Alexandria Real Estate Equities Inc (ARE) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Alexandria Real Estate Equities first quarter 2007 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 Miss Rhonda Chiger. Please go ahead, Ma'am.

Good afternoon and thank you for joining us today. This conference call and webcast 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 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 our first quarter '07 conference call. With me today are Jim Richardson and Dean Shigenaga.

In reviewing the quarter I think this was as much a picture perfect quarter as you can really get with all operating and financial metrics really pretty darn solid and up the middle of the fareway. We will highlight some of the key operational and financial matters for 1Q '07, talk about the impact for the balance of '07 and then into '08, and then broadly obviousldiscussed our business in the dominant Life Science Real Estate platform we pioneered.

We view ourselves as operators of this platform and we manage the business really for the long term to perform consistently, predictably, and methodically. As most of you know we are uniquely expert in this niche and we have developed a unique and extraordinary capability on the Life Science tenant side which I'll talk about in a few moments.

This month we celebrate our 10th anniversary as an NYSE-listed company and are really proud of the -- to have posted one of the strongest performances of any public REIT since we came public in May of 1997. Our assets have been purchased, developed or redeveloped really at sensible prices and our operational skill and savvy have enabled us to continue very strong margins, great same-store performance and mark-to-market on leases as we'll talk about quarter to quarter over the 39 quarters we have been reporting. And certainly one of our main goals is to manage the highest possible returns on invested capital and, clearly, the people we have are the best there is.

Let me talk about assets for a moment. Most -- virtually all of our assets are located in the most well-located sell markets. We have virtually no exposure to the weaker mix suburban markets of Seattle, San Francisco, and San Diego. The tenants we now have, as I think I said on the fourth quarter and year-end call, we have the strongest and most creditworthy tenant base we have ever had in the history of the Company. Looking at [Bardost] leading that esteemed tenant roster.

We have deliberately avoided and have been very careful to have underwritten away from many R&D companies which have, at R&D stages, which are burning huge dollars and with questionable long-term prospects. We have absolutely done, I think, a very, very superb job of developing this client tenant roster and the tremendous relationships that it goes along with that.

On the financial strategy we have continued to have a solid and delevered balance sheet with strong coverages and as Dean will tell you, we have reduced our exposure to variable rate debt greatly. We have deliberately kept on our balance sheet all of our core assets without the need to give them away and transfer strong returns and keep them for our own shareholders. Our return on our own equity is therefore much higher.

This quarter we announced for the first time outside of North America our entry into the Chinese market. As I've said previously, our business is an international one and we must serve our clients worldwide; and as I said, announcing today the first international market we are entering outside of North America. We expect at least two more announcements in the very near future concerning other new international markets.

And as I do every quarter let me talk briefly about some of the macro trends in the industry. The Democratic Party's control of Congress really has hastened two initiatives. One is a new proposed legislation regarding the FDA Drug and Safety Evaluation and limiting advisory committee members potential conflicts of interest; and also a new investigation in the pharmaceutical company marketing practices of off label use. So we'll continue to see and monitor these developments as they do impact our industry.

Big Pharma continued major cost-cutting throughout the last quarter and M&A activity continued in a fairly strong fashion. One of our clients in our mid-Atlantic market was bought by a major Japanese firm for several hundred million dollars, and a great example of credit enhancement on that particular lease.

Two of our top 10 tenants, Novartis being No. 1, received FDA approval for a first-in0class drug for hypertension which looks to be a very large blockbuster drug; and GlaxoSmithKline also received FDA approval for a refractory breast cancer drug. So we are very proud of the achievements of these two very important top 10 tenants.

In the Biotech industry, debenture investment in the sector actually was the highest ever and exceeded the previous high of tje fourth quarter of 2000. But I think we have to be careful. My guess is a lot of that money is being raised to get companies through Phase II proof of principle of both safety at Phase I and efficacy at Phase II so they will be positioned for future potential sales to big Pharma. And certainly the availability of capital continues pretty much unabated.

One of our main private clients in our San Francisco Bay property base received a $50 million financing. So again we have done a very good job of picking the very best of the best.

Moving on to earnings guidance and dividend policy. we've had strong core growth. Very strong market discipline, as Jim will talk about. We look to have hopefully future rent and occupancy growth and we have managed to a conservative balance sheet situation for future growth as it will unfold over the coming quarters and years. We have an 11% growth in FFO per diluted share before the D-42 charge for the preferred stock redemption.

As Dean will talk about we had very solid operating and financial metrics really in all categories this quarter. Our margins continued in a very strong fashion compared to most of the other companies out there. We reaffirmed the 571 guidance pre D-42 charge. 10.7% growth. We will continue to -- or you will continue to see some selected asset sales of non core assets. This quarter we did sell a 175,000 square foot building in the suburban DC market to a user tenet.

The dividend policy of the Company, the Board increased the dividend 6% last year and will continue to evaluate further increases this year. We continue to maintain a very low 58% dividend payout ratio.

Moving to some of the key metrics and, again, Dean will highlight these a little bit more detailed. We did post our 39th consecutive quarter of same store growth, both cash and GAAP. Truly remarkable and pretty unique among all REITS in our -- either the Industrial or the Office sector.

Solid lease in quarter, Jim will talk about this in some debt. I think it's important to note many of our leases this quarter were medium-size spaces for medium terms, generally in the 5 to 15 range. But we posted an amazing 46 leases for almost 0.5 million square feet. 8.2% GAAP rental rate increase.

Our top 10 tenants, the average remaining lease duration approximate eight years. On our REIT redevelopment pipeline we delivered two properties out of the redevelopment pipeline in San Francisco and Massachusetts. On the development side, the Crown Jewel pipeline that we have built over many years at a very highly advantageous cost basis continues to produce opportunities for the Company to develop long-term cash flow.

We currently have, as you know from the press release and supplemental, 1.2 million square feet in active redevelopment, including the East River Science Park in New York city and an additional 6.1 million square feet embedded pipeline at very stages through the development and preconstruction stage for much of it.

We also have begun to develop a significant international pipeline in addition to our first entry in China to be announced soon, somewhere in the 3 million to 4 million square foot range. We plan to kick off a second Mission Bay multitenant building soon for about 165,000 square feet and our 1700 [Owens] Building is about 77% leased or committed at this point.

External growth, we did acquire two land parcels in our two big markets during the quarter. We passed on acquisitions in the quarter. Most of the acquisitions -- and Jim will talk about some of those -- just don't make sense in some of our markets for the reasons he will kind of enumerate.

Let me move on to the balance sheet and capital markets before turning it over to Jim. We continued again to have a strong and flexible balance sheet for future growth. We did expand our credit lines, primarily for development and Dean will talk about that and, again, we have substantially reduced our exposure to variable rate debt.

So a quick highlight of the quarter from various perspectives and let me turn it over to Jim for really the real estate operational perspective.

Thank you, Joel. I will start with some broad market commentary.

The general market conditions in Alexandria's Life Science markets really haven't significantly changed over the past quarter. Supply is generally limited and constrained in most of the markets, resulting in single digit vacancies. Demand remains steady across the board. The largest markets do continue to the the most dynamic, the most supply constrained and offer the most opportunity for future upside through rent spikes.

We are encouraged by a higher volume of earlier stage turn activity that we began to see in the second half of last year and has really continued, which is clearly critical for long-term health and growth of our specific sector. The broad recovery overall in the tech sector and the Class A office markets in most of our core markets also is indirectly benefiting our asset base. As everybody on this call I'm certain understands and is current on, there's been no slowdown whatsoever in capital flows and the resulting yield pressure cap rates continue at historic lows. And as Joel hinted at, we have maintained very consistent discipline and really tried to focus on true value-add opportunities that we can achieve through redevelopment, additional development and/or entitlement or some substantial rent growth upon rollover of key spaces pieces of space.

What we continue to avoid are stabilized assets that are devoid of these characteristics of which we are seeing an increasing number. More specifically over the last couple quarters, we've passed on a number of sale leaseback type transactions where we believe there is location risks or credit risks or special purpose improvement risks that is not being reflected in the trading values and/or reflecting the reality of the risk profile.

And so as we have said on numerous occasions before, our first mover advantage has really allowed us to accumulate an existing asset base -- including undeveloped land in the very best locations in our submarkets with the highest concentration of industry at a very favorable basis, which puts us integrate position to continue to grow the Company in a prudent manner despite what is certainly a challenging macro environment.

So turning to leasing we, as Joel indicated, had another continued stable performance with 461,000 square feet of leasing activity, similar run rate to what we had throughout 2006 in which we had at least 1.6 million square feet. 70% of the space lease was either renewed or released space with the remaining 30% previously unoccupied. And importantly from a distribution perspective, 60% of all of this activity was on the East Coast. Maybe more importantly 40% of the total leasing was in the Maryland market, which I will come back to here shortly and 20% was in the Bay area.

So we've made very good progress in Maryland. And I think we have, on calls in the past, highlighted this as an area of real focus for us.

Going into the first quarter nearly 400,000 square feet was slated to roll over in 2007. We've been able to maintain our occupancy in the region above 90% and have simultaneously reduced the rollover exposure to less than 100,000 square feet for the balance of the year. And rent growth again was 8.2%, which falls within the 5 to 10% range that we had been projecting.

So as we look out to the balance of '07 our remaining rollover is about 780,000 square feet, of which about half is in Massachusetts which is a very positive outcome for us. With the relative strength of that market spaces specifically that are rolling presents a good opportunity to meet or exceed the rent growth projections that we have previously communicated. 40% of this space is either committed or anticipated to be resolved shortly and we continue to expect rental rate growth on these new and renewed leases in the 5 to 10% range for calendar year 2007.

As we look out into 2008 we have got about 150,000 square feet scheduled to roll over with the biggest concentrations falling into our two largest and clearly most dynamic regions, eastern Massachusetts and the Bay Area. On a first look about 30% of this space is either resolved or we are anticipating successful resolution with a balance being a little bit too early to project. We do see rental rate growth projections at plus or minus 10% for 2008.

Then although it's much too early to specifically project in 2009, our preliminary analysis indicates that there will be some reasonable upside on the rollover inventory.

Very quickly on vacant space with 734,000 square feet vacant in the operating portfolio, that's very similar to the gross amounts reported out last quarter, 30% of the space is either leased or we are negotiating on it. The distribution of that space has shifted slightly to the Bay Area and Maryland in this past quarter. So, overall, we believe that our ability to lease space at a very steady and significant pace with positive mark-to-market characteristics, very modest CapEx and continuing enhancing our tenant quality -- as Joel highlighted before -- is really a key component to this stable growth platform that we have.

Turning to redevelopment, we made a couple of key additions to the pipeline in the first quarter. The first property in Torrey Pines that we will be completely demolishing, redesigning, and reconstructing. This is a property in a fabulous location with tremendous views and excess parking related to the overall market. It was formally an office building that had been leased years ago to EF Hutton, that was kind of jerryrigged over time for a variety of different smaller office lab users that is just not releasable in its current state.

So as I said we'll go through a complete redesign and reconstruction. Then, secondly, portions of the HGS campus out at the Shady Grove Life Sciences Center which came back to us in the first quarter, we are converting to multitenant. One building, specifically, is a single tenant lab building that we are redeveloping the infrastructure to accommodate multiple tenants that are actively engaged there; and the other is office space in a building that we are converting to lab.

So these two additions really accounted for much of the new inventory. As I said, we are engaged in planning construction activities on each of these projects right now.

A number of properties and spaces will also come out of redevelopment and be placed back into service in 2007 and early 2008. Just to reiterate this plank of our growth platform allows us to do some very important things, to quickly respond to market demand; to reposition and enhance the overall value of these assets in our regional franchises while all at the same time generating double-digit returns on incremental capital invested on a nonlabor basis.

So this is an area that we are very proud of being able to continue to grow. We've pioneered this concept within our niche and are employing this mechanism in every one of our markets currently.

Joel talked a little bit about development, including our current activity at the East River Science Park now exceeding 1 million square feet. At 1700 Owens, as he indicated, over three-quarters of the project is leased and committed. The remaining space really sconsist of small office suites that we are turning to venture capitalists and essential service providers. And we have had good incremental activity quarter to quarter. Then, additionally, we have some nearly finished Science Hotel Suites that have generated quite a lot of interest and activity.

So with entitlements in the advanced stages on over 1 million square feet and six buildings in Mission Bay, as Joel indicated, we will kick off in 2007 at least one building totaling 165,000 square feet. In South San Francisco, we continue to move forward on three buildings in two specific separate projects totaling 300,000 square feet and South San Francisco remains one of the most dynamic and supply-constrained markets in the entire portfolio.

Dispositions. We will continue to selectively cull out non-core assets on an opportunistic basis. As you know we sold three of these type assets in 2006. We concluded an additional sale in Maryland in the first quarter and we will likely conclude three additional property dispositions in the second and third quarter of '07.

So just then quickly wrapping up, consistent with Joel's comments, first quarter was very solid in all respects with a set of fully integrated regional offices in each of our core markets. We continued to execute at a very high level in all phases of property operations development as well as our external growth efforts and we are confident as we left out to the balance of '07 that we are poised to deliver performance consisten with this tenure track record that is unmatched.

We will continue to advance a variety of strategic initiatives that will further enhance and distinguish the Company and its brand. With that I will turn it over to Dean.

Thanks Jim.

The first quarter for '07 again as Joel had highlighted was a very strong quarter for the Company. We continued to execute on our unique roadmap for growth providing for our 39th consecutive quarter in growth and FFO per share diluted, our 39 consecutive quarter of positive same property growth on a GAAP basis, and really the beginning of our 10th full calendar year as a publicly traded company with positive leasing activity.

Our results for the quarter reflect our continued ability to execute and deliver consistent and predictable results, quarter after quarter. As you have noted in our press release, we reported FFO per share diluted of $1.38, up 11% over the first quarter of '06 and this is before the $0.10 per share preferred stock redemption charge.

Briefly, I want to mention a report that was issued in March of 2007. Forbes.com -- through a study that was performed by an L.A.-based firm, Audit Integrity -- ranked Alexandria as No. 12 of 100 American companies that in their opinion showed the highest degree of accounting transparency and fair dealing to stakeholders during 2006. Our accounting and finance team is extremely proud of this recognition since they really have first-hand knowledge of how sound our accounting policies and procedures are, relative to the average accounting and finance department.

We are also very pleased to mention that, again, for the third year in a row we completed our financial audit with no audit differences and completed our internal control audit without deficiencies. Obviously, our management team and all management teams and investors of any public company expect to receive clean opinions in these audits. But many companies do receive audit differences, and internal control deficiencies and still receive clean opinions.

Again, we have not had any audit differences or internal control deficiencies in each of our audits over the past several years.

Let me take a moment to highlight certain really important capital matters before I comment on very important analytics critical to our performance. First, as we had previously reported we closed on a $460 million private offering of convertible senior notes in January 2007. The notes had a coupon of 3.7% and mature in 2027.

In March, we redeemed our Series B preferred stock and recorded a D-42 preferred stock redemption charge of $2.8 million or $0.10 per diluted share. Subsequent to quarter end as Joel had hinted, in May of 2007, we completed an important amendment to our credit facilities to increase our facilities from $1.4 billion to $1.9 billion consisting of a $750 million term facility and a $1.15 billion revolving credit facility. We also updated our accordion provision for an additional $500 million of capacity.

Let me come back to our facility in a moment when I cover our Development and Redevelopment program. Briefly let me also point out that our debt to total market cap was 41.5% as of quarter end and our unhedged variable rate debt exposure dropped significantly to approximately 8% of total debt.

Consistent with our ongoing policy to mitigate our risk to variable interest rates, we will continue to evaluate additional interest rate swap agreements. 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.

We will also continue to focus on our employees, consultants, and advisers that have allowed us to grow our business and operations in an efficient manner. We were recently identified by Baseline Magazine as No. 7 of the Smartest 100 Publicly Traded U.S. Companies. Our employees are very proud of this recognition as each of them have worked really hard to build an intelligent, creative, and talented team to lead us through the future growth of our Company.

G&A expenses are expected to grow as we continue to focus on the growth in the depth and breadth of Our company, the geographical expansion, and an increase in staffing in key areas at both management and nonmanagement levels, including construction and development personnel. Our G&A expenses as a percentage of total revenues was in the 8% range for the quarter. This is consistent with the prior 12 or more quarters.

Going forward, we are projecting G&A to run about $8 million per quarter and we expect that it will stay in the 8% range of total revenues.

Next, let me highlight certain steps that are important to our performance. As I had mentioned previously, we continue to be very diligent with our strategy to maintain a strong and well diverse (inaudible) asset base in the best possible location in key Life Science submarkets.

We have found that the success of our Life Science Real Estate Niche is extremely dependent on location, location, and location. We've also been very diligent in an ongoing pursuit of high-quality, broad and diverse Life Science sector client tenant base. Our top tenant, Novartis, as Joel had pointed out, is a AAA rated company and represents only 7.9% of our annualized base rate. Our second largest tenant represents less than 4% of our annualized base rent.

I point these out because this really highlights our limited exposure that we have to any one single tenant. Our internal proprietary Life Science research team has successfully underwritten our targeted and high-quality tenant base. Our underwriting success is clear as we have achieved positive same property performance and quarter-over-quarter growth in FFO per share on a diluted basis for now 39 consecutive quarters as a public company.

Moving next to our Development program, as you know we have a very significant program that has added substantial value to our asset base over the years, through the successful roundup development of first-class laboratory facilities. We continue to proceed with important development pre-construction activities on over 6 million square feet of our valuable land bank in strategic and irreplaceable locations. Our balance sheet is in solid shape and our recently amended credit facility will provide important capital for our ongoing efforts with our construction activities through our value-added ground up Development and Redevelopment programs.

Our Redevelopment program is integral to our unique roadmap for growth. This program generally involves the conversion of non lab space to lab office space at very attractive yields. It is extremely important to note that we do not place vacant leasable lab space into our Redevelopment program.

Same Property results continue to be positive and we are 3.3% on a GAAP basis and 4% on a cash basis for the quarter, with the majority of the increase in Same Property results due to increases in rental rates. Same Property occupancy was very solid at 94.1% for the quarter end. We continued to execute on key terms of our lease structure which provides for strong and consistent operating results. As of quarter end approximately 90% of our leases were triple net leases and an additional 4% of our leases require our tenants to pay the majority of operating expenses. 90% of our leases provide for the recapture of Capital Expenditures, including and not limited to, roof replacements and HVAC back systems. In 91% of our leases contained annual rent steps that are generally fixed in the 3% range or based on CPI.

Going forward, our guidance for Same Property performance remains in the 2 to 3% range on a GAAP basis. And we still expect increases in Same Property results to be driven primarily by increases in rental rates.

Briefly on a few important operating stats. Our occupancy for our operating asset base was solid and consistent with the prior quarter at 93.1%. Again we view this level of occupancy as an opportunity to grow internally through an increase in overall occupancy.

Just as a reminder, certain assets that we have acquired over the last 12 to 18 months contain spaces for future redevelopment and also contain some vacancy. These spaces have a negative impact on our overall occupancy statistics and operating results but clearly provide for future growth through our value-added Redevelopment program. These assets will continue to have an impact on operations until the completion of redevelopment at some point in the future.

Margins remained solid for the quarter at 74.3% but have been slightly impacted by gross leases that were recently acquired and by operating expenses from certain building that were recently vacated by HDS in Maryland. On a prospective basis we are projecting margins to be in the 75 to 77% range. Straight line rents -- excuse me straight line rents for the quarter were approximately $5.1 million and we are projecting a $5 million run rate going forward.

Other Income, again, was very consistent with the last several quarters and continues to consist of construction management fees, interest, investment income and storage. Other Income has been and should remain a stable source of revenue for the Company and going forward, our projection for Other Income remains in the $3 million to $4 million range.

Capitalization of interest for the quarter was approximately $10.8 million and really reflects our ongoing efforts with our important value-added Development and Redevelopment projects, including our strategic effort to move along our preconstruction activities for our embedded future development opportunities. During the quarter we added multiple spaces to our Redevelopment program which were important for the ultimate conversion and permanent change in use, some of which Jim had highlighted earlier.

In closing, let me briefly comment on our FFO guidance for 2007 has been updated to $5.61, really to reflect the impact of the D-42 preferred stock redemption charge of $0.10 per share that we recognized in the first quarter. Our guidance for 2007 on a normalized basis to exclude the D-42 charge still represents a very solid increase of 11% over 2006. EPS guidance has been updated for 2007 at $2.25 and please note our earnings guidance is back end loaded.

With that I'll turn the call back over to Joel.

Thank you very much and the operator will open it up for questions and answers. We would be happy to (multiple speakers)

(OPERATOR INSTRUCTIONS). Anthony Paolone. J.P. Morgan Securities.

Joel, can you talk a bittle bit more about China and the amount of capital you expect to put into this investment that was announced?

I can't talk very much about it. Let me tell you what I can. Well, let me maybe give you a little bit of background.

Our partner in this is a joint venture made up of a major European Life Science Company together with an important U.S. private company that have a joint venture. And we are joint venturing with the joint venture to take them to China. Much as I think in past calls I've indicated that would be our platform strategy for doing that, we are under pretty tight CDA with that entity.

The entity has not made any announcement and so I'm hesitant to say much. But I would say that -- nor am I, I think prepared to give cost per square foot and so forth -- but I would say over time we certainly view the Chinese market as an important marker and that we hope to commit substantial amounts of capital to that market.

I think in a future call, possibly the August call. I will be in a better position hopefully to be able to get those numbers to you once I have approval.

The stage of development, we have finalized the -- actually the land grant. We do control the land that actually happened early -- actually the -- in the fourth quarter of '06 and we have been working hard to prepare the site and design the complex. It will be a three-building complex comprising about 275,000 square feet.

The cost of constructions however, Tony, clearly are lower than they are here in the U.S. So when I hopefully report in August I will able to give you much more detail.

Is the U.S. private company a real estate partner or is it a Life Science partner from the U.S?

It's a Life Science partner. They had key technologies. They partnered with the Europeans, which has -- this is very common in the industry with the large European company which has both a very large balance sheet, a multibillion dollar equity market cap company. They have the balance sheet and they have pretty substantial distribution in China.

So it's based on my 30 years' history in the Life Science industry, it's a very common partnership that would be the natural partnership to take to China.

And when you think about China and some of these other international markets that you are contemplating, it looks like you're getting double-digit returns on your domestic developments. What kind of risk premium do you think you would get going to these other areas?

That's a fabulous question and I would say we would view it as somewhere about 500 basis points or more.

And how would you -- I guess, as an equity component then would you finance in the local market, debts, or how that work?

Remains to be seen. The structure and the tax regimes are challenging and we have kind of worked our way through that. But I think it is fair to say that we probably would just do it off our balance sheet for the moment. I think a much larger development we might consider some kind of a financing technique but for this one, I think we would do it off our balance sheet and we are 90/10 partners in this venture. We are 90. They are 10.

Are you all still involved or can you comment on the process surrounding [Slough]?

The only thing I can say is we signed a CDA six months ago that we can't talk about it. In fact it has fairly harsh penalties if you even mention it. So I think it is fair to say we don't -- you know I said publicly that you know and Jim just repeated what we said. We look to deploy capital at the highest return on our invested capital as possible and that's how we have run the Company now for almost 10 years. And that's how we plan to continue to run it. So I think that is about all I think I could say at this point.

On asset sales you mentioned some more of those coming down the pike. I think it was last quarter I want to say you mentioned 500,000 for the year -- 500,000 square feet. Is that --?

I think that we have in our pipeline marked for sell a number of assets maybe as many as -- I don't know. Jim.

We may need probably yes probably nearly double digits probably nine or 10 remaining.

Right and the numbers would be somewhere in the 400,000 to 500,000 square feet. But again these are all one off situations. Many of them like the one we just sold have tenants that have interest in buying them. Some are looking at, some were looking at investment sales but it is kind of a combination. So they're really one by one.

Then $1.3 billion of capacity now on your line versus what is out on it, seems, Alton (inaudible) plus the accordion you mentioned. Why do you think you need so much?

I think, number one, we want to make sure that we have the availability. Given the availability of capital generally and the cost of capital we want to make sure we are fully capable of taking on whatever opportunities may come to us, that we deem to be really accretive and value added. I think when you look at New York, when you look at Mission Bay and although we've indicated we are likely to kick off anywhere between one and three buildings, we certainly have discussions going on. Nothing that we could report that would lead us to believe a commitment where we are looking to lease potentially many campuses that could range from 7000 to one million square feet.

Then you look at just the other development, pipeline redevelopment and then the international. I think it is prudeent for us to take this opportunity to keep our -- as much dry powder as possible.

I don't know. Dean, do you want to comment?

Yes I agree with Joel. It's really just -- I think it is very consistent with what we have done in the past with our credit facility to ensure that there was capacity and as Joel had highlighted and as we have highlighted over the past several calls, the Development pipeline and construction activities are becoming more significant. And having that availability I think makes it clear to us and clear to our investor base that there is the capacity to manage our construction activities, which is here today in a very meaningful way.

I wouldn't read anymore into it as it may relate to your previous question than what we have just said.

[Dave Aubuchon] with A. G. Edwards.

Joel, I believe you mentioned in your prepared remarks something about 3 or 4 million square feet of potential was it international exposure or development in the China or -- ? (multiple speakers)

I mentioned 3 to 4 million international development pipeline. That was not meant to be just a -- just for China. But I think overall outside of the United States that we will be announcing over the -- I think over the very short-term -- the capability to develop that kind of square footage again x U.S.

And those are the two separate markets. Correct?

Well there may be more than that.

So when you think about your international expansion how are -- as Alexandria as a company -- are you going to be able to develop the platform internationally? Are you going to have people on the ground in both China and wherever else you happen to strike these deals or how is that going to --?

We already do. I mean I spent almost 10 years in Asia in my prior life and we have quite a number of people who have indigenous roots in them in quite a number of countries. So we are going to tap that tremendous resource we have here that exists within the Company today and then obviously build those out in the local markets as well.

The land you announced you purchased in the quarter at least on an [FAR] per square foot, triple digits in some -- in core markets. Can you detail exactly where those land purchases were within Eastern Mass., and San Francisco?

I don't know that we will let you know precisely where they are, but I will ask Jim make the comment overall on account of our strategy.

Yes. I would say that Eastern Massachusetts acquisition that price per FAR foot relative to the submarkets that it is in is at the lower end of the range. And that is also the case for the Bay Area asset. Very definitely the case there, as well. In fact, probably below the lower end of the range.

These are in very strong vibrant submarkets, that are very competitive and have very low vacancy.

And actually the price per square foot, I think Massachusetts being somewhere in the 170 range. I think San Francisco is 74, but (inaudible) square foot. Pretty favorable (inaudible).

Jim, you mentioned the higher volume of earlier stage tenant activity. Is there any underlying currents that are responsible for that type of activity creeping up now versus maybe earlier in the cycle. Or can you maybe describe what you are seeing and maybe why you are seeing it now?

Yes, maybe I'll describe just a little bit about what we are seeing. Joel maybe you can add on as to what that dynamic means. As he indicated before, there has been a historic high investment from the [VC] community most of that generally has been towards later stage development companies. But we are seeing earlier stage companies that are more qualified of higher -- clearly high-quality partnership than their predecessors -- getting money. And there's been a shift in the way these companies are acquiring funds and translating basic research.

And so it may be to some extent a delayed impact of increasing venture capital flows over the last several quarters. But it's pretty against our core markets those, you know, Seattle, San Francisco, Massachusetts -- it's been very consistent over the last three quarters that we are seeing a lot more deal flow at the smaller end stage.

Yes. to give you an example. Several of the companies that we actually helped create up in the accelerator in Seattle have so called graduated and gone on to take -- one tenant what from a couple thousand square feet to almost 30 and another one is in the process of doing that. Those companies together raised well over $100 million.

So I think it's very selective but it's larger amounts of money to take the products farther along through the FDA, as I mentioned to position them. I think the exit these days primarily is not the IPO market for the really high-quality companies, but it really is the M&A market.

You know just another example. In Cambridge we started with a company when we first launched the Science Hotel about 2,000 or 3000 square feet (inaudible) Pharmaceutical which is really one of the pioneers together with (inaudible) now Merck in the RMAI area. That company went from the couple thousand square feet to over 60,000 square feet in a relatively short period of time. And from a startup to a pretty well capitalized public company.

So if you underwrite these companies well we knew -- I personally had a long history with the founders and you do things right you can have really great companies. Now that doesn't mean theren't are a lot of others out there but we are trying to focus on, really, the creme Delta la creme.

One last question. Is the -- what type of leasing progress are you seeing at the Life Science Square redevelopment in Cambridge?

We are seeing a lot of activity but as we are kind of going through our selective Redevelopment plan, our commitments are certainly short-term and so we are kind of at the initial stages here, Dave. But I would say just generally speaking there is a lot of activity in that market for that kind of space.

Were you asking the MIT property or --?

Right.

Oh, okay, the Tech Square?

Right.

Okay. I'm sorry I thought --

Yes. We have, I think we are about to sign a leas today maybe or over it the next couple of days. It's been finalized for a major user of space there and I think we are seeing the requirements to be pretty robust. That space will be delivering -- the first of that space maybe later in the year possibly and then into next year. But I think so far, things look good but we have our first significant tenant. Very, very high-quality tenant -- extremely high-quality tenant that is about to execute a lease.

And given the movement in rent over the last year is it fair to say above your expectations on the rent side?

Yes. Slightly. I mean, I think we knew. We saw this coming and we know we are at a point in the market where there's not much product. And actually what's really unique about that building is that it very effectively accommodates medium to large size users as well as small users which, in that market, isn't always the case. There's a lot of -- the space that has been available has been really large floorspace where users get lost. So we can have the best of both worlds.

So I don't think it's surprised us but we are definitely beating and exceeding projections.

John Stewart with Credit Suisse.

Joel, can you give us a sense for about how many square feet we are talking in China?

I don't think I'm prepared to make any country allocations; but I think if you ask me next quarter I will be prepared to tell you that.

I just meant in terms of your initial foray.

Well, yes, the initial building will be 275,000 square feet. Three building complex.

And can you just help us understand what is the attraction to China for this European Life Science company, particularly given that different patent protection environment?

Well yes, that's actually a good question but an easy question to answer. It really is -- and this is true worldwide -- you have a very robust technology discovery base and innovation base here in the United States. You do to some extent in Europe but there are a lot of European companies very well capitalized, who have literally decades of experience in China.

And what they are going to be bringing to China will be a diagnostic and testing kind of platform for a variety of diseases. So if you can attack that, that is -- it doesn't necessarily have to be patent protected because it's hard to knock off something that's pretty unusual and pretty dramatic that you can put into the market in a very major way both through doctors and hospitals and clinics and things like that. And that will then lead to kind of the next piece will be the therapeutics that underlie that diagnostic.

So it is really a packaged product that will be a front end of who's got, let's say it was -- I'm just giving you, for example, this isn't the case -- but let's say somebody comes up with a test for cardiovascular and you can both do the test and deliver a Lipitor like drug -- and again I'm using total hypothetical here. That is a pretty amazing capability that the Chinese just don't have anything like that.

So that when you've got a market of 1.3 billion people that's a pretty huge market and if you've got a network established there and you can do both the testing and the therapeutic together that's a pretty dramatic situation. So I think that is the opportunity basically.

That's helpful. Dean, thanks for the continued and tremendous closure potentially on the development pipeline. Quick question. Were there any dead deal costs in the first quarter?

You mean leasing or?

Dead deals.

Oh, dead deals. We probably on average have less than $100,000 at any particular time of dead deals. You look at our share deals and -- .

That was true in the first quarter as well. Nothing out of the ordinary.

Yes. Nothing out of the ordinary because again we have a pipeline that is -- we look at and we are always looking at deals and some we get part of the way though and we walk away and others, we get a little further down. But I would say it's never been a significant item for us.

And I wouldn't read anything more into it than what he just said.

Well, should -- does that mean you are not capitalizing any significant pursuit costs ongoing?

Well, I don't know that we have any significant costs to capitalize, I would say.

That's helpful. Then just lastly, any update in terms of leasing at Eastern or Science Park in Mission Bay?

Yes I will let Jim take Mission Bay but as far as East River Science Park goes, we are in the process of building out our regional team there. We will probably not actually put together our marketing effort until the fall. I think I've mentioned that maybe on a couple of the tours or conversations that we have had with analysts and investors.

We do have an ongoing effort with a major institution. They are in programming and so we are working carefully with them to see what we can do to fit their program into the West Tower. So they may take as much as 150,00 to 200,000 square feet in the West (inaudible). I'm pretty optimistic about that. That's not a tenant that we went out and got. Actually it just came to us and we have had a variety of series of meetings from a number of pretty large Pharma -- both Big Pharma and big biotech companies looking at New York.

But again we won't ramp up that effort until the fall.

And Mission Bay, Jim, you can -- .

Yes I would say that we are, John, we are kind of at the front end of initiating more a comprehensive marketing effort at Mission Bay. The first building as you know kind of came out quickly and is substantially leased and we have been engaged in the process to get all the other buildings placed. And now that we are at that point where having those discussions and (inaudible) internally I would say that the overall status of the peninsula market is such that there is a lot of interest from large users in campus opportunities.

I don't know that I've seen that market this tigh with real solid corporate demand since I've been practicing in the Bay Area. So it's a unique time. There is a lot of interest but we are a little bit away from being able to deliver product so I would just say stay tuned.

Chris Pike with Merrill Lynch.

Just a quick question on conversion opportunities in your international markets. Almost all my other questions have been answered but I'm just curious. Are the (inaudible) that you guys are seeing in the markets that you are looking at are there conversion potential? Or is it simply you are looking to buy asset [scrape] or perhaps just buy land and develop from ground up?

I would say our strategy will be the ground up development for a variety of reasons because of the nature of the tenants we are bringing to those markets.

Michael Bilerman with Citigroup.

Just a quick question on the total Development and Redevelopment and server in process pipeline. You have about $780 million in today being capitalized. How do you see that capital spend trending during the year both with the liberties and new projects and capital on the existing projects?

Yes, I think the easy way of looking at that, Michael, is just turning the page I think 15 and 16, the Redevelopment and Development schedules and you can kind of eyeball the in-service states. You do see some decent amount of it coming in the service in 2007 but I would say, as you know from our historical focus on the value-add opportunity on Redevelopments and Developments it's a constant cycle. Assets are coming out. Assets are going in.

And I would say if you had to project out at least in the near term over the next few quarters, it will probably maintain or increase over time as we focus on it. We mentioned another opportunity to kick off a project that the Bay area and other development opportunities that we will announce in the future.

It won't be a significant increase you saw between 4Q and 1Q where it sort of went up about $200 million? I assume some of this stuff in Mission Bay is already in the preconstruction pipeline today, therefore there shouldn't be much added capital that is being capitalized in '07?

Correct. We did have some larger redevelopment opportunities come in in the first quarter as Jim had pointed out so I would agree with you that you will not see such a significant trend up in one particular quarter.

I got bumped off the call by accident and I don't know if you discussed G&A, but I apologize if you have to repeat yourself. Can you just talk a little bit about the G&A levels today and what sort of [day second] support in terms of assets and how we should think about that trending over time?

Yes actually, Michael, that's a good question. I kind of tried to highlight over the last few quarters what our G&A run rate has been and I think if you look back over the last two or three or more years, G&A as a percent of total revenue has been really consistent. Surprisingly consistent quarter-to-quarter year-to-year in the rough 8% range. So I think our G&A results of the first quarter are in line although up in total dollars, still in line as a percent of total revenues.

And my comment earlier was that G&A expenses will continue probably to be in that 8% range going forward.

And then just lastly, Joel, in terms of international if you look three years out, you talked about this three to four million square feet. What do see as percent of the Company x North America in terms of your asset base?

That's a great question and I have been asked that before. I am not sure I could characterize it in three to four years but I would say over time and maybe medium term I don't know if that's three, four, five, six, seven but somewhere not long but not short, I would say as part of the asset base I would think it would be somewhere in the range of 25% of the asset base and maybe somewhere 25% of revenues.

Philip Martin with Cantor Fitzgerald.

First of all, just to clarify something. China, the 275,000 square feet is that -- so that's 100% spoken for at this point?

Yes. I can't comment on the transaction at all, Philip.

Pre leasing or --?

But we have a tenant in hand who is going to occupy certainly a -- an important portion of that project. Whether it is all or part in this point I am not able to tell you but I will be able to probably announce that in the August (multiple speakers).

That's fine. I am just trying to get a handle on -- . Well, again, on the other international potential opportunities, it would be a similar type of formula where you would locked out a significant tenant before moving forward?

I think each country is going to have a different approach. I think some countries are more cluster-oriented so our strategy in North America would be more similar. Others are very I would say dependent upon a foreign company coming to that country. So I think they are going to be different strategies and kind of different modes of operation. Country to country. It will not be kind of cookie cutter across the board.

I think Asia is quite different than Europe and North America.

And then more of a global type question. On the private equity there's so much money sloshing around out there, private equity is obviously a big part of that. There's risks and opportunities with that and certainly you spoke of that a little bit in your opening remarks with money there for startup ventures, even slightly beyond the VC stage. But how about private equity coming into a more mature biotech pharma type company tenant and you know, shutting down parts of their operation to squeeze out more efficiencies? Do you see any risks in your portfolio with that?

I would say in general, certainly, any significant risk absolutely not and in general that rarely happens because the value of these companies really sits in the patents, the technology, the innovativeness or the innovation they've created and, obviously, the people. So to the extent -- I mean, these are not organizations like the Big Pharma, like a Pfizer or something where you could go in and really slash Sales and Marketing or you could -- parts of development out or refocus research.

Its creation.

Right so most of these companies, private equity or hedge fund money or other kinds of money, tend to be I think pretty patient because they are looking at achieving major clinical milestones. If the milestone fails certainly there's risk of shutting the company down or doing something with it. But in general they don't pull that trigger until there is a clinical event, either positive or negative. And we don't have I would say a lot of exposure to those kinds of investors in the portfolio.

Certainly I think less than 12% of our portfolio's private Life Science companies and among those are really just very, very high-quality. So we really have almost nil exposure to that kind of a scenario.

That's what I thought. I just wanted to make sure since we are hearing about a lot of crazy things in the private equity market these days.

Yes, I know, for sure.

Then, Jim, on the supply demand, obviously it sounds like there are some very good supply demand fundamentals in the market here. You spoke of that in your remarks. And it sounds like they are continuing to get better. Is that, number one, is it inviting more development competition into your markets, which could impact your ability or your pricing power I guess is the best way to put it. And or just does it mean incrementally more development opportunities for Alexandria going forward?

As I would answer always this question it's all case-by-case market-by-market. But generally all of these markets are pretty mature, and so the ability for there to be a rush of development that wasn't already in the pipeline for an extended period of time is pretty remote. I think another very important key here is one of the comments I made, relative to the broad recovery of the tech sector and Class A office space in these markets, there are other avenues generating outsized returns for developers beyond our niche. Back when there was the meltdown in 2000, that question you're asking, Philip, was a little bit more germane as developers were scrambling to figure out how to work out off assets or locations that they had intended for other type use that had evaporated.

So I would say, generally speaking, I think there's just a good balance across each of the industry sectors and the overall supply of opportunity is pretty minimal; that the effort we made over the last five or six years to accumulate these assets took a lot of time and effort but also we kind of captured the lion's share of those in the places we want to be. So I don't think we have a whole lot of exposure.

My last question. In terms of your land bank is the entire land bank within the Company identified in your Development and/or Redevelopment pipeline? And if it's not, what portion or how much is not?

Well if you go to page 17 of the supplemental -- kind of the middle column shows 6,051,000 square feet. That's really the total development pipeline. And as Dean has footnoted down there on two that does not include the 420,000 square feet option parcel we have at the East River site, which is currently occupied by the medical examiner.

And there's the tent there for withholding the unidentified remains of the World Trade Center victims. Once that's removed to Ground Zero, the memorial, that will become available. That doesn't sit there nor does the parcel in China that we've got essentially a land grant from sit there as well.

Anthony Paolone with J.P. Morgan.

Thanks. I guess this is for Jim on the Bay area leasing. Can you put some numbers or give account of maybe the number of searches for fairly large blocks of space you are seeing out there for large box of space that would fit with Alexandria would be able to deliver?

Yes. I guess I would hesitate to give you a specific. There are a handful of large users looking for major campuses i kind of broader Silicon Valley region of which Mission Bay is a part of. So, yes, beyond that, Tony, I would probably hesitate to get more specific about how many of those we are talking to and the probability and where they are going to end up. But there is a dearth of alternatives out there right now to handle really any requirement over a couple hundred thousand square feet in quality space.

That does conclude today's question-and-answer session. At this time I would like to turn back over to the speakers for any additional or closing remarks.

Well thank you very much for joining us and look forward to talking to you for the second quarter results in early August.

That does conclude today's conference. You may disconnect at this time.