crucial hallmarks of this company.

I think it's important to note, if you look at our IPO through the end of last year, the total return of Alexandria exceeded companies like and indices -- companies like Wal-Mart, indices like the RMS, Cisco, GE, Berkshire Hathaway, Microsoft, IBM, the S&P 500, the Dow, the Russell 2000 and COAG (ph). So, again, as a benchmark in the company's history, we're very, very proud and pleased to report these results.

As I do every quarter, I wanted to highlight a couple of macro comments from the industry at large before we get into the quarter. I thought, very interestingly, on August 8, the Canadian Supreme Court ordered that private insurers can compete in the Canadian healthcare market. And I think this, for the first time, will open up the Canadian market from a governmental run situation to one that will now include private insurers, and we think that's going to be good for the pharmaceutical industry in Canada.

Two days later, on August 10, Majority Leader Bill Frist delivered a speech entitled, The Manhattan Project for the 21st Century, in which he identified pandemics. And you've heard, certainly, about, among a number of them the so-called bird flu, where he believes that the country ought to essentially do what it did for the Manhattan Project in World War II, create a major project to detect, identify and model existing and new emerging diseases and to develop the infrastructure to essentially manufacture, distribute and administer these drugs should -- in order to prevent or, in fact, contain any kind of an outbreak.

September 5, the cover story of Business Week was Smart Drugs, and as we have said all along, clearly the movement in the biotechnology industry is toward much more targeted drug use for -- based on DNA profiling. And we think that's going to make a much more effective set of - and I think, pharmaceuticals and avoid what happened with Merck's drug. A couple of weeks later the FDA Commissioner, Lester Crawford quit and he was succeeded by Andrew von Eschenbach, a very well known scientist from the National Cancer Institute.

And immediately upon his nomination, Dr. Eschenbach basically said that what he wants to do at the FDA is essentially put together a major program to eliminate suffering and death due to cancer and turn the disease into, essentially, a disease management effort by 2015. And this should be positive for cancer research.

And on October 12, the NIH launched a major program to transform clinical and translational science, the so-called CTSA and we're very focused on taking advantage of that effort throughout each of our regions. And then, finally, October 24, an announcement by the federal government that biodefense related research will increase 8% during this fiscal year starting October 1, '05 through 9/30/06. So all good news items for the industry.

Let me move onto earnings guidance and dividend policy. I think 3Q '05 was characterized by a very well rounded consistent performance, an 8% increase in diluted -- or FFO per diluted share, and we're very pleased with all the operational and financial metrics. We've updated guidance, as you can see, from 41 to 42 for '05 and continue to give 514 guidance for '06. We're still planning several dispositions in the first two quarters of '06, but I think very solid '05 and '06 guidance.

Dividend policy, as we said before, ARE maintains one of the lowest payout ratios in the REIT space at 59% and with very strong dividend coverage. And obviously, the board will look at, for the fourth quarter, opportunities to make sure that the dividends somewhat mirror FFO growth. Moving onto operating financial performance and key metrics, Dean will comment more on same store growth, but if you look at our nine-month record, 2% GAAP, 6.9% cash, you see the statistics for the third quarter.

Again, a very important and key element of our growth. And again, the 33rd quarter in a row that we've reported positive same store growth and really, I think, a huge metric for the company. With respect to rental rate growth on lease rolls, Jim will comment in depth on that, but again, 33rd quarter in a row we've had positive increase. Our nine-month year to date is almost approximating 10% -- very strong. We did have a good quarter of leasing, 32 leases at 343,000 square feet. So very solid.

Occupancy is relatively stable at 94.5%. Our operating margins, again, maintain themselves at among the highest in the industry at 77% with 3.3 times interest coverage. So the operating metrics, again, being very strong. Again, we have no current reserve for bad debts on account of rental revenues. On the redevelopment end, we continue to deliver solid growth and this is, again, a key element of our unique roadmap for growth.

Clearly, the timing of tenant programming, which can be complex in many cases and materials deliveries, given a whole lot of things happening across the U.S. and the world present a challenge time-wise and so that is reflected, to some extent in our scheduling. We have a 1 million-plus square foot bank in our redevelopment program and this, again, is very positive for future growth.

On the development side, another cornerstone to our roadmap for growth, we have added three developments this quarter for a total active development pipeline exceeding 0.5 million square feet. And again, we report that we've got more than 4.5 million square feet of land in our development bank, which again is very positive for future growth. So, we look forward to continuing the delivery and initiation of a variety of developments in a variety of markets.

On the external source, and again, Jim will comment a little bit on this, we closed -- added five properties to our asset base this quarter for a little over 300,000 square feet and the sourcing based on our unparalleled and unique relationships 6.9 I'm sorry 69.4 million total for markets and average cost of $230 a square foot. So, we think very, very positive for the company. You may see over the coming quarters that service income may tick up a bit due to some construction management work that we're working on for the U.S. government for laboratory development. So that's a good sign as well.

With respect to the balance sheet for the third quarter, and Dean again will comment more -- in more detail regarding the variable and fixed rate debt strategy. But we continue with a strong and flexible balance sheet. The quarter ended with the 38.3 debt to total market caps, so very, very good shape. And clearly, we'll be moving more debt to fixed rate long-term debt in the coming quarter. So let me ask Jim to comment on a variety of items.

Thanks, Joel. My specific comments related to our leasing external growth activities will contain also observations on our view of the submarkets that we operate in. Otherwise, just very briefly, market conditions are consistent with those that I've elaborated on in conference calls earlier this year. The general trajectory of our markets continue in a positive direction. Market and leasing activity is reasonably strong, vacancies are down. Absorption is up and we continue to see rents incrementally rising.

The macro environment is generally positive for Alexandria, because it obviously supports a broad multi-product rent appreciation trend. The obvious downside is the impact on asset valuations and perspective seller expectations. Ultimately, this dynamic may be offset by rising interest rates and a slowing economy.

Let me talk a little bit - expand a little bit on some of Joel's comments on our external growth activities. And rather than sound like a broken record and parrot the mantra from other companies and other calls, let me just say that the broad market conditions are generally unchanged. Accretive high quality, well located opportunities are few and far between. Nonetheless, we continue our multifaceted roadmap for growth. We added five properties, as Joel indicated in the quarter in four separate regions. All five were operating assets generating solid current yields. And several of the properties have value-added components through either future redevelopment or additional entitlements we will be able to gain.

And I think important to note also, that Joel touched on, four of the five additions were sourced enclosed through true op market transactions, which just provides further evidence of the real tangible value of the broad unparalleled network that the company has. Augmenting our strategic selective acquisition effort is an equally selective opportunity based development program. We initiated three projects in the third quarter of '06, expanding this program now to include seven projects, 556,000 square feet in six submarkets in five regions.

Each of the projects is Class A, flexibly designed building that's intended to fill a need in the specific submarket, relative to the product type and the current demand that we perceive there to be. And I think, equally important, is that we have robust activity at various stages in every one of those projects. So clearly, a carefully planned, properly timed development profile will be among the core elements of our growth platform for the foreseeable future.

Let me turn to leasing. Again, in the third quarter '05, overall activities were consistent with the first six months of the year with a modest uptick in some selected submarkets. Growth continued to be driven the more mature commercial companies, as well as a higher level of institutional demand. Supply and availability characteristics generally remain in equilibrium with few submarkets exposed to significant downside with most of them actually poised and continuing to tighten up.

Third quarter performance was very consistent with the first half of '06, relative to our gross activity and positive rental growth. Joel briefly referenced, when we exclude the impact from one real critical renewal in a currently challenging East Bay, San Francisco submarket, our rent growth for the quarter was approximately 7%. And just to briefly elaborate, the specific property that drove those numbers down somewhat was a tenant that entered the portfolio during a tight period in that submarket through the acquisition of another company. And when it came time to renew, the market was not as strong as it had been when they entered the market with a little less leverage.

The 343,000 square feet of activity was actually more evenly divided this quarter between the East and the West Coast, roughly a 60/40 split respectively. The Massachusetts and Maryland regions performed exceptionally well, representing more than half of the total activity. As we look forward, let me turn to rollovers. 2005, 178,000 square feet remaining. Of that square footage, approximately 60% is either committed or -- we're anticipating commitment or near-term resolution.

The unresolved space is a relatively nominal 66,000 square feet, and is located in 15 generally smaller incremental spaces distributed around the country. Relative to growth for the balance of the year, our analysis of the remaining rollover space outcomes support the consistent projection we've made throughout '05 of a 0 to 10% growth rate on new and renewed leases. Given the year-to-date performance at the high end of this range, we expect the full year to conclude similarly.

2006 rollovers. Total remaining at this point in time, approximately 950,000 square feet and we continue to make very good steady progress in resolving our rollover exposure for '06 while increasing portfolio value in the process. I want to review just quickly some of the key characteristics of the rollover. It's important, given the magnitude. 66% occurs in the second half of '06, 50% actually occurs in the fourth quarter, while 20% occurs on the last day of the year.

Further, the rollover is generally well dispersed geographically with 84% scheduled to occur in our four largest markets. Therefore, as should become evidenced shortly, we are making good progress at increasing rental rates across -- what I would characterize to be generally improving markets with substantial remaining time to fully resolve.

Overall, about 40% of the rollover has either been leased or committed with nearly three-quarters of the first half '06 rollover falling into one of those two categories. When combining the space anticipated in a redevelopment with the least in committed space, the result is a total projected unresolved inventory of about 35%, most of which occurs in the second half. As indicated during last quarter's call, we're anticipating rental growth rates ranging between 5 and 10% for '06.

Finally, let me quickly turn to currently vacancy. About 5.5% of the operating portfolio up slightly from last quarter, due to a couple of additions of property with current vacancy, and the addition of one multi-tenant property delivered from our redevelopment pipeline with some current vacancy as well. We made good progress in the third quarter, at least about 75,000 square feet of space previously classified as vacant. And going forward, we've either leased or are in serious negotiations on approximately 40% of the balance of the currently vacant space.

So, let me just quickly conclude by saying that overall the third quarter performance was very steady, consistent and positive, similar to prior -- the prior several quarters. Our submarkets are continuing to incrementally improve as supported by the generally optimistic projections that I shared. And we anticipate a beneficial impact from the rollover opportunity, selected development activities and our steady redevelopment production.

With that, I will turn it over to Dean.

Thanks, Jim. Good afternoon, everyone. I want to take a few minutes to highlight certain financial and accounting matters for the quarter. We have continued to execute on our unique roadmap for growth, providing for our 33rd consecutive quarter in growth and FFO per share. And as Joel also mentioned, our 33rd consecutive quarter of positive GAAP basis, same property growth. FFO for the quarter was $1.21 per share, diluted, which represents an increase of 8% over the third quarter of 2004. Just as a brief reminder, during our second quarter call, I mentioned that we had one property held for sale and during the third quarter we completed the sale. Again, this was a very small 100% office property that we sold at a very slight gain.

Next, I would like to take a brief moment to discuss an accounting matter that was raised recently at another meeting. As mentioned on prior calls, we have consulted with our independent public accounts and have concluded that our policies and accounting are in accordance with GAAP. We also discussed the recently highlighted accounting for tenant reimbursement of construction costs that are incurred by a landlord.

We do not have any significant portion of our revenues attributable to construction cost reimbursed by a tenant, but if and when this occurs our policy is to recognize the receipt on a straight line basis over the lease term in accordance with GAAP. Real briefly before I move on to our operating stats, I would like to briefly comment on the increase in our G&A expenses from 4.8 million to 5.9 million from the second quarter to the third quarter of 2005.

This increase in G&A expenses while primarily related to the growth and the depth and breadth of our company, also included a few non-recurring items. The increase was primarily related to our new markets in Canada and New York, staffing increases, the move of our corporate headquarters in our San Diego office and additional stock compensation expense. Going forward, we expect G&A expenses to be approximately 5.5 to 5.6 million per quarter.

Moving on to the few operating stats, our operating portfolio continues to reflect the overall strength and stability of our operations. Occupancy for the third quarter was 94.5% as compared to 94.7% in the second quarter. Our occupancy, as Jim had highlighted briefly, a few of these was impacted in San Diego related to a full building tenant that vacated in the third quarter, and vacancy at two recently acquired assets in Seattle that are future redevelopment projects for the company. These assets are included in our operating portfolio statistics, since they are not under active redevelopment.

Our margins remain very solid at 77% for the third quarter and I continue to believe that the 77 to 78% remains a good BRN rate on a go forward basis. Briefly, our same property results continue to provide positive results quarter-after-quarter. Our results for the nine months ended September 30, 2005 were 2% on a GAAP basis and 6.9% on a cash basis, with most of the increase attributable to increases in rental rates.

I do want to point out one footnote that was included in our supplemental package, which indicates that our same property results were impacted by certain pre-payments of a portion of rents due under two leases that do impact cash revenue. Under GAAP, we're required to record these payments on a straight-line basis. Excluding the impact of these leases the same property results on a cash basis on the nine months ended September 30, 2005 were 4.5%. Again, our guidance for the remainder of 2005 and into 2006 for same property results remains in the 2% range -- that's on a GAAP basis.

Briefly again, I would like to highlight our accounting for FAS 141, the company complies for the provisions of FAS 141 and allocates the purchase price for real estate acquired to the various intangible and tangible assets acquired. However, there have been no purchase price allocations in 2005 for above or below market leases that would have an impact on FFO.

Briefly, I will give you the straight-line rent adjustment that's included in our supplemental package. It was 3 million for the third quarter. And on a go forward basis, expect straight-line rents to be in the $3 million range. Briefly on our debt strategy. As of quarter end our debt to total market cap had improved to 38.3%. About 66% of our debt represents fixed-rate debt and 34% being variable. This is of course after consideration of the 350 million of swaps in effect as of 9/30.

The notional amount of swaps in effect will increase to 375 million by year-end, and we will continue to evaluate additional hedges against our variable rate debt; which is as you know, is very important in our funding of non-stabilized value added redevelopment and development projects. We are also working on the conversion of up to 100 million of variable rate debt to fixed-rate debt over the next quarter, and we will continue to look at converting additional rate debt to fixed-rate debt in 2006.

As a result of the increase in swaps in effect at year-end, and the CMBS financing that I'm describing, our percentage of variable rate debt to total debt is expected to decrease further to approximately 30% by year-end. As each of you are aware, any increase in interest expense due to variable rate debt related to our key development and redevelopment projects should not have a significant impact on our results, since we are required to capitalize interest in accordance with GAAP on our development and redevelopment of projects.

Briefly, to comment about the 189 million of debt that matures in 2006. The majority of the maturities will be handled over the next two quarters, of course, before the maturity date of each loan through either new secured fixed-rate CMBS financing or refinancing of existing loans. Lastly, I want to briefly comment on FFO and EPS guidance. Consistent with our prior calls and our policy, we do not comment on individual detailed assumptions going into our guidance.

Our FFO and EPS guidance has been updated to 482 and 226, respectively for 2005 and 514 and 245, respectively for 2006. Please note that while interest rate estimates as we all know for 2006, have moved up significantly, we believe that it is positive that we have held our guidance at 514 for 2006 for FFO per share diluted. We will continue to look for additional insight on interest rate by the Fed over the next several quarters.

With that, I'll turn it over to Joel.

Okay, thank you very much. Operator if you could open it up for Q&A, please?

[Operator Instructions].

We'll take our first question today from Anthony Paolone, from JP Morgan.

Hi, thank you. Joel, you mentioned you have some service income coming in through some contracts, can you talk about just magnitude and duration of that?

Yes, I may ask Dean to comment on that.

It's -- we do expect an increase over the next couple of quarters in the range of maybe $0.01, possibly $0.015 over the next couple of quarters.

That is per quarter?

Yes, it's probably closer to $0.01 over the next quarter and then maybe a little bit above that the following quarter.

Okay. Joel, can you give us a bit of an update on just returns on invested capital for your redevelopment pipeline and how those are trending relative to the guidance you've given historically?

Yes, I think it's fair to say that one of the important cornerstones of the company is -- not only growth, but really business, is ability to try to deliver space in existing buildings which doesn't equivocate to essentially full building users. And so where we have either purchased or we have somehow otherwise acquired buildings it is important to have space in a bank that we can deliver to tenants who we would like to grow with. And since we tend to go out and target tenants that we're interested in in growing with, that becomes kind of a key element.

We have traditionally put in somewhere between, I think we have given guidance between $85 and $100 a square foot into space that we've put into active redevelopment which means we actually change the use and go through the programming design and then build out in delivery. And historically we have looked for low double-digit, sometimes higher, depends on the situation, returns on those incremental dollars. And I think we could say today that those numbers still are pretty much accurate. Every situation differs depending upon the credit quality of the tenant, the nature of the improvements, location, et cetera. But by and large, I think that's a fair characterization today.

Okay. Well my last question, on your seven development project that are underway right now, can you give a sense as to what pre-leasing is for those?

Yes, let me look at those. We don't typically announce leasing underway, because this industry is such that it -- it kind of works in tandem as I have described. But I would say on the thee -- or gem set on the three that we have initiated this quarter, San Diego and the two in San Francisco, clearly the large one in San Francisco is Mission Bay 154,000 square feet. We have a variety of discussions going on now, but obviously nothing to announce.

The other start that we made in the South San Francisco market we're in negotiations with a full building user and similarly in San Diego. And in the Southeast those two buildings which will be delivered shortly are pretty much, I would say fully leased. Suburban D.C. similarly and Seattle, similarly. So I would say there are no large vacancy holes in any of the development pipeline right now.

So then basically it sounds like all full, except for obviously Mission Bay which was started without a lease.

Right. And it's a much complicated programming effort and certainly time wise. Jim you might want to -- .

Yes and Tony, just to be clear, most of these -- many of these started without a lease in place. So Joel's talking about we're under construction simultaneously marketing, leasing, negotiating on these -- on the properties.

Right. And again, traditionally, when we break ground, we have a pretty good idea -- well, number one whether it's a single tenant or a multi-tenant building and who we're really targeting for that space, not just really throwing up space and then kind of waiting for somebody to show up with a lease signed. That's typically not how we go about our development properties.

Okay, thank you.

You're welcome. Thank you.

And for our next question today, we'll go to Philip Martin with Stifel Nicolaus.

Good afternoon.

Good afternoon.

I think that's the first conference call I've been on that somebody's actually said Stifel, properly. But a couple of questions. Joel you mentioned at the top -- during the beginning of the call the cancer research and the FDA Director's goal of really making that a real focus. Can you tell us how your portfolio is well positioned or could be positioned to benefit from that? How many tenants do you have within the portfolio that are really true cancer research type tenants? And what could that -- how would that change from, let's say, six months ago, the redevelopment or the growth opportunities internally that you have in the portfolio?

Yes, that's a really good question and clearly one of our focal points in the Washington D.C. area is not only biodefense which is by one of our big focuses, but obviously related government entities and also a variety of entities focused on the cancer area. We have a big presence with the Fred Hutch Cancer Research Center in Seattle; they are a crucial part of our asset operations in that market. And they are one of the leading cancer research specialists.

One of our main -- one of our important buildings in the San Diego market is inhabited by the Burnham Cancer Research Institute and other world-class cancer research institutes. We're also focused on a number of the big biotechs that have big projects in the cancer area. And so we are well positioned, I think, to take advantage of some of those companies' really spectacular growth over the coming quarters and years. So, it is a key focus of ours and one that clearly maybe among the most important of all disease states today. So, we are very focused on that particular product area.

Does the changing of the guard at the top of the FDA -- does that take away any potential opportunities that you may have had six months ago, that -- or is that not the case, is it just more of a renewed focus on cancer or -- ?

Well, I think it's a -- yes, I think it is a renewed focus. Coming out of the NCI clearly makes him more qualified to focus on that area, then say, Lester Crawford who is kind of a career administrator and also a very capable one, but did have some issues in Congress. But I think that it's fair to say, what is most worrisome about the FDA but I think they're getting their act together after the departure of Mark McClelland who went to CMS; is the ability to be able to approve therapies sooner rather than later. And I think that's what everybody is always holding their breath about vis a vi the FDA given Vioxx side affects and so forth.

But I think as I said, when you look at the -- if you read the Business Week article of September 5th, and everybody knows that clearly most of the top tier companies both Pharma and Bio are focused much more on targeting their therapies to patients who will have positive reactions as opposed to adverse reactions. That's clearly where the industry is headed, so in the future you are not going to have one pill being $1 billion blockbuster for everybody. You are going to have a variety of pills really catering to large groups, but much more focused groups.

So the market I think, will get even bigger, but it will be more focused to individuals who can positively react to those therapies, as opposed to people who its either benign or maybe have adverse reactions. So, I think at the end of the day, this is good. I think there was some in Congress that felt that appointing the head of NCI was kind of a conflict, because how could he do multiple things, but I think they're figuring that out.

Okay, and Canada, my last question. I mean, obviously you gave us a glimpse and you saw some -- you may have seen some things on the horizon there. And certainly that's opening up as you mentioned it's proving to be a pretty good ground for the pharmaceutical industry and sector. What types of opportunities do you see up there and do you think that's going to be a bigger part of your business? Or certainly within your tenant base, I would assume it is.

Well, I think we made our first acquisition in Canada that turned out to be a very positive one. The company that we entered the sale lease back with ended up being acquired by Glaxo Smith Cline. So that turns out to be a real positive home run for us. And I think the view of Canada is, that with an ability to have private insurers and private party payors, clearly the market may evolve further and clearly Canada has been and continues to be a very strong research center. So, we look at it positively in both ways.

Okay, okay, thank you.

Thanks.

(Operator Instructions).

We'll go next to Dave Aubuchon with AG Edwards.

Good afternoon.

Good afternoon.

Can you -- on the development pipeline, can you give a number what your total expected cost is and then maybe what you have spent to date?

Yes, Dean will give that to you.

You know this is -- the numbers do vary as we talked about quarter-on-quarter due to the mix. And the mix definitely has changed this quarter. But our cost to date is about $135 per square foot. And we expect our all in cost to be about $325.

And I'm assuming the Mission Bay projects kind of weight that average up?

Well we have one project in there currently and that does tend to be a little bit more per square foot than the average of the properties under development.

Right, okay. And Joel is there any update on the progress at East River Science Park?

Well, when we reported last time, we reported that the city had not made any decision. We were awaiting that decision and then on August 10th, I participated in a -- the city issued a press release and participated in a press conference with Mayor Blumberg to announce Alexandria's selection by the New York City Economic Development Corporation and we are in full due diligence on that project right now.

The site is as you know, is between NYU and Bellevue along the FDR Drive and the East River -- great views. It's a very complex site given the fact that it is right near the water and there are a number of strange structures or former structures on that site -- lot of underground utilities and so forth. So right now, our team is working hard to try to characterize the site, not only for subterranean development, obviously foundational work, etc, but also obviously environmental and so forth. So that's kind of where we are at the moment.

And Dean, you mentioned the increase in the G&A cost this quarter is partially attributed to the New York staffing. Can you elaborate on how many people you have there working full time on that project.

Well, we have really four people on the ground who are working full time on our behalf and then we have a rather larger cadre of highly capable consultants and experts. And that will evolve over time, but that's kind of what's on the ground today.

Okay, and when you say four people, this is under the Alexandria umbrella?

Correct.

Okay. Thank you much.

You're welcome. Thank you.

And we'll take our next question today from Jonathan Litt with Citigroup.

Hi, this is Krupar Rival (ph) with Jon Litt and John Stewart. In terms of your New York future development, I know that the East River Science Park, you're doing the due diligence right now, but do you expect New York to be the equivalent of a Mission Bay at some point? And where would you see Alexandria's total development pipeline there to be?

Boy, that's a tough question. The East River Science Park is a 3-building project approximating about 950,000-odd square feet. And beyond that there is no entitled, well there is only one additionally entitled site, but it's owned by an institution so it's not going to be sold to any third party.

Beyond that, there is no other currently entitled site on the island of Manhattan today, but that may change over time and my guess is it will but I guess that's good news for us. People are looking at potentially something, doing something in Governor's Island, but I don't think that's going to be this kind of use because if you live in New York I think the only way you can get there is by ferry and I guess it's going to have some other use in there.

And there are some other possibilities in some of the boroughs, but at the moment the city, we really are in a co-marketing relationship with the city on this site and they want to make sure this is highly successful. So I don't see anything else emerging over the short term.

Okay, great, and kind of related on your development and redevelopment pipeline. I noticed that there were a couple of assets that were delayed a couple of quarters. Could you comment on what's driving those delays?

Yes, as I said in my formal remarks, one of the things I would say that happens most often, and it's going to happen both in development and redevelopment, depending upon the user is when the user moves down the line or moves down the process, you kind of move down a leasing process, a leasing negotiation process and a design and programming process. And that can change dramatically over time, so that always is something that we have to be cognizant of.

And so that is one key issue and I could be specific in a couple of cases, I won't necessarily here, for instance, where you have a user that is, say an institutional user, that's looking at maybe a biology use but because of competing issues it might have to go to chemistry use. That's a fairly fundamental, doesn't seem like it would be, but a fairly fundamental change in programming, time, and effort. So that's certainly true. And then also, cost of goods and delivery of goods has been a challenge in some locations as well.

Joel, it's John. I look at your redevelopment schedule and I'm trying to understand. When you put in an estimated in-service date, is that because you have a tenant that's lined up for that space and so then delays happen because there's some circumstances with that tenant? Or is that your best estimate of how long it'll take once you have a tenant?

No, I think it's kind of a combination because what we try to do, and again it varies based on situations. In some cases where we have a building we don't even know what the date may be. We kind of estimate somewhere between 18 and 30 months where we have a building that, say, has a different use and we have to go through a change in use permit with the city. We often times have no clue how long that may take in order to get space even permitted to begin the programming and tenant search.

So sometimes that's a front-end issue that we simply just take a best guess at and we really don't know. In some locations we have, sometimes lab is done for the first time or it's a building that has not been programmed for lab in a long, long time and so you'd have to go through a fairly arduous effort. If you know -- like San Diego right now is an area that the city is kind of a mess, a number of people are under indictment, the mayor is kind of being overthrown, it's kind of a mess. So that is a location that has caused us some delays, for example.

But it really is all three of the above, depending upon the particular case, John. So it could be our best guess where there is demand in the market but we don't have a significant -- a targeted tenant. There could also be, we are working actively with the tenant, and so that could be also a situation where we're making an assumption again based on our best guess.

Well I guess as I look at the schedule of the 13 redevelopment projects, seven of them now have later estimated in-service dates than a quarter ago and that seems like an awfully high - or large number of these projects that are now being delayed. As we model and think about your growth and as you add to your redevelopment pipeline and you add to your development pipeline, the question is that the harvesting is getting delayed at the same time --

Yes, I think the way to think about it is again a lot of the spaces are fairly small spaces, not real large spaces, so those shouldn't adversely impact us I think in a negative way. I think sometimes the larger projects simply are -- where we're going through a total, say rescan the total gut of the building and sometimes time and permitting and even programming just take an amount of time that can't be predicted.

And I think I said a quarter or two ago, our estimated in-service dates that we have historically done are probably on the shorter end rather than maybe on the more conservative end and that's something we will try to catch up to. I could have Dean comment as well on that.

John, let me just give you some color from our perspective, as well. As we look at our disclosures on our in-service dates, again these are estimates and we take a further view of it as we model out our guidance and we use our best assumptions on when we think they're going to come in service, which tends to be different than what we put in our disclosures, for the purpose of our earnings guidance. So, we take a more conservative view as it relates to our guidance with the in-service dates.

I guess the other question on this would be, how much of your developments and redevelopments when they come into service, are leased versus vacant?

Oh I think it varies. I think Jim indicated this quarter for example, one of the deliveries we made had about a 28% vacancy in it, one in eastern Massachusetts. So I'd say that by and large, if it's a full-building user that you're going to have no vacancy. If it's a multi-tenant building, it's likely to have some vacancy. But again, a lot of these spaces you have to look again at the specific ones actually are quite small spaces.

Now are you capitalizing until you get to 95% or if you're 28% vacant you're expensing at that point?

No. I'll defer to Dean, but you can only capitalize or you must capitalize until you've conducted -- until you've finished the activities that are ongoing to turn this space over. And once those happen, whether the space is full or not, you can't capitalize interest at that point anymore.

That's correct. The technical languages, capitalization, occurs while activities are ongoing to bring an asset to its intended use. And I think, just to further reiterate what Joel is describing was, we did have an asset in the redevelopment pipeline that we brought in with some vacancy into our operating portfolio.

And as I also mentioned in our notes, there were a few occupancy hits up and down in San Diego and in Seattle, related to some vacancy, which currently sits in our operating portfolio. That will likely become future redevelopment opportunities, but currently reside in our operating portfolio. And it does put a drag on our earnings currently.

Right, and those have vacant space today, John, but we're not in permit process or we're not in change of use process, so they sit in the operating portfolio.

And just one final follow-up question. The amount of space that has been already put in service, that was in the development or redevelopment pipeline, how much of that space do you think is still vacant? Do you have that broken out?

For what time period?

For the past couple of quarters.

We could get that number for you. I don't have it today, but I know the one that we did bring in this quarter had a 28% vacancy. But we can get that to you and give you a shout.

So maybe we'll follow up offline.

That'd be great.

Thank you.

And we'll take our next question from Brian Legg with Merrill Lynch.

Hey Joel, the 121,000 square foot development that you started in south San Francisco, is that right there in front of Boston Properties' Gateway buildings?

It is.

And so you said you're targeting tenants, would that be Genentech?

No comment.

Okay. And when you talk about the 4.5 million square feet of land bank, is that already including the 556,000 square feet?

No. That's excluding.

So the total development, ground-up development, is 5.1 million square feet?

That's correct.

Okay. Did that change from the second quarter? It says 4.5 million square feet last quarter, also, and you started several other --

Brian, not significantly. That number I believe was fairly consistent. Let me -

And while you're looking that up Dean, Joel you said something about 1.7 million square feet of redevelopment potential in your portfolio overall, did I hear that correctly?

That's' right. If you look at the operating portfolio I guess on page 10 of the supplement, which is about 7.5 million square feet, embedded in there is 1 million square feet of potential redevelopment.

Okay, so that 1.7 million square feet is inclusive of the 465,000 that you have currently under -- ?

It would be exclusive of that.

Oh, so it's 466,000 plus the 1.7 million? That should be, if you were to say, everything that could be redeveloped?

It's actually 1 million. So, if you look at the footnote at the bottom of the redevelopment schedule, I think it says that it's about 1 million square feet, yes.

Okay. And Dean, what was the capitalized interest in the quarter and the components, principle balance, and the interest rate for which you're capitalizing?

I only have handy with me the capped interest number for the quarter, and that was right about $6.9 million. I don't have the other components, but could follow up with you.

Okay. All right. That would be great.

And we'll come back to you on the reconciliation land. But the 500,000-plus in active redevelopment is exclusive of the 4.5 million in the bank.

Okay. All right, great. Thank you, very much.

Thanks, Brian.

And ladies and gentlemen, this does conclude our question and answer session. I'll turn the conference back to our speakers for any closing remarks you may have.

Okay, thank you very much. We actually finished in less than an hour and we appreciate it. Have a great and safe Halloween night, and we look forward to talking to you on the fourth quarter and year-end earnings call, probably in early February. Thank you everybody.

And this does conclude our conference call. We do appreciate your participation. You may disconnect at this time.