Alexandria Real Estate Equities Inc (ARE) 2006 Q1 法說會逐字稿

Good day and welcome, everyone, to the Alexandria Real Estate Equities first-quarter 2006 conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Rhonda 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. Our 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 our other periodic reports filed with the Securities and Exchange Commission.

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

Thank you, Rhonda, and welcome, everybody, to the first-quarter call. With me today is Jim Richardson and also Dean Shigenaga. We're very gratified again to report our 35th straight quarter of growth in revenue FFO and then FFO per diluted share. Alexandria with a total return from its IPO through the end of last year 12/31/05 of an amazing 604% compared to the NAREIT benchmark of 285% really has established a long-term track record of consistent, predictable, reliable and solid performance. This really was another quarter, which exhibited the same. We certainly hope for those of you out there that ARE should be a core holding for all investor styles.

Also, we have been and will continue to be excellent stewards of our precious debt and equity capital and will utilize it with great care and prudence. We're pleased to report $1.24 per share diluted for the first quarter, and we are also increasing our guidance $0.01 to $5.16 for the year, which would be a 7% plus growth.

A few comments as I always do on the macro industry. As "Landlord of Choice" to the life science industry, providing high-quality real estate and the technical infrastructure supporting it, services and capital, we think that the outlook for the next 10 years for the industry is very positive. We see strong growth in the markets for the treatment of both chronic and acute illnesses. The markets will be driven now even more so than in the past by a confluence of political and demographic trends, certainly most notably the globalization of so-called "flat world effect," population growth and aging. And obviously, we're going to see a host of new products from the genomic revolutions of the late '90s and early 2000s. A key trend will be the ascendance of personalized medicine and an adaptation by the industry really to some profound demographic political and technological shifts.

If I focus in on the industry segments, I may talk just a bit about each one for a moment. I think, big pharma, you will see a continual fundamental restructuring of that sector of the industry I think much for the better. There's much to do at big pharma. But, overall, I think it will be a good change and a fundamental benefit to certainly those companies in the industry as a whole. I think biotech will continue to be the engine of innovation.

The biggest challenge will be how to reconcile the fast throughput of high technological changes with the delivery system that is really pretty antiquated. I was at a meeting the other day with the Head of Kaiser Health, and it is interesting that 80% of the doctors out there today delivering healthcare practice alone or in groups five or fewer, and only 20% of the docs really are in organized system-wide organizations, such as the Kaisers of the world -- really kind of a number that most people don't think about. To influence those doctors in the five or fewer, making up 80% of the real delivery system is a big challenge and one that the system will have to adjust to over time.

I think the medical device area, we see a strong convergence of engineering and life science, which will be positive for the future. In the diagnostics area, the scenario that we see a new dynamism and a centrality in the hope of obviously ultimately better and cheaper healthcare.

Then, if you look at the biodefense world and kind of the pandemic world, you ought to take a look at the November 1, '05 Whitehouse report on the national strategy for pandemics. It's a really interesting white paper on this area, and it will kind of curdle your blood if it already isn't in thinking about it. Several field tests that were done over the last year with pandemics -- and this was reported by the Kaiser system -- ended up in total failure and in an -- utterly unable to take care of, prevent or even contain the spread of a pandemic in several field exercises. So, we are ill prepared to battle this, whether it be by natural or bioterrorism causes.

One other good note on the biodefense sector -- two of our clients recently were part of a group of five companies announced on May 4th that won a 1 billion -- the five of them shared a $1 billion contract regarding biodefense needs. So, that's -- still, we see good funding coming in.

I think a couple of disturbing trends for the industry are though that the US, which dominates the world in science and technology today, certainly risks losing that edge to the extent that government spending is going to be downsized over time and that is going to be somewhat hurtful. So we're going to have to pay careful attention to that. Foreign inventors now are equal to the United States in technology patents, which is amazing. Published science articles right now -- Europe is number one, US two and Asian number three. And, the US ranks 25th in the world in per-capita science degrees. So, we better think hard about our future because we're going to need a lot of talent to maintain our competitive edge.

Now, moving to the quarter earnings, guidance and dividend policy, we had a very solid and stable quarter really on all financial and operating metrics. Dean will be exploring some of the details more fully in a few moments. Our margins remained at the top end of the peer group at about 77%, which is always important. And, again, we updated guidance based on what we see facts and circumstances today. Again, our responsibility to our shareholders will be to prudently and sensibly steadily increase earnings within the framework of prudent risk management, sound capital structure, and undertaking transactions that really meet the hallmarks of care, prudence, and financial selectivity as well as obviously maintaining a safe and growing dividend. We reported a continuing low payout ratio of about 57% and to remind everybody that the Board did increase the dividend by about 6% last year.

Moving on to the quarter itself, same-store growth, GAAP rents -- I'm sorry -- same-store growth about 2%, cash at 5.3%. Again, Dean will highlight some of the specifics there. We had a very strong leasing quarter, and Jim will describe the details of that a little more in-depth. In fact, it's interesting to note that three of the leases that were executed this quarter at pretty strong rental rates were in the suburban D.C. market -- a total of 28 leases for over 500,000 square feet and a 6.2% GAAP rental rate increase and pretty stable occupancy. We have no current reserve for bad debts on account of rental revenues.

On the redevelopments, we continue to have a good active pipeline and an embedded pipeline of about 1.1 million square feet in the embedded opportunities what we have not yet drawn down. But certainly, based on our multifaceted strategy for growth -- become an important part of our overall growth. This is space, which can be converted to lab and related technical space.

On the development side, another crucial cornerstone to our growth platform, we have increased our land bank to about 5.8 million square feet. So, we can substantially increase the size of the Company on that bank -- highly valuable, which we will provide again for future growth. The fair market value of that land bank is certainly at least two to three times our cost basis on average, especially in the Bay Area where we have a very low original cost basis.

We are almost completed with due diligence on the East River Science project and well into ground lease negotiations, probably one of the most complicated sites we've ever dealt with for a whole variety of reasons.

On the external growth side, let me say before I just highlight a couple of things -- and again, Jim is going to talk a little more depth about these. Typically, our acquisitions are sourced based on unique long-term relationships, both in the life science and real estate industries as I think Jim has stressed in the past. By and large, virtually all of the transactions which we see end up being purchased by other REITs or institutions in our -- Alexandria's life science niche have previously been rejected for a variety of sound and prudent business reasons.

This quarter, we added two acquisitions in the Seattle market, two in Massachusetts and one in our Southeast market -- the largest in the Cambridge market. We did make a key land acquisition in a submarket in the D.C. area, which is located in a very important location for future development. At the end of '06 -- and Dean will comment a bit on this -- we placed three properties in discontinued operations as held for sale. There's about 268,000 square feet, where we want to deploy the proceeds to more accretive uses. We also have said and we continue to pare down a short list of other assets, which we will consider for sale and possible redeployment of capital.

Then finally on the balance sheet side, we continue to have a strong and flexible quarter-end balance sheet with debt to total market cap about 39.7. Dean will highlight our continuing move of the variable to fixed-rate debt, which is certainly important in this environment. Let me turn it over to Jim at this point to really focus on some of the key real estate operations.

Thanks, Joel. I will start with some brief broad market commentary. The leasing activity, as briefly highlighted by Joel, has in most of our submarkets across all relevant product types really been pretty generally strong and certainly trending in the right direction. Within the life science's sector, vacancies continue to steadily decline while rents are gradually increasing. Recovery to the extent there has been a recovery in our segment has been particularly strong and swift in eastern Massachusetts on the San Francisco Peninsula and Seattle, where vacancy rates in each of these markets are now below 10%. San Diego and Maryland have been slower to respond. But, recently, over the past couple of months, activity has picked up in each of those markets.

As I think will be evident in my subsequent comments on a leasing update, we are generally encouraged by the resiliency, diversity, strength of our core markets, as well as the highly-valuable locations and the position of our portfolio. I think a primary reason that we have consistently and successfully managed the rollover year after year with positive rent growth includes superior quality locations and superior product. The industry we serve may be more sensitive to these factors than virtually any other industry. As is probably clear, this is a benefit of our first mover advantage across our regions. Later entrants are forced to pursue older buildings in less desirable submarkets at higher prices.

Turning to external growth, as Joel said, we added six properties of portfolio in the first quarter, encompassing all three prongs of our roadmap for growth -- land for development, redevelopment, as well as some stabilized operating properties. The transactions were concluded in three different regions at a total cost of about $106 million. Broadly speaking, nothing has substantively changed in this environment. It remains very challenging due to excessive capital flows as well as broader acceptance of the lab office product as a credible product type in the core market locations.

So, the net result is cap rates for core product now are trending below 8% and moving toward 7. Off market transactions for quality-stabilized products have all but disappeared. There is a possibility that the incremental creep in interest rates will relieve some pressure here. However, to date, the only thing we have observed has been modestly-reduced bidding pools on properties that have been brought to the market.

So, I think it's important to highlight how we are doing in participating in this environment and making wise, prudent acquisitions that make financial sense. Our view is the only way to achieve an A+ going in yield is through the introduction of or compromise in one of the following areas or variables -- location, quality of the product, non generic or broadly flexible space, tenant risk, lease-up risk, or some form of creative financial engineering.

I thought what I would do is just briefly kind of touch on real world example that is fresh in our minds with one of our acquisitions in the first quarter at 303rd Street. This property is in a phenomenal location in the [Candle Square] area of Cambridge -- solid tenants; brand-new, Class A generic space. The variable here is lease-up risk. The property was approximately 75% occupied at close and generated a sub 7% yield. Upon redevelopment investment of about $30 a square foot and full lease-up in stabilization, that property will get us into a stabilized yield in a low 8% range. If the property had been fully leased and sold, it probably would have sold around a 7 cap. So, that's the kind of environment that we are operating on a daily basis.

It's also critically important to us to track and manage the cost per square foot. 303rd was a property we bought in excess of $500 a square foot. With normalized Class A lab rates in the Cambridge market at $50 per square foot triple net and above and with highly-escalating replacement costs, $500 per square foot is acceptable in our view in this particular submarket for a fully dedicated new Class A office/lab building.

Let me turn to leasing. As Joel said, we had a very solid quarter with over 0.5 million square feet leased. As we look forward for the balance of 2006, our rollovers have now diminished to just roughly 700,000 square feet, down 22% over the prior quarter. They are still heavily back end weighted with over 70% of the rolls in the second half, 40% in the fourth quarter and nearly 20% on the last day of the year. As we look at status today, about 35% of the space is either committed or anticipated to be shortly resolved. About 30% will go into the redevelopment pipeline and that really consists of three large single tenant buildings, two of which we're converting from single to multi-tenant and a third, which is an R&D flex building, which will also be converted to office/lab. And, then the remaining 35% is too early to determine a status at this point.

Of the space expiring in the first half of '06, only 22% is unresolved. And, we are still anticipating mark-to-market between 5 and 10% over the full year of '06. I think the first quarter at 6.2% is indicative of us hitting that range. 2007, as you can see from the release, we've got a little bit over 9 -- a little bit more than 900,000 square feet that will be rolling over. And it's reasonably well distributed with the exception of a high concentration in our suburban D.C. market. About 40% of the space is currently committed or we anticipate to be shortly resolved. 50% is too early to determine. In the Maryland or suburban D.C. role, about 40% of the space is leased or anticipated to be resolved prior to expiration. So, we're making good progress on that fairly hefty role. At this point, we see rental rate increases in the similar 5 to 10% range for 2007.

Then finally, on vacancy, we have just shy of 0.5 million square feet currently vacant, which is about 6% of the operating portfolio. It's evenly distributed across the core markets. 30% is leased or were in negotiations, which we expect to successfully conclude. A majority of that space is in the 10 to 15,000 square foot range. We have seen good pickup in activity in this segment in most of our markets. So, we're making good, solid incremental progress quarter to quarter.

With that, I will turn it over to been.

Thanks, Jim. Good afternoon, everybody. Well, as Joel had hinted, we continued to execute on our unique roadmap for growth, providing for our 35th consecutive quarter in growth and FFO per share and our 35th consecutive quarter of positive same-property growth on a GAAP basis. We reported first-quarter 2006 FFO per share diluted of $1.24, which is up approximately 4% over the same period last year.

Before I comment on a few key statistics important to our overall performance and our unique roadmap for growth, I would like to briefly comment on a few other key items for the quarter. First, with our debt strategy and overall variable-rate debt exposure, as Joel had mentioned, our debt to total market cap was approximately 39%. Approximately 63% of our debt was fixed-rate debt, and the remaining 37 was variable-rate debt. This is of course after consideration of the 375 million of swaps in effect as of quarter end.

We continue to focus on the conversion of variable-rate debt to fixed-rate debt and anticipate closing a fixed-rate financing in the second quarter in the range of 150 to $175 million. Our projection of variable-rate debt as of forward-looking and as of the end of the second quarter is estimated to be at or below 30% of total debt, primarily as a result of this financing and our ongoing hedge program. We will continue to evaluate the timing of additional hedges against our variable-rate debt exposure, which is as you know very important in funding our non-stabilized, value-added redevelopment and development pipelines.

One brief note on our unsecured revolving credit facility, as you may have noted in our press release, there is a maturity coming up in 2007. The revolving facility matures actually in December of 2007, and we have a one year option to extend the maturity date to December of 2008. And, as another reminder, our term facility matures in December of 2009.

Next, moving to our discontinued operations, as Joel had pointed out, during the quarter, there were three assets that were designated as held for sale and presented as discontinued operations -- again, three assets totaling about 268,000 square feet, two of which were stabilized operating assets and one asset was the 100,000 square foot asset that we reported vacant in the prior quarter. Upon sale, we're anticipating a gain. NOI from the assets are approximately 3 million per year. Capital from these sales will be recycled to more accretive uses. These sales are anticipated also to close during the second quarter.

Next, moving to G&A, consistent with my comment last quarter, we continued to focus on the growth and the depth and breadth of our Company as we expanded to new markets and increased staffing in key areas. As a result, G&A expense has increased over the past year at a rate fairly consistent with the overall growth in our business and operating results. G&A expense as a percentage of total revenues for the first quarter was fairly consistent with the last few years, which has been in the 8 to 9% range of total revenues.

Next, moving to our operating portfolio, as shown on page 10 of our press release, our operating portfolio occupancy was solid at 94.1%. This occupancy reflects the changes from the three assets held for sale, the completion of one ground-up development, the completion of multiple spaces at two redevelopment properties and leasing activity for the quarter. Also presented on page 10 of our release is the comparable occupancy as of year end of approximately 94.3%, which as presented excludes the three assets held for sale. The one development and two redevelopment assets that were completed during the quarter are multi-tenant facilities and were substantially occupied upon delivery into the operating portfolio. Some vacancy was absorbed in these assets when they were placed into service. It's important to point out that we are in negotiations to lease a large portion of the vacancy in these recently-completed redevelopment and development assets.

Next, I just want to highlight a few certain stats important to our performance and our unique roadmap to growth. Again, results for the quarter continue to reflect the ongoing execution of our unique roadmap for growth and the overall strength and stability of our operations. Same-property results continue to be positive quarter after quarter for 35 consecutive quarters and were 2% on a GAAP basis and 5.3% on a cash basis with the majority of the increase in GAAP basis same-property results due to increases in rental rates. Looking forward, our guidance for same-property results for the remainder of '06 is in the 2% range on a GAAP basis.

Again, on our operating portfolio, as I had mentioned earlier, occupancy was solid at 94.1%. We view this level of occupancy as an opportunity to increase our overall occupancy revenue, FFO and FFO per share. Margins continue to remain very solid at approximately 77% for the quarter. And looking forward, 77 to 78% remains to be a good run rate.

Straight line rent adjustments for the quarter were approximately $3 million. I anticipate looking forward that $3 million run rate should be good going forward.

Lastly, other items that are important to our overall performance and unique roadmap to growth include the ongoing solid leasing stats that both Joel and Jim had mentioned earlier, the ongoing value-added redevelopment and development pipelines -- several of which were completed during the quarter -- and our very selective acquisition of operating redevelopment and future development assets.

Lastly, I will close with a brief comment on our guidance. Consistent with our prior statements and our policy, we do not comment on individual detailed assumptions going into our guidance. FFO and EPS guidance for 2006 has been updated to $5.16 and $2.32 respectively. With that, I would like to turn the call back over to Joel.

Okay, operator, we will open it up for Q&A please.

(Operator Instructions). Jordan Sadler, Citigroup.

I'm here with Jon Litt. I jumped on about a minute late. I wasn't sure if you addressed this, so excuse me. Just on Mission Bay, can you discuss where you're at in terms of trying to sign a larger tenant there?

Yes, I will maybe address that briefly and then ask Jim for any further highlights. We're building 154,000 square foot multi -- pretty robust, multi-tenant building, which is our lead kickoff building there, which is set forth in the properties under development. We have signed one lease with a company that is moving its R&D operations out of Colorado, which has become kind of a wasteland for R&D since Amgen closed down there and a number of companies are leaving. So, that company moved its headquarters to Mission Bay area recently and now is redeploying its R&D assets. Jim, you may want to talk a little more about that lease.

Yes, we've got a number of things going on in that building. We're making some pretty good progress incrementally there. As we expected, it's a multi-tenant, multi-product building. And then, on the larger front, we're continuing to advance our preconstruction efforts on all the other parcels and are in dialogue with several fairly significant users on those parcels but nothing we are ready to report yet.

Then, on East River Science Park, Joel, I think you mentioned in your commentary that -- well two things; one that you're almost complete. I was just curious about timeframe until you think you'll be able to have that signed up. Then, second, you said it's becoming the most difficult project that you've encountered. Maybe you could elaborate on some of that and how you -- if at all that will affect your expected yield or cost on that project.

Okay, well I think just to be very clear, I think I said we were about done with due diligence. So, we are about 90, 95% down with due diligence. We are well into ground lease negotiations with the city. The complicating -- and there are several stakeholders that are part of that that really have a vested ownership interest, so it's not a single entity. The complication of the project or the due diligence is what I refer to. It's a site -- in fact, I think John Stuart and Jon Litt led a tour there a couple months ago. The site is a very compact site of budding the FDR in between Bellevue and NYU.

What makes the site extremely complex is the perimeter issues and the adjoining land parcels are pretty complex and pretty overlapping. There is a [D Map Street] that has to be opened. So the due diligence -- the city when they did the RFP basically knew very little about the site. Whatever was known was primarily known by due diligence done by NYU, who lost the control of the site. So, the city actually had no knowledge.

So, we had to start kind of at square one and it's pretty complex. The other thing is virtually all of the underground utilities or the utilities for Bellevue, one of the adjoining land owners run under this site and which have to be characterized, mapped and then ultimately planned to move. So, it's not like just going into a parcel that you can characterize, do your due diligence and then begin to dig. It's a lot more complex than that and a number of major estates involved; the city is involved. So, that was my -- that was my really reference to the complexity of the site.

So, I mean it sounds like it's getting -- there are additional challenges that you hadn't I guess foreseen going into the project. Is that--?

I don't think anybody knew where they were. But, you know like any project, you work with the stakeholders, you have good people on your team and you figure out solutions that hopefully are workable and cost-effective for everybody.

But, an expected yield on that deal, is it changing because of the moving parts?

I don't think at this point, we would want to kind of characterize deals where I think we've got our costs where we want them to be. That took quite a while, and we're continuing to work on benchmark rental comparables. But, I think at this point, until we finally resolve the due diligence and the responsibility for that, we probably wouldn't be in a position to say where we are. So, those are the discussions that are ongoing at the moment.

Lastly, just for Dean, could you give us maybe in terms of volume on the expected sales that are coming up on the three assets that are held?

Approximately 268,000 square feet, NOI approximately about 3 million a year. And if you wanted to know roughly --

Proceeds.

Probably in the low to mid $40 million range.

Steve Sakwa, Merrill Lynch.

I was wondering maybe if Jim could just speak to the releasing activity. I was just looking -- the renewed/releasable rental rates, you generated about $26 a foot. If I look kind of on the redevelop/develop, those went out somewhere in the kind of $37 on a cash -- on a GAAP basis. I'm just -- I don't know if those are market differentials or if there were some renewal options that kept the leases down. But, that seemed like a large spread. Is there anything going on there?

Well, typically, the second-generation space is kind of all over the board relative to size, type of space, intensity of use, age. And although I wouldn't want to make this a general absolute rule, I would say those rates would tend to be lower than redeveloped or newly-developed space. Let me see if I can see anything in particular that would've -- and also the market that it happens to be in. And as I'm looking on this right now, a couple of them were in markets and for space that just generate lower rents (multiple speakers) -- some markets that are lower rent submarkets.

Yes, I mean, if you compare say, a Maryland to a Massachusetts market, you're naturally going to get just the fair market value rents there -- are just somewhat lower.

And then maybe, Dean, just on the income statement, can you just maybe remind us when you do that segment breakout of your revenues, there's a line called "other income," which I guess has maybe doubled or a little more than doubled over the past year. Could you just remind us what goes in there?

Sure. The bucket of other income consists of really project management fees, storage interest, a few miscellaneous things, small numbers and then some investment income. Period to period, even though I think when you look at 1Q '05 to 1Q '06, the bucket is up. But, on a relative basis, the makeup of other income has been very consistent period to period, except for the fact that I think in general, each of those buckets I described have grown over time.

You could expect project management fees to grow through the year, based on some government contracts we had. I think it is also important to note, if you look at other income in the REIT world as a whole, our research says the overall REIT group has an average about in the mid -- around 7.5% for other income. And ours is right dead on at that level. So, that gives you some benchmark.

Okay and then maybe just on the balance sheet, I guess what do you target in terms of floating versus fixed, Joel? I guess when would you anticipate getting there?

We have always said that -- well and it's somewhat dependent actually on development and redevelopment as Dean said because those are non-stabilized assets, and you simply cannot get long-term, fixed-rate debt on development projects as you know -- or redevelopment because they are non-stabilized. So, it's going to fluctuate a little bit with the dollars needed to fund those programs. But, I think, clearly to the extent that we've got about somewhere north of 50-50 fixed versus variable and as Dean said, after the end of the second quarter, our projection is to have essentially two-thirds fixed and one-third variable after the effect of the long-term financing we're working on and the swaps in place, which actually rise over the next few quarters, and we're pretty heavily in the money -- we think that's probably a legitimate benchmark -- again, so dependent on development. Because, if we commence development on another large chunk at Mission Bay, we're clearly going to have to keep that in mind (multiple speakers) -- on the active development, meaning breaking ground. We are in full-scale development preconstruction.

Tony Paolone, J.P. Morgan.

Joel, the 494,000 square feet of land you picked up for $6.5 million, how does that work? It seems like a particularly low price per square foot in the D.C. area. What do you get for that price?

Yes, it's an unusual location, which we're not prepared to announce at the moment. But it really is in conjunction with a university-related development, and so it was just a very opportunistic acquisition. Let me just leave it at that. But we think it's a very nice location and one that as I say has a very interesting university-related application.

When I look at your two acquisitions in eastern Mass., I mean there's probably some submarket differences. But, one is at $553 a foot and the other is at $83. I mean, how do you reconcile just such big differences there?

I mean, one is essentially East Cambridge and one is a suburban acquisition. And, that's really -- that's the difference.

Yes, I think rents -- the rent levels clearly -- the building that is a much cheaper-priced asset doesn't have the same level of investment and infrastructure improvements either.

And the one in Cambridge, is there much money in addition that needs to be put into that asset to get it up to stabilization?

Tony, right now, we are looking at about $30 additional per square foot.

Okay. Any sense of timing as to what -- when you'll get that to a stabilized occupancy level?

We're in active negotiations and discussions right now with a couple of different users. There's a dearth of space in the size range in Cambridge, which is one of the reasons we thought the risk was warranted going in.

Okay, and is that asset all of the -- in operations right now, so all of the NOI and interest expense, it's all in the numbers?

Actually, that asset was placed into redevelopment. The way this works is there is an occupied portion of this building. But, because there is a significant amount of space going into redevelopment, which is the vacant space of approximately 36,000 square feet, the entire asset is placed in the redevelopment. But, only the portion undergoing redevelopment is truly what we call under redevelopment.

So, that portion of the asset gets say interest capitalized against it or the--?

Correct. And that is shelf space; that's not built-out space.

My last question is the large expiration in '07 -- or I don't know if there's more than one of them in the D.C. area. Can you talk about when that occurs, what you know about the tenants' intentions at this point and releasing prospects?

Yes, it is. I think I've mentioned we've got about 40% of it that we've either already resolved or we're virtually certain will be resolved prior to expiration. It's a couple of large buildings I think in the first half generally speaking. But one of them has several component buildings that are -- we're looking at opportunities for different kinds and types and sizes of users. And we are in active discussions on each of those as well.

So, notwithstanding my comments, fairly consistent over the past couple of quarters about Maryland being relatively slow, we're making some pretty good progress on those. So, I don't think we have a huge exposure, but we're certainly focused on it because the demand hasn't been as robust as we would like.

(Operator Instructions). [Gary Boston], ABP Investments.

Jim, I was interested in your comments on the different factors that can mitigate some of the cap rate compression and just wanted to get your feeling on whether there are certain ones of those that you wouldn't take on in terms of the risk.

Yes, that's a really good question. I guess the last one I listed -- creative financial engineering -- we're pretty conservative in the way we look at opportunities. They have to make sense on their own merits. If you have to navigate financially to make sense of something that doesn't otherwise, we won't do it. We will take tenant risk if we think we have got an extraordinarily well-located asset. So, we would take tenant risk as a potential upside piece. In unique situations, we would also take risk on the product development itself. Joel, in the past, has talked about a couple of the key manufacturing facilities that we've have purchased that made a whole bunch of sense because of who was in them, what they were manufacturing and so on and so forth. But, that's a fairly measured and small component of what we would be willing to do.

Location, we've been pretty diligent and focused on maintaining core locations that we think make sense over a long period of time for our niche -- for a broad segment of the niche. Lease-up risk, we clearly would be willing to take in the right situation. Quality of product, that's something that we have been very judicious about over the years. There are assets in good core locations that are just disasters to try to manage the redevelopment of, and we just think the costs outweigh the benefit and we've passed on those as well. So, quality of product is kind of a nonnegotiable for us as well.

I apologize if you did touch on this because I had to jump off for a second. But Joel, any comments on what is going on down in West Palm Beach with the Scrips and how you might be involved?

Yes, I think I've made a statement publicly. We have a long history with many of the key players in that industry in that area. We have purchased a property for redevelopment very near where Scrips is now located. And that is in process of undergoing redevelopment and we will be -- I think we're the first to actually kick off that life science cluster in Palm Beach County. So, that -- just stay tuned for more, but that is ongoing as we speak.

Philip Martin, Cantor Fitzgerald.

A couple of things. I'm going to jump around a little bit. But, first for Jim, in terms of leasing costs going back looking at 2004 and 2005, those two years respectively, $8.44 a foot in '04, 6.52 in '05. We're now in the first quarter at 4.90. Is -- I mean the trend is positive. I want to discern, is that the positive trend or is that more of a function of the releasing that you're doing, etc.?

I'm not so sure you can read a whole lot into that. I think it -- and I hate to give this answer all the time. But it is so truly case specific; it depends on what pool of properties happens to be in a given year or quarter and how much attention they need. I think it's more a function of that rather than a trend in one direction or another.

Okay, well, that actually helps. Just explain that a little bit. Now, in terms of -- again, jumping around a little bit, the 6.2% growth on your renewals, that was again well-distributed? Using your term, that's a pretty well-distributed -- because I know you are at 5 to 10% as your forecast for '06. But, again, I just wanted to make sure that that was well-distributed across the portfolio.

Yes, I'm trying to get my hands on something I could give you -- a specific comment. Hold on one second. In fact, why don't you go to your next question while I pull that out?

The next question is really with the acquisition pipeline. Certainly, it sounds like as we all know, the acquisition market is very competitive -- aggressive on a pricing standpoint that sounds like from what your comments were today. But, is the acquisition philosophy and strategy really geared more toward the value-added repositioning side, so you can really -- you know more so than it has been over the last two to three years?

No. I would say it is very highly focused on franchise enhancement. So, if a redevelopment in a particular region is the right opportunity for us to really contribute to that franchise's growth and position, that's what we will do. Occasionally, there will be a stabilized acquisition that by some quirk of circumstances will make sense in this environment in those regions as well. So, it really just depends on a region-by-region basis how we can best kind of optimize our operations.

Certainly, this was a big quarter for you on the acquisition front. Can you talk a little bit more about the development pipeline going forward for '06? And how much of this first-quarter acquisition activity was really driven from your tenant base or needs from your tenant base?

Okay, let me answer now that I've got this other information in front of me, your question that I deferred. It was evenly distributed (multiple speakers) all of what we did. It was well distributed across the region.

So, it was a pretty good number there then to look forward to. Okay.

Yes, maybe going to the development pipeline you had asked about from our tenant base, the -- if you look at the --

Or even the acquisition pipeline too.

Okay but let's -- well acquisition pipeline from the tenant base I would say was probably not necessarily connected. Those were really independent opportunistic situations that we acquired based on really most importantly location and quality of product and potential for financial returns. If you look at the properties under development, the San Diego property, we brought an existing tenant to a new building. And then as I said, we are going to gut and rehab the existing building, which is a very old building and then ultimately multi-tenant it.

One of the San Francisco Bay, the 120,000 square foot was leased to Genentech. It's a company that we have had a long relationship with but never a tenant relationship. And so, this is the first real tenant relationship that we've had with that company. But, we have many relationships within the company. So, I think it's kind of a combination of some are existing and some are new but almost all with existing relationships although they may not be tenant relationships.

Okay and again the existing relationships, I mean certainly it does give you a competitive edge when you're out there on the acquisition front, knowing that you have excellent existing tenant relationships and your ability to possibly release or retenant or reposition an asset or take that leasing risk.

Right. That is absolutely a correct statement and an important key in this market for sure.

And then lastly, Joel, on the bioterrorism front, I mean certainly, you talked about sector by sector, big pharma going through a fundamental restructuring and then even from a government spending standpoint on healthcare and that sort of thing, that's declining. So, that's creating a bit of a challenge going forward.

The government funding on research -- government spending on healthcare itself is skyrocketing.

Yes, and that's correct on the research. But, offsetting that somewhat is bioterrorism. And is that a fair statement and is that -- based on the white paper that you referred to, is that growing even more than you thought it would be 1.5 years ago or 2 years ago when you first started talking about this?

Right. I think that's true and just the number of contracts -- there aren't many. But the ones that have been let have been rather large sums of money. So, we think that's a big pool. Big pharmas' R&D spending continues to increase pretty robustly as does the biotech sector. So, I think those sectors will help make up for the government side. The sad part is that the government really still needs to be in this game because a lot of research even under the "by Dole" kind of concept still needs to be incubated and really developed at the university or institutional level. A lot of that must come from government spending. So, that's an important component, even if not in total absolute dollars certainly in focus.

Do you have the number that the government is looking to spend on bioterrorism or what that budget is?

Well, the BioShield one is like 5 to 6 billion. There is another several billion -- I think I went through the numbers last quarter but I didn't bring them with me -- several billion for the pandemics. And then, there is a BioShield II, which is rumored to be as much as 10 billion. So, the numbers are going to jump pretty significantly here over the coming few years. It's one of those -- like Homeland defense, it's hard to be cheap with those dollars because we're very ill prepared.

In terms of your portfolio being positioned to benefit from that, is the decision makers at the federal or government level? Talk about your communication with you know those responsible for doling out these contracts, etc.

Yes, most of these end up being granted by -- they could be granted by the DOD, the Department of Homeland Security, DARPA. I was actually at a meeting not too long ago with the guy that runs the grants out of DARPA, and they were talking about some of the pandemic ramps that they are working on. But most of our communications actually tend to be at the Company or consortium level, who are teaming up to put in RFPs. So, what they need to do is present that they have the capability to do the research, development, commercialization, and manufacturing delivery. So, that's where we kind of come into those discussions.

I think our really pre-eminent position in the suburban D.C. market has allowed us to take advantage of some of those opportunities. We're doing a big government project right now there. So, I think that's how we have seen it. Some have found their way to California, haven't seen much go up to the Massachusetts area and not a lot to other locations.

My last question -- I just want -- you had mentioned in your opening remarks on May 4 a $1 billion contract.

Correct.

And I guess (multiple speakers) --

-- for a variety of flu requirements. Different types of flu -- avian, etc., went to five different companies, two of which are our clients. (multiple speakers) That would be GlaxoSmithKline that's using our facility for that very thing actually in Canada and in Massachusetts.

I also want to just make clear that earlier on when we were talking about -- Jim kind of gave a case study on 303rd, the Cambridge asset we bought, and it had about 30,000, 35,000 square feet I think that is in active redevelopment. Landlords work on that. I think Jim mentioned about $30 a foot. That's not fully built-out infrastructure. That's really the landlord's work on that. And fully built-out infrastructure depending upon a biology or chemistry or other use might be somewhere upwards of $100 a foot. So, just make sure you keep that in mind.

Dave Aubuchon, A.G. Edwards.

The Cambridge asset, is the lease roll there significant at least in the near-term?

No, it rolls. It's like five or six years out.

It's goal expansion space for somebody who is already in the building?

I'm sorry?

Is the goal to expand somebody who already leases space in the building?

Yes, our two primary tenants in the building -- both of which are good candidates for expansion and both of which have eyes on each other's space.

G&A, Joel, where are you generally adding people or dollars?

I think it's kind of incrementally. I think we clearly will be -- we will be bulking up. I think in some of the markets, we have bulked up a bit in the San Francisco market as you may know or have seen at Mission Bay. And we have a large operation down in South San Francisco so that clearly is one location somewhat related to the size of our land bank, particularly in that location. As we expand selectively into new markets, that will clearly be -- and I think incrementally in New York depending upon the timing of that rollout. So, I think those are the ones that have gotten the most focus over time.

So, market-driven, not necessarily I guess in Pasadena?

No, although, Dean continues to have a lot of financial people.

Then last question is on the last supplemental fourth quarter of '05, there was a D.C. redevelopment; 131,000 square feet dropped off. Did that get leased up or what happened to that?

Part of it has been leased up. What we did there, I think I may have explained maybe a year or so ago. It was a building that was in pretty poor shape. It was a building that is I don't know probably -- oh, I don't know -- maybe 20, 25 years old. And we had the opportunity when kind of the key tenant moved out a number of years ago, we essentially virtually almost gutted the building, reskinned it, put in a parking structure, really virtually redid the building and then incrementally bringing tenants in. So, we've got it relatively stabilized. There is some vacancy in the building, but it is now completed online. But, it was a long go. We also had some environmental issues there as well, which slowed us down quite a while with the Maryland Department of Environmental Safety.

Okay, so the previous estimate for the in-place -- to the in-service portfolio was the third quarter of '06 that you had to split your -- I just want to make sure I understand correctly. Your leasing was ahead of expectations there?

I think some of it was. But also, the building and different spaces were finished ahead of time. More of the latter than the former.

Dave, just to clarify too, because I don't want to contradict the earlier statement that I made about the quality of assets that we buy, we bought this property early on in the Company's formation at a very good price and a good location. So, in that sense, it was warranted. At today's prices, it would not have been.

That actually reminds me of a question. At what point when you start to look at your asset sales, do you think about kind of I don't want to say flip but in terms of buying an asset like this, leasing it up, putting money into it, leasing it up and then flipping it out of the portfolio versus something that has been in the portfolio stabilized for a number of years. How do you think about that?

Yes, I think we would look potentially at both. Again, location is a big determinant. This building you happened to just mention sits right on the I-270 corridor. It has great views both going north and going south and is in a very desirable location. When the market fully comes back, we think it's a great asset and certainly will be fully leased at that point. So, maybe not one we would necessarily think of flipping, but I think we're looking at the three that are marketed this time. Two are in one submarket that we would like to lighten our emphasis on because we're focused on some growing in some other submarkets in the Maryland area. And the final one was an asset in the New Jersey market, which we targeted for quite a while for sale. So, it was very consistent with what we had wanted to do for some time. We've got a list of probably anywhere between I think 5 and 10 different assets that over time, you'll see us probably turn and again redeploy those proceeds.

And, just a last general question about the investment environment. Do you think that the market is valuing vacancy just as much as occupancy I guess at this point?

Good question. No. No, I don't. I think -- and again, I guess it gets very market specific in certain places that there's probably a pretty close alignment. But, I would say generally speaking, no, not like you might see for office space in Midtown. You'll see that same dynamic, which again I think is the 300 -- hopefully, the 303rd example gave you some sense for that. There's not a huge disparity, but there is the ability to get a little bump.

Jordan Sadler, Citigroup.

My question was regarding the roll for 2007. I noticed it bumped up from last quarter. I was curious if that were related to short-term leases or acquisitions done during the quarter.

Jordan, I think we would have to get back to you on that. We don't have that handy unfortunately.

Yes, it may be the latter. But, we will check it out and give you both.

Gentlemen, at this time, there are no further questions. Mr. Marcus, I will turn the conference back over to you.

Okay, well, thank you very much. We did it within just an hour, and I appreciate the very excellent questions and look forward to presenting the second-quarter results in late July, early August. Thanks again so very much.

Ladies and gentlemen, this will conclude today's conference call. We thank you for your participation, and you may disconnect at this time.