Alexandria Real Estate Equities Inc (ARE) 2006 Q4 法說會逐字稿

Good day and welcome to the Alexandria Real Estate Equities fourth 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, ma'am.

Thank you for joining us today. 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. Now I would like to turn the call over to Joel Marcus. Please go ahead.

Welcome everybody to the fourth quarter and year ended 2006 conference call. With me today, Jim Richardson, Dean Shigenaga and Pete Nelson. We are pleased to report our fourth quarter and full year 2006 operating and financial results, with a strong fourth quarter, with an FFO per share diluted up 10% to $1.34 on the full year, as you can see from the press release. A very solid one at $5.16 per diluted share, a 7% growth rate for the year. This, as Dean will also highlight in his piece, our 38th quarter of solid operations and financial performance.

Most importantly, I think Alexandria continues to be very laser focused on achieving the highest possible return on its invested capital, and continues to manage its balance sheet well and to decrease its overall cost of capital.

For the future clearly development will be a key driver. And we have been very fortunate to have been able to create one of the pre-eminent development pipelines to drive this future growth, with land accumulated at very favorable cost basis. We have not bought our development pipeline fully priced. We have created it. And we believe we can capture and retain the value therein.

Looking at this quarter, clearly our entry into New York City, one of the hottest markets in the country, is a major milestone and significant event for the Company. We have commenced the development of the East River Science project, at about 725,000 rentable square feet. Our pilot payments are $2 for a square foot, and our base rent is $2.70 a foot. We believe that we can achieve double-digit returns on this development, targeting essentially Cambridge lab rents, which will enable us to achieve those rents -- or those returns, I should say.

If you look at the total return comparisons for Alexandria from our IPO in May of '97 through 12/31 '06, if you look at the top three companies in the office sector, we're very proud that we are among I think rarefied air, with SL Green having a total return of about 746%, Alexandria at about 677%, and Boston Properties at about 632%. So again we feel very fortunate about that really remarkable achievement in the almost ten years we have been public.

Looking for a moment at our top 10 tenant client list, as the end of the year our top tenant is Novartis with an effective rent of about 8.3% of the asset base, followed by GlaxoSmithKline. In the number three position is Imagenetix, a company that has quite a number of marketed products, a sizable market cap and owned about 40% plus by a major Danish pharmaceutical company. Followed by a company that will now exit the portfolio, Human Genome Sciences. And we will talk about that property coming back to us as of 1/31/'07. I think it is good that they are exiting the -- or our asset base at this point, given some of the clinical and balance sheet challenges they have. So that will certainly put us in good position.

The number five tenant is MIT, followed by six, Theravance, a company that is partially owned by GlaxoSmithKline. Seven is Genentech. Eight is Amylin, a company that has had great success in the obesity and diabetes area. Nine is Amgen, and ten is a company that has done quite well since its public offering called, Synomics.

So we feel that we are in absolutely great shape as far as the credit quality of our tenants for the coming year. And it is clear that ARE clearly is the best in class owner and operator. And we're very proud of this stellar performance and track record, and believe we should absolutely be a core holding for all institutions.

As I do each quarter, I want to make a few big picture life science industry comments. The past year '06 was a mixture for biotech and big pharma. Big pharma's annual compounded growth rate over the last five years has averaged about 7.5%, where biotech has averaged about 15%. Interestingly enough the central nervous system drugs have been the most lucrative at about $60 billion in revenues, 23% of the overall market. The estimated compounded annual growth rate of big pharma over the next five years is going to dip to about 5%, given patent expirations and generic inroads. But biotech should stay fairly robust at about 14%. So that is I think interesting good news.

Many of you saw the Pfizer announcement of its major restructuring. For those of us who have been in the business for many decades, this is not surprising at all. What went wrong at big pharma is pretty easy, centralized R&D. The "not invented here" syndrome has been bad for that segment of the sector. Their insistence on following kind of the small molecule focus, more heavily driven chemistry than biology. The top hundred drugs were developed against less than 50 targets. And they have been very slow to embrace novel therapeutics, such as antibodies and proteins, which really have garnered the majority of the market for the biotech companies.

Big pharma has been insistent on incremental improvements of follow on compounds. They have poorly integrated R&D in their commercial groups. They followed the blockbuster model with large salesforces and marketing budgets. They have pushed annual price increases to sustain double-digit growth. And clearly M&A has been driven by the loss of patent exclusivity and focused on companies with marketed products and big premiums. So I think we clearly have passed a tipping point of big pharma and their need to reinvent themselves.

The old model is being replaced by what is called the external, internal R&D where increased effectiveness and efficiencies are taking place through some of the restructuring changes that you have read about in The Wall Street Journal and other articles. And clearly a focus on licensing, partnering, acquisitions, particularly with respect to high-quality biotech products and companies to fill their pipeline and the technology gaps.

We have been benefited. For example, two acquisitions which have favorably impacted our top 10 list that I just gave you, one was the Amgen acquisition of the Abgenix. About a $2.2 billion acquisition focused on the antibody products and technologies. And the GlaxoSmithKline acquisition of ID Biomedical's vaccine business at about $1.4 billion.

Let me turn to earnings guidance and dividend policy. Earnings as you know, as I have said, up 10% for the quarter, 7% for the year. And very solid operating and financial metrics really in all categories of the Company. And Dean will talk about that. We continued among the highest margins in the industry at about 76.5%. And all of our covenant coverages have been very strong.

Let me speak to guidance because that is an important area that people are focused on. Historically Alexandria has generally given ten point guidance based on our internal very complex and sophisticated models. We have tried to raise guidance through the year as many key assumptions become clearer during that year. And have tried successfully I think for 38 quarters in a row to avoid reducing guidance.

Our guidance, even where we have had substantial dilutive equity offerings such as '06, has actually been raised. So we very proud of this remarkable track record. Our initial guidance for '07 is $5.71 per diluted share, approximately a 10.7% growth in '07. We expect to revisit guidance obviously every quarter. And really consistent with past quarters we hope this will be a base for revaluation through the year. Our guidance at the beginning of the year must be cautious. And here, as we have said, we still have significant variables that we need to evaluate.

Let me highlight a couple of those. Initially dilutive acquisition of properties and land to yield excellent downstream returns and growth clearly have a dilutive effect. Significant expenditures that we're embarking upon and undertaking in our expansion into at least three new markets to be announced in the not too distant future become very important and impactful on this guidance issue.

We have up to 12 asset sales possible during 2007 for square footage greater than 500,000 square feet. And as Dean and Jim will highlight a little more, several large buildings have come back to us from around October 1 through February 1 in Maryland and San Diego. And that is clearly a part of our effort to give you solid, but careful guidance here.

The Board on dividend policy, the Board increased the dividend 6% in '06. We think that is very, very positive. We continue to have one of the lowest payout ratios in the entire sector at about 58.8%. The Board will obviously continue to reevaluate the dividend situation quarter to quarter.

Moving into the operating and financial performance, again Dean will highlight this in much greater depth, together with Jim. Key components of our internal growth, our ninth year of positive -- actually 38th consecutive quarters and ninth year consecutive year-to-year positive same-store growth. I think we're the only office or industrial company in the universe to do so to the extent there are any that remain. Dean will give further color on that.

It is also important to look at when you look at the expense trend in the same-store pool that 90% plus of our leases essentially are triple net, and even more have CapEx pass-throughs. So that is one of the reasons that we're not too worried about any trend in expenses. And we manage them well with our ability to pass those through to the tenants, as well as critical CapEx expenditures.

We had an extremely strong leasing quarter and year, one of the strongest ever. GAAP up 29% for the quarter, and for the year 14%. We delivered two properties out of our redevelopment pipeline in San Diego and San Francisco. And I think the development pipeline, really the crown jewel of the Company, we have 1.2 million square feet underway and another almost 6 million in preconstruction development.

2007 kickoffs, we may be able to kickoff potentially based on, and Jim will talk about this a little bit, based on what we see the demand and the various approvals in San Francisco, potentially as many as three starts at Mission Bay, and three significant development opportunities we will undertake in three new markets. We currently have no current reserve for bad debts on account of rental revenues. And our interest coverage stayed strong at well over 3%.

A moment about external growth. We have three very significant value-added acquisitions in the fourth quarter in Eastern Massachusetts, and one very important, significant value-add acquisition in the Bay Area. The balance sheet, which Dean will address, continues to be strong and flexible. We have done I think a fabulous job of redoing our term loan and credit line, and have the firepower and capacity to continue to grow the Company in a very thoughtful and careful way. We have also added additional hedges and limited our variable rate exposure. Without further ado, let me turn it in over to Jim.

As Joel summarized, and was clearly communicated in the press release, 2006 was a phenomenal year for the Company at a variety of levels. On the real estate side, where I will focus, our ability to continue to execute on some very significant opportunities really contributed to this truly, what I would characterize, as transformational year.

I want to highlight a couple of these accomplishments that warrant mentioning again. We made the acquisition in the middle part of the year of the 1.2 million square footage clear top-of-the-line project, Tech Square in the heart of Cambridge. We developed and leased 125,000 square feet in the heart of South San Francisco to Genentech. At the end of the fourth quarter we completed the first commercially oriented Class A research building in Mission Bay, which we delivered at more than two-thirds leased.

Overall the expansion of the operating portfolio totaled nearly 2.5 million square feet, while we had a net increase of another 800,000 square feet in the strategically located land bank that Joel referenced. And just to note, this does not include the East River Science Park. Finally, overall the portfolio leasing exceeded 1.5 million square feet for the second consecutive year.

So as we have said repeatedly, our ability to execute this business plan region by region, submarket by submarket, building by building and tenant by tenant is truly the key of our continuing success. And we will continue to diligently apply this strategy to the benefit of all of our stakeholders.

With that let me turn to our leasing performance to start with in the fourth quarter, a continuation of a very consistent and solid year with 427,000 square feet of new leases, which represents about 27% of the total amount for the year. And most impressively, as Joel noted, 29% rental increases on new and renewal leases, which represents one of our strongest quarters ever in that regard, which really speaks positively to the continuously tightening environment across the primary markets that we operate in.

The activity was distributed reasonably well across the country this quarter with about 56% of the leasing on the East Coast and 44 on the West, as well through our core regions, with Massachusetts, Maryland and San Diego all above 20%, and Seattle at about 15% of the activity. All in all it was a very good finish to a very solid year.

As we enter into 2007, which I will talk about here momentarily, there are several positive market related trends that I see emerging. The San Diego market activity is really more encouraging than it has been for several years. Maryland is poised to continue at a relatively steady pace based on our first impressions. And then the North Peninsula of the Bay Area, as well as the general Cambridge market, remain very vital with an ever dwindling supply and heavy demand.

Just looking at very quickly the overall year for 2006, leasing activity was up about 5% over 2005 at nearly 1.6 million. Our effective rents on all the space that was leased in 2006 as compared to 2005 transactions was actually up 18%. As Joel said, the mark-to-market on leases rolling over was up 14%. Our TIs and leasing commissions were down 21% in '06 versus '05.

And importantly, I think the balance between the leasing of the space that rolled over and the vacant or new space that was released was about a 45/55 ratio, which really shows a good harmony between resolving rollover space as well as enhancing value through new development and redevelopment. Finally, the activity was really concentrated in our three largest markets, with a roughly even distribution amongst Maryland, Massachusetts and the Bay Area, totaling about 70% in those three regions.

So we built on a positive performance in 2005 through 2006. And as I have commented several times before, we have got a very highly developed and fully integrated now regional infrastructure that is allowing the Company to continue to validate our ability to grow and create value across all segments of its business, including this most important area.

Turning now to 2007 projections. As noted, 12% of the portfolio is rolling over in '07. And ironically the allocation of that rollover substantially mirrors the levels of leasing activity in those same regions in 2006. Maryland, Eastern Massachusetts and the Bay Area again account for about 75% of the rollover exposure. Right now as we look out our current status about 40% of the space is either committed or anticipated to be resolved, with 60% being too early to make an accurate projection.

One significant increase in inventory of '07 related to an acquisition we made during the quarter in Cambridge with a property that is going to have a short-term leaseback that we anticipate we will throw into redevelopment sometime during '07. Again, right in the heart of Cambridge near some of the other acquisitions we have made in 2006.

I think it is also important to note that five of our rollovers in '07 exceed 50,000 square feet. Two of those are in Maryland, one is in San Diego, one in the Bay Area, and then the fifth one is the one I just mentioned in Cambridge. The most significant exposure relates to the large four building campus in Rockville that came back to us at the end of January that Joel referenced, that had been previously occupied by Human Genome Sciences. We are in the process of releasing and partially redeveloping that project. The entire campus is about 300,000 feet.

And to date we have successfully released about 100,000 square feet. And we have got reasonably good activity on significant parts of the remaining space. The good news is it is absolutely at the epicenter of the life sciences community in suburban Maryland, in the heart of the Shady Grove Life Sciences Center. And we are updating our rental increase projection for 2007 to between 5 and 10%.

Overall, occupancy remained static with some modest shifting between the regions. We had a large building come back to us in Torrey Pines in the fourth quarter, that we have had some pretty good activity on, and are currently negotiating with several prospects. And then additionally in our L.A. metro region we acquired a small property that we are going to be redeveloping and repositioning that was responsible for a small downtick in occupancy in that region.

Overall we are leased or in late stage negotiations on about one-third of the vacant space. And the rest of it is pretty well distributed across many regions with manageable blocks of space.

Let me do my quick Mission Bay -- quarterly Mission Bay update. As I mentioned, the 1700 Owens building shell was completed late in the fourth quarter. We're still under construction with a variety of tenant improvement projects. As a quick refresher, the 1700 Owens project is really our flagship project up in Mission Bay, incorporating many of the elements that we believe are essential for the success of a cluster, including early stage tenant space, flex space for developing companies, and high-end office space for some of the critical support infrastructure users.

The project is more than two-thirds leased and we are in active negotiations on most of the balance of this space. And as most of you know, Merck is the anchor tenant with approximately 40% of the building, which has been extremely well received in the marketplace. And anyone who has had an opportunity to visit it has been duly impressed.

Importantly, as Joel touched upon, we are continuing to advance on the entitlement process on the remaining parcels at Mission Bay, and we're at various stages. More specifically, we are in advanced stages of design, approval and permitting for six buildings, totaling approximately 1.1 million square feet. And within those six buildings are the three that Joel touched upon that we are going to be evaluating kicking off here in '07, early '07.

So consistent with what we have done before, we will assess market conditions as we procure the various approvals, and then commence construction, as we believe is warranted, given our view of market conditions.

I think it is important to understand the dynamic of the Bay Area. There are very few large blocks of quality space on the entire peninsula, not just San Francisco. And Mission Bay is one of the few quality locations for technology oriented development of any magnitude. So we remain pretty encouraged and bullish on our prospects for all the North Peninsula markets. As you know, that is where we have a substantial portion of our development capacity. Continued solid demand and low single digit vacancies really characterize the market. We're well-positioned to continue to capture that value.

Moving to dispositions, and Joel touched upon this as well, we're going to continue to cull the portfolio of noncore assets that really don't serve a strategic purpose going forward, allowing us to free up some capital to enhance the growth platform, but also importantly taking advantage of a seller-favorable disposition environment. The bucket of assets represents about a dozen properties in various stages of the disposition process. And I would say our best guess at this point is that a majority of them will be sold over the course of '07. Virtually all of them are oneoff buildings in suburban locations.

Let me quickly conclude before I pass the torch here to Dean. '06 was an extraordinary year for ARE on many fronts. '07 presents a whole new set of opportunities and challenges to exploit this best in class platform that we have developed. We've got a healthy rollover of the existing portfolio, which clearly provides an opportunity for continued organic growth.

As is obvious from these comments, the embedded challenge for us will be the magnitude of several of those rollovers in some of our less robust regions, specifically San Diego and Maryland. The maturation of our development and redevelopment pipeline in the best locations in these premier clusters is going to begin to pay substantial dividends in 2007. As will our fully integrated regional ops, allowing us to enhance all aspects of our local activities, including the conversion of selected strategic acquisitions. The ARE brand has clearly been elevated. And the reputation of the Company is now at a level that provides unique opportunities that really are unavailable to other aspiring lab developers and investors. And with that, I will turn it to Dean.

As Joel had mentioned, we continue to execute on our unique roadmap for growth, really providing for our 38th consecutive quarter in growth in FFO per share on a diluted basis,our 38th consecutive quarter of positive same property growth on a GAAP basis, and really our ninth full calendar year as a publicly traded company with positive leasing activity.

Our results for the quarter and the year reflect our continued and consistent ability to execute and deliver consistent and predictable results quarter after quarter. As Joel had mentioned, fourth quarter 2006 FFO per share diluted was $1.34, being up about 10% over the fourth quarter of 2005. Let me take a moment to highlight certain items before I comment on a few key analytics important to our overall performance.

As Joel had mentioned, and as I previously discussed, in November we completed an amendment to our unsecured revolving credit facility and our unsecured term loan. The new facility has a total commitment of $1.4 billion, $800 million being the revolver and $600 million dollars in term. Our amended facility contains an accordion that allows us to increase commitments by an additional $500 million, for a total of $1.9 billion. It also contains a one year extension of the maturity date of both the revolver and the term loan at our election. We believe our facility provides us the capacity and flexibility we need for future growth, including working capital for our significant value-add redevelopment and development programs and expansion.

Also as you are well aware, in January of this year we closed a $460 million private offering of convertible senior notes. The notes were issued at a conversion premium of 20% above the closing price of our common stock the day prior to the launch of the offering, or at a conversion price of $117.96. The notes have a coupon of 3.7% and mature in 2027. We have a right to call the notes in five years. And the investors have put options in year 5, 10 and 15. The deal contains a net settlement provision under which the par value of the notes will be settled in cash, and the upside over the conversion price to be settled in common stock.

We view this unique instrument as a blend of both debt and equity at the end of the day. The proceeds from this private offering were primarily used to pay down our outstanding debt on our credit facility and a small secured loans. Briefly, our debt to total market cap was approximately 39% as of year-end. The mix being 23% on that unhedged variable-rate debt and 77% fixed-rate debt.

As highlighted on page 10 of our supplemental package, we executed a total of $350 million of additional interest rate swap agreements, which both increased the notional amount hedged and extend the term of our hedging program further into the future. We now have $600 million in notional amounts hedged as of year-end. And that continues through mid-2009, with contracts burning off over a period of time through March of 2014.

Consistent with our ongoing policy to mitigate our risk to variable interest rates, we will continue to evaluate additional interest rate swaps. We will also continue to diligently pursue fixed-rate financings for our stabilized assets in order to convert variable-rate debt to fixed-rate debt.

Next briefly on G&A. As you noticed, G&A as a percentage of total revenues for the quarter dropped to -- dropped slightly to approximately 7%, really as a result of acquisitions in the second half of 2006. On an absolute dollar basis, G&A expense is up approximately 24% over 2005. Really this is fairly consistent with the continued growth and expansion of our operations.

Going forward we will continue to focus on the growth in both the depth and breadth of our Company, geographical expansion, and an increase in staffing in key areas at both the management and nonmanagement level, including construction and development personnel.

Next let me quickly cover key areas that are important to our performance. First, for the strength of our client tenant base. As I had mentioned on prior calls, our management has been very diligent since our IPO with its strategy to maintain a strong, well diversified asset base in the best possible locations in key life science submarkets. We have found that the success of our life science real estate niche is extremely dependent on location. Successful and growing entities within the industry really place extreme importance to proximity to the drivers of each life science cluster submarket, major institutions like UCSF in the Bay Area, and successful companies like Genentech in South San Francisco. In addition, the ability to walk across the street to collaborate with other scientists is also very important to successful entities within the industry.

We also have been very diligent in our ongoing pursuit of a high-quality broad and diverse life science sector client tenant base. As Joel had mentioned, our top tenant, Novartis, is a triple-A rated company. And they represent only about 8% of our annualized base rent. Our next largest tenant represents less than 4% of our annualized base rent. And really I point out this statistic just to highlight that we have limited exposure to any one particular tenant.

Our internal proprietary life science research team has successfully underwritten our very targeted and high-quality tenant base. Our underwriting success is clear as we have achieved positive same property performance in quarter over quarter growth in FFO per share on a diluted basis for now 38 consecutive quarters as a public insurance company.

Moving next to our development and redevelopment program. Our very important and significant development program has really added substantial value to our asset base over the years through the successful ground up development of first-class laboratory facilities. During 2006 we completed the development of four properties, totaling approximately 360,000 square feet at solid double-digit returns on our investment. We also commenced the development of three properties totaling over 1 million square feet.

In addition, we continue to proceed with the important development preconstruction activities on over 4 million developable square feet of our valuable land bank in strategic and irreplaceable locations. Our redevelopment program is integral to our unique roadmap for growth. Historically we have had about 0.5 million[R1] square feet of space undergoing a permanent change in use through redevelopment. Our redevelopment program generally involves the conversion of non lab space to lab space at very attractive yields. And it is important to note that we do not place vacant leasable lab space into our redevelopment program.

Next, our same property results continue to be positive quarter after quarter for 38 consecutive quarters. And we're 2.3% on a GAAP basis and 4.1% on a cash basis, with really the majority of the increase in same property results primarily due to increases in rental rates. Same property occupancy was solid at approximately 95% at year end. We continue to execute on key terms of our lease structure, which provides for strong and consistent operating results. As of year-end approximately 90% of our leases were triple net leases. An additional 4% of our leases provide that our tenants pay the majority of OpEx. In addition 91% of our leases provide for the recapture of capital expenditures, including but not limited to roof replacements and HVAC systems. And approximately 89% of our leases contain annual rent steps that are generally fixed in the 3% range or based on CPI.

Guidance for growth in same property performance for 2007 remains in the 2 plus range on a GAAP basis. And we expect increases in same property rental rates to continue to be the primary driver of same property performance.

Next let me briefly cover a few key operating statistics. Occupancy for our operating assets was solid and very consistent with the prior quarter at approximately 93.1%. We really still view this level of occupancy as an opportunity to grow internally through an increase in overall occupancy.

As Joel had mentioned, certain acquired assets contain spaces for future redevelopment, and currently contain vacancy. These spaces have a negative impact on our occupancy statistics and operating results, but clearly provide for future growth through our value-add redevelopment program. The timing of redevelopment will have an impact on operations until the completion of our redevelopment activities.

Margins remain very solid at approximately 76.5% for the year, but have been slightly impacted by the acquisition of Tech Square and gross leases associated with the office space and the campus project. On a prospective basis, we're projecting margins to be in the 76 to 77% range.

Straight line rent adjustments for the quarter were approximately $5.9 million. The increase really over the prior couple of quarters is due to recently acquired stabilized assets and the completion of recent developments. Going forward we're projecting straight line rent adjustments to be in the $5 million to $6 million range per quarter.

Other income continues to consist of construction management fees, storage, parking, interest and investment income. As I have mentioned previously, we have been each major component of other income increase steadily over the past several quarters, with really no significant change in the overall mix of other income. Other income has been, and should remain, a stable source of revenue for the Company. Going forward our production of other income is in the $3 million to $4 million range.

I guess in closing here I just want to make some comments on our FFO and EPS guidance. As Joel had mentioned, our FFO guidance for 2007 is $5.71, representing a solid increase of approximately 11% over 2006. EPS guidance for 2007 is $2.35. And just please note that our earnings guidance is back end loaded.

We're very diligent and precise with respect to our guidance, and have historically provided pinpoint guidance as opposed to a broad range of guidance. Some have considered our guidance from time to time as overly conservative, as we have historically been successful in increasing rather than decreasing guidance, even in a year such as 2006, when we raised guidance despite two large equity offerings during the year.

Our guidance is based on various assumptions under multiple scenarios. There are a number of factors that can impact our performance significantly. Consistent with our policy, we do not comment on individual detailed assumptions going into our guidance. But with that said, I would like to provide some general comments on our guidance.

Our guidance does consider the impact of our recent convertible debt offering, which really at first glance appears much more accretive to FFO per share. However, there are several items that substantially soften the impact of the potential accretion from the convertible debt offering.

First, really the low coupon on the convertible debt offering lowers our overall effective interest rate used in the calculation of capitalized interest. Second, certain property and land acquisitions completed in 2006 have initial yields that are dilutive in the near-term. Really these acquisitions represent future redevelopment and development opportunities that are expected to generate very attractive returns in the future.

Our ongoing pursuit of future value-added redevelopment and development opportunities will continue, some of which will be dilutive in the near-term. We also have, as Joel had mentioned, significant ground up developments in three new major markets. We also, as Joel had hinted, have numerous asset sales that are under consideration for 2007. Lastly, the impact from our continued effort to increase staffing and key personnel that will benefit our future growth and expansion. With that I will turn it over to Joel.

Operator, we will be happy to take questions please.

(OPERATOR INSTRUCTIONS). Christopher Pike, Merrill Lynch.

Just a couple of quick questions, and then maybe we can just talk a little bit more off-line. In terms of the dispositions, I know you talked about 12 assets. Can you frame that out at all in terms of maybe amounts, value, the type of value you are going to be selling.

I would say at this point it is hard to give exact amounts, but the numbers on square footages exceed 500,000 square feet. So an average -- depending upon the particular market, those numbers could range north of $250 a foot.

Dean, just a quick question. In terms of other income, you said $3 million to $4 million. I'm assuming that is on a quarterly basis?

No, that is a runrate for the year.

For the year. For the full year.

I'm sorry. You're correct. It is per quarter. Going into 2007.

Sorry.

Than one last little nuisance guidance question here. We can maybe talk a little bit more off-line. With respect to the G&A you said it was 24% up year-over-year in '05. And it is based on continued buildout in terms of infrastructure, personnel and so forth and so on. Given the type of guidance number or earnings growth you're expecting, should we assume a similar type of 24% up next year?

That is a good question. We definitely have an expectation that in 2007 G&A expense on an absolute basis will continue to grow I think at a fairly consistent pace going into 2007. Obviously that will trend relatively consistent with our growth in revenues and operations.

I guess just one last question. Maybe perhaps for Jim. With respect to the lease expiry, page 15, I think you did comment as to why there is some shifting, but I just wanted to be clear in terms of that. It is more along the lines of more -- the recent acquisitions -- there could be some shifting there that are pushing those square footage expiring relative to 3Q. And also it is the Maryland building that are skewing that from -- or shifting that the third quarter?

I think I don't have third quarter in front of me, but as I recall the significant piece is, the Cambridge acquisition that I referenced that we made that pushed that number up by close to 150, 140, 150,000 square feet I think.

Philip Martin, Cantor Fitzgerald.

Just -- maybe Joel, you can talk about this a bit. It really pertains to your future business model. You used the word create and create value a lot on these calls and on one-on-one business. But when you look at your business model going forward, and you look at the ability to create new clusters out there, is that -- is it fair to say that over the next three, four or five years we're going to see Alexandria doing more on the creation of new biotech or life science clusters?

That is a great question, and the answer is absolutely yes.

Driving that specifically, or more specifically is what? I'm sure there is industry issues, biotech, life science industry issues, but can you give us -- based on your experience and skill set what are the key drivers behind that?

I think some of the key drivers will be certainly the internationalization of research, development and commercialization. That may be the main one. I think also the continued enhancement by many, many institutions, whether they be nonprofit or academic, to focus on more commercially -- the ability to exploit commercially their inventions.

I think if you read, there was a great article recently in The Wall Street Journal regarding the NIH. I was actually going to mention it. But really given we are at a quarter end and a year end, I didn't. But where Dr. Zerhouni really focused on a pot of money from 5% of the NIH budget to really go very serendipitously after very unique efforts to commercialize -- well, to focus on research and the commercialization and translation of important discoveries on some of the biggest problems, for example, diabetes and obesity.

That is going to drive I think the focus of broader research beyond what may be today the traditional main clusters. I think they will continue to be hopefully as vibrant as they have been, some more than others. But I think you'll see a number of new ones emerge rather dramatically over the coming years.

Are you getting a pretty good response I'm sure from your tenant base? You have good relationships across the industry. You have an excellent tenant base already. Are you seeing demand from your tenant base for some of these tenants to maybe anchor a new cluster, etc.?

Yes. I'm not sure about anchoring per se, but to participate and to be part of that for a specific reason to access research capability, development capability, clinical trial capability, manufacturing, commercialization capability, absolutely. In fact, that will be the model that we use, which I think, if I'm not mistaken, some of the industrial companies like ProLogis and others have used very successfully. Clearly tenant existing client driven.

Thank you very much.

Thank you, a great question.

Dave AuBuchon, A.G. Edwards.

On page 17 on the development and redevelopments schedule, you have a footnote, $50 per square foot. And costs have been spent already. Can you give what you are expected total cost on that development, the 1.7 million square fee is?

Page 17, the 1.2 million?

$1.2 million. I'm sorry.

Give me one second. It is actually interesting because there is a blend. I think you probably are fairly familiar from our prior discussions that the cost of construction in New York is different than our cost of construction in San Francisco. So the number is a bit skewed and doesn't necessarily apply across the markets.

I would say a way to think about that would be somewhere between $300 and $350 a square foot in the Bay Area, and something around $500 a square foot in New York City. Again, that is going to vary market to market.

And then the $300 to $350 in the Bay Area, does that include your land cost?

Generally no.

How should we think about -- where should that number be generally?

Our land basis generally has been in the $40 to $60 an FAR foot based on the historical purchases we have made.

If you look back, I think that is a -- on a Company, on a portfolio, if you call, wide basis our entire land bank probably has a basis that is in the mid $30 a foot, just under $40 a foot.

The three projects that you have outlined there in the Bay Area, relative to the development that Jim commented on that may be started this year, where's leasing for those projects? And I guess I am just curious are you going to start to respec projects this year in addition to what you have already?

It is possible. The first one is the Mission Bay project, and that is already pretty substantially along. The other ones have just started. We just initiated. We've got a lot of activity, but no leasing done yet.

I think your question is the three that we might consider kicking off in Mission Bay, was your question about the tenant demand for those?

Right. Because the 154,000 square foot project you have in the schedule is the Genentech, right, or the one in South San Francisco?

No, no that is the Mission Bay project.

That is Mission Bay.

Right, and the other two are in South San Francisco. So we have noticed that there is certainly a dearth of space in the city. And there are a number of requirements continuing to look at, I guess as Jim described, the North Peninsula. So based on how we normally do things, who we think would be likely targeted clients or companies or entities, frankly, that we would like to go after, if we have a level of confidence that we wouldn't sit on development properties for a long period time after they have been constructed, we certainly would consider going forward with one or three. It is really one building or three buildings. It could also be two, because there is kind of a pair together. So we're evaluating that right now. I don't know, Jim, if you have any other --.

I guess just maybe to highlight my earlier comments, I can't recall a time certainly in the recent past where there has been such a dearth of opportunities, not just in North Peninsula, but all the way down the Peninsula, for large, quality blocks of space. So timing is a big part of this as well. So there's just a lot of requirements out there that is having difficulty getting fitted into the current inventory.

And the three buildings that you may start this year in aggregate total, how much square feet?

I think they are in aggregate -- hold on I will let you know.

Between what, 3 and 400,000 feet will be --.

It would be -- exactly. Between 3 and 400,000 square feet.

My last question, Joel, I think you mentioned that you have -- there will be a possible expansion into three new markets. Are we to assume that those are developments or a combination developments and expansion?

No, those will all be ground up development.

All groundout development. And would these be spec projects as well or build to suits?

I think probably a combination.

The total square footage there?

They would come in phases. They wouldn't necessarily be all at one. One is about 250,000 feet, another is about 900,000 feet, and another is about 1.5 million square feet.

The total projects?

Yes.

These are entirely new markets, you're obviously not prepared to disclose.

Correct.

John Stewart, Credit Suisse.

Joel, how many of those three new markets are outside of North America?

No comment.

Can you give us your thoughts without maybe commenting directly on the process, at least on the quality of the swap portfolio?

I think it is mostly a -- as you know, mostly a northern California focus, primarily -- well, heavily in South San Francisco. And the two main tenants and clients of theirs are Amgen and Genentech. So in general I think that is certainly a positive.

Any sense for when that plays out?

I do not.

Did you -- you may have mentioned this, and if so I missed it. But what were the rents at the Rockville campus relative to market? The in-place rent from Human Genome?

They are rolling out at about market.

At market?

Yes, pretty close.

Michael Bilerman, Citigroup.

Joel, in terms of three new markets, is any of that under option right now, or it is --?

No.

And you would view that as sort of -- what type of initial investment would you view in going into that those development sites in terms of your land cost?

It depends. Some are land purchased and some would be long-term ground lease, similar to New York. And again we would expect the cost of construction to vary anywhere from kind of a low end -- kind of a low to the medium end I would say in general.

Any of these are RFP type processes, or it is stuff do you have targeted separately?

Two of the three are.

Are RFPs?

Yes.

You talked just a little more about this lease roll. I think you talked about 200,000 square feet that expires 1/31. 100,000 of that 30 have been released, and what is the timing on that rent coming back?

It will be '07. And on a cash rent basis certainly and obviously most of these leases I think are done.

Were you asking about the 100,000 or the remaining 200?

For both.

The majority of the 100, as Jim had mentioned, are done. I think most of them are probably coming -- the majority of it is probably coming online with minimal downtime. The remainder --.

The remainder of this space I just think kind of -- it is hard to project. We have got, as I said before, a pretty decent level of demand on a lot of this space, or I should say interest. Because it is a real high-quality location and good quality space. But I'm not at a point yet where I could give you an accurate projection I think as to how quickly that will be taken down. Which is one of reasons I made those comments at the very end about the opportunity and the challenge.

And what is the dollar per foot on that lease on a net basis?

Those leases are in the high 20s, low 30s on a triple net basis.

You talked about being 40% done on the 1.3 million square feet of expiries next year. What sort of rental levels are you getting on that relative to expiring?

I don't have that calculation off the top of my head.

Generally are you in sort of a zero to 10 or 20?

I think what I am projecting over the entire year is 5 to 10%.

Just turning to development for a second. Dean, how much are you capitalizing today in terms of construction costs that is rolling into cap interest?

I don't have that number, but our press release does have the $9 million that was capitalized during the fourth quarter. And I think if you had to project into 2007 I would imagine that number net net would -- as I mentioned earlier on the call that decrease in our effective interest rate on the convert, but offset by some higher construction and development activities. I still think that the $9 million is probably a good runrate going into '07.

Jon has a question as well.

Just on New York. And I apologize if I missed some of this. What kind of stabilized cap rate do you expect to get there?

Let me talk about return on cost maybe. We hope that with our construction costs in the range of maybe $500 a foot, and rents that would be essentially benchmarked to Cambridge rents, we think we can achieve double-digit returns on leasing there.

And we think that our -- there are pretty favorable rental and tax structures with the city because they clearly made a huge effort to move this to a specific use, as opposed to selling it to condo developers or residential developers that they could've made a lot more money.

You said -- and I don't know if I got this right -- you said there is $270 a foot in rent and $2 in pilot.

That's correct. The base rent is $270. And those don't kick in for quite a while until after construction. There is a complex formula. They kick in kind of occupancy by occupancy, and then they finalize at a certain stabilization point, which I'm not able to get into. And that is true both for base rent and pilot payment.

It is kind of $4, almost $4, or $5 a foot (multiple speakers) cost of the land.

Right. Very favorable and this is a 99 year lease.

And you still have to pay the property tax?

That is the pilot.

The pilot. That is so your tax is capped at that $2?

That's correct.

For 99 years?

No, that runs for I believe either 25 or 28, I can't remember exactly.

On the incremental $500 a foot that you have to put in, you expect a stabilization at 10% plus --?

Correct.

Return on cost. Now is the city also putting money into infrastructure there or are you --?

They did. I can't give you that number, but there is a sizable amount of state and city funds that go into infrastructure costs. There is a very complex web of utilities and other, sewer lines and all kinds of things under this that must actually be excavated, moved and to prepare the site, and that is what is going on now. So a number of public entities have essentially agreed to pay those.

They will deliver the site ready for you to build on, or are you doing that work?

That's correct. We're doing it.

When do you think the first tenant could take occupancy?

Sometime potentially mid '09 in the less improved space, meaning some of the I would say office space. And then there will be probably deliveries of space from say midsummer/fall, winter of '09 into '11, because there are two buildings that will start 6 months apart. And then the third building, as you know, doesn't become available until the unidentified remains get relocated down to ground zero.

I think Michael had one follow-up.

What is the total I guess development spend for 2007 for all these projects that you are working on?

That is an important question.

Well, if you're looking at developments alone --.

Sort of the totality of this -- I mean I guess you have got about 1 million square feet and then another 700 for New York. That is on schedule 17.

That is part of -- that is the majority of that actually on that schedule.

Just roughly, because I don't have the schedule with me, my guess is roughly $200 million.

Anthony Paolone, JP Morgan Securities.

Joel, can you tie together the growth in big pharma and biotech in the next five years being lower than what it has been in the last five years with your development pipeline, which is pretty large, and how that gets filled? It seems like a lot of supply in your industry in general coming on.

I would say that is kind of a broad and very good question. I would say maybe, number one, we have tried to, as you could glean from how I ticked off the top 10 list, we have tried to stay away from or minimize our exposure to those big pharmas that we think have major structural problems. They all have issues. Some of them far worse than others. So that is number one.

Number two, I don't think there is any gigantic amount of new supply in the best of the submarkets. Mission Bay has a limited capability, as Jim has said. South San Francisco, there is certainly just a limited capability of land availability there. Certainly New York, we are the one site in the city that is available. There aren't any other competing sites within the city. Cambridge has a pretty limited supply. If you look at the major markets -- Seattle, kind of the downtown area, which is really the best area near Lake Union -- again, a very limited supply. San Diego, Torrey Pines, again somewhat limited. North Carolina and Maryland may be somewhat more.

But if you look at the major life science centers, clearly there's not a lot of land and supply available. There is a lot of activity going on, but it is -- I think there will -- based on what we can see, certainly for the foreseeable future, a good balance. We think, however there's a great opportunity to expand the footprint with respect to institutions and those companies that continue to grow at double-digit rates. As I said, I don't think they will be the Mercks or the Pfizers necessarily, but there are a number of other -- there's a host of other companies that are looking for larger footprints, and institutions were looking at major expansions based on the health care and biopharmaceutical needs. We see that as a positive.

In a place like northern California, whether it is Mission Bay or South San Francisco, is there a way to quantify just the amount of jobs needed in the biotech sector -- I would imagine it is in the thousands -- over the next several years to fill up what you've got on your plate?

They do track existing jobs and job growth. One interesting kind of subplot there is just UCSF by themselves on the Mission Bay campus, the ultimate employment or population there is 8 to 9,000 researchers. That is just on the one kind of subcluster. And I think, Joel, right now, as I recall, they are in the kind of low thousand, maybe 1,500 to 2000 that are there right now. That is pretty exponential growth just within that one subcluster. And that is frankly the biggest challenge for that whole region is attracting that kind of talent consistently, given the high cost of living in the northern California environment.

You mentioned potential joint ventures, and you have talked about that in the past. What do you think has kept that from not happening thus far?

I think probably the credit goes to Mr. Shigenaga sitting across from me. He has been able to keep our balance sheet extremely strong and flexible. So I think at this point, given the opportunities we have, we haven't felt the strong need to bring in a capital partner.

We certainly have I think the skill sets and the capabilities to execute. Just look at the statistics we put up for nine straight years. I feel very good about that. That doesn't mean we wouldn't or couldn't look at either a joint venture or some kind of a partnering opportunity. And we clearly have had a number of discussions. And we will keep those primed for potential expansions into other markets. That is where we see it.

I think it would be very hard to bring a partner into an existing market, because it creates conflicts and issues pretty directly. I think New York is one where we considered at one point, but we feel we have things under such a good degree of control as far as costs and rollout, and our targeting of clients, that we feel that at the moment there's no need to give away the gravy there.

On acquisitions, what is the cap rate on the deals you did in the quarter, I guess maybe once the near-term roll is addressed?

I would say, as Dean commented on the guidance, each of those acquisitions -- let me just flip to the page where they are here. Bear with me one second. I guess page 16. If you look at the Cambridge assets, each of those assets by and large were mildly dilutive. I don't necessarily want to get into specific cap rates. We try to avoid that.

But each of those cases -- each of those situations have major redevelopment components. And one of them, the larger one, has some significant development components. And again, we view this as we were able to acquire these properties where we feel we have some significant upside through those efforts within Cambridge.

In the Bay area that acquisition again is at a cap rate that would have some mildly dilutive impact for a period of time. And then they would be essentially potentially either redeveloped or even removed and developed for a larger scale development on that site. That is how we're trying to think about our acquisitions. And Jim can give you more color.

I think that is right. I think the only thing that I would add is that, even on some of the operating stuff, the environment is so competitive out there that if there isn't a real upside opportunity or value-add, it is kind of -- these opportunities really disqualify themselves. So even the operating properties are either -- have vacant space that we're going to be able to lease and use the return, or have relatively short-term rollover at below market rents.

What is 240,000 square foot of land worth? What do you allocate to that?

Meaning -- what do you --?

I guess the one project has land available for 240,000 square feet.

That is the Cambridge.

Yes, it has excess development potential. You mean what would it be worth just that piece of it by itself?

Yes. Of your $229 million, or the $95 million I guess associated with that one, like what do you allocate to that -- to that land, to that piece of land?

If I understand what you may be getting at, this project is unique in the sense that it's got multiple buildings --.

On multiple blocks.

On a large parcel of land, which it is not like there's a separate piece of dirt that we can carve out. And I think where you're going is, with capitalization being able to carve out a piece of the land and say, if we move forward with the entitlement process to develop that, that we can get the benefit of more of a neutral impact from going through preconstruction activity essentially.

This project is a little more complicated because there is buildings or structures on the majority of the parcel. And some of it -- or a large majority of it is currently under short-term leases, with yields that obviously we would prefer were higher. But given the redevelopment and development opportunities, we're very comfortable with the upside in the future.

I guess just as a generic answer, the overall market there, as we can best tell right now, is north of a couple of hundred dollars an FAR foot in Cambridge. There is so little land available there. And given where rents are and construction costs, that is a justifiable sustainable number. But I think that asset Dean is talking about is pretty complex.

That couple of hundred bucks is what I was looking for. Last just a couple of questions on guidance. Dean, is there an EITF charge for calling the preferred in the number?

The number is more of a normalized number, meaning a D42 charge that we would take upon the redemption in Q1 for our Series B is excluded from that number.

Then the second is Slough, or any consideration of Slough included in that number?

No.

Christopher Pike, Merrill Lynch.

Joel, real quick. It just seems that there is more competition for the type of assets that you guys have built a platform around. And I'm just wondering if you could perhaps add some color in terms what you're seeing from new entrants into the space, what that is doing to pricing? And your general feeling on some of these folks who may be bidding for stuff really not understanding what they are getting themselves into.

That is actually a great question. I would say broadly speaking, if you look at each of the submarkets where we have had the substantial first mover advantage and have been able to garner a dominant position both in land and in buildings, irrespective of how much competition there might be, either from just capital players or just people who think they are in the business, who are real estate people but who don't know a darn thing about the life science industry, which is pretty much everybody else. It is pretty clear to say that there's not a lot they can really do.

They can take little bits and pieces and chunks, but they can't really compete in a dominant head-on-head fashion. It is only in fairly unique -- Slough maybe unique in South San Francisco, because they actually got there first. And really out of just a very set of fortuitous circumstances created a beachhead there, and Genentech grew beyond anybody's wildest imagination.

But I think it is fair to say -- so we don't view any -- however many people there are in any number of markets as a major direct threat, because that is just not -- no matter how much money you have, you can't create more land. You can't buy buildings from institutions. By and large there's a very limited amount of land and buildings that can be gotten in private -- from private hands.

But I would say, if you look at the amount of money flowing into all these sectors, witness EOP and any number of the taking private situations, there's a lot of capital searching for good real estate with good quality tenants. And this is a niche which people recognize may have some opportunity. And I think that is why you see the interest by a lot of folks in Slough. And my own view is it certainly is good in one sense. It recognizes I think the premium valuation that is deserved of this Company and what it has been able to do over the nine years we have been public. I view it in some sense strangely enough as a real positive.

Don't you think it also maybe -- I don't want to say it ruins it for the folks who are really long-term believers and holders, but it almost maybe in some way, shape or form acts as a detriment to folks like you who are long real estate in this space?

I would say quite the opposite. Maybe the truth be known, when people participate in or pay such high prices that assets are fully priced -- and we work extremely hard, as Jim has described, at buying assets that aren't fully priced where there is real upside, and we can so-called create value, either through the development or redevelopment or otherwise, or even conversion of leases to our quadruple net leases. I think that is really the key these days. And so that is why we're looking at doing what we're doing.

And I think the people that pay full prices, they will have a hard time reaping significant benefits in the future when people pay, as I say, just almost overly priced or fully priced on some of these transactions. That is kind of my view.

But I think it also recognizes the great value that we have and hold. And again the quality and the location of our land and our properties, other than some of the few noncore assets we have, is really absolutely second to none anywhere, and so we feel really good about them.

Mr. Marcus, I will turn the call back over to you at this point for closing remarks.

Thank you very much everybody. It has been a little longer call because of the fourth quarter and year-end. We thank you for your time. We will look forward to speaking to you in May. Really the anniversary will be the 10th anniversary of our listing on the New York Stock Exchange, so we look forward to updating you at that time. Thanks so much.

Once again, that does conclude today's conference. Thank you for your participation. And have a nice day.

[R1]Although "500,000" is numerically equivalent, I have put in the verbatim number because I don't see a reason to change to smaller figures.