Alexandria Real Estate Equities Inc (ARE) 2007 Q3 法說會逐字稿

Good day and welcome, everyone, to the Alexandria Real Estate Equities's third quarter 2007 conference call. Today's conference is being recorded. At this time for opening remarks and introductions I'd like to turn the call over to Ms. Rhonda Chiger.

Thank you, good afternoon. This conference call contains forward-looking statements including earnings guidance within the meaning of the Federal Securities Laws. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the 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.

Thank you, Rhonda and welcome everybody to our third quarter '07 conference call. With me today are Jim Richardson and Dean Shigenaga. Barren's recently had a survey that found 57% of institutions stated that strong management, a differentiated business strategy and dominant brand were the essential elements which determined their respect for shareholders and we believe that we've established a preeminent management team, a dominant business strategy as well as brand and I think our third quarter results confirmed that.

As I do every quarter, I wanted to focus a little bit on macro comments. We believe as you see the shifting sands in the biopharmaceutical industry that the technologies that will maximize efficiency in patient care will clearly reap the richest rewards as time moves forward. There will be a convergence, as I said before, among drugs, diagnostics and devices and there will be four key areas where advances in technology could make significant impact on health care budgets and the quality of patient care, predictive genomics which is a broad genetic marker analysis of acute diseases and our client in the Maryland market, [Qui Kyogen] has one of the world's leading platforms addressing this particular technology platform. Disease management, which is the monitoring and compliance with drug use together with vaccines, again we have one of the leading companies in the country, Solara Diagnostics, which is heavily focused in this area as well as Merck in the vaccine area. Microsurgery and imaging will be a key component of future technology advance and patient care and budget management and Scripps, one of our new top 10 tenants is a leader in that area and finally the integration of clinical information and medical records will be a key to future health care costs containment and a joint venture that we will be bringing to China, one of their preeminent strengths is that focus.

Let me talk about the pharma industry very, very briefly for a moment. The FDA bill which became law this past quarter will increase the oversight of drug safety, something that has caused a lot of angst overtime leading with--- obviously Merck's Vioxx has been one of the focal points of that. There has been no new legislation or any legislation regarding biosimilars and this is certainly positive for the biotech industry at least for the moment. Ongoing restructuring to make big pharma more competitive are ongoing and so far no adverse impact on our client tenants. Pfizer had a big drug approval in its first in class HIV therapy as well as Merck's advisory panel approval of its first in class AIDS drug as well happened during this past quarter. In the biotech industry probably the big news this past quarter has been Amgen's restructuring the first time in history, but at the moment no impact to Alexandria.

This has been a volatile quarter and there was a lot of M&A activity. Two of our clients were acquired by major credit companies with aggregate proceeds north of $725 million so that's good for credit enhancement of some of our smaller tenants. Key themes for this quarter, clearly we had a strong operational and financial quarter and we continue to believe that ARE is an ideal safe haven in a turbulent market, especially a very tough credit market environment and should be a core holding for all investor styles. We have deliberately increased our positive exposure internationally and we'll talk more about that in a few moments and our strong and world class client tenant base continues to strengthen each quarter. This quarter we're proud to welcome the Scripps research institute as one of our top 10 tenants. It's the largest U.S. independent not-for-profit research institute. We have several relationships with them in San Diego as well as a key collaboration in Palm Beach, Florida.

We will continue not only this quarter in a turbulent quarter, but obviously in the quarters and years to come to protect asset value, cash flow and earnings growth and all three of us, myself, Jim and Dean, will obviously address some of those issues. We continue to believe there will be special opportunities to increase our dominant market share, increase the solid stable predictable and reliable earnings growth and our asset value in the coming year, all the while while promoting our dominant platform and brand internationally.

Among our goals for 2008, which I think are very important, will be our further plan to expand our footprint in China. We hope to commence operations in India in a limited way and our plan is to enter hopefully one more cluster market in Europe through a joint venture. We continue as our operational and financial performance for this quarter clearly addresses continue to be absolutely laser focused on preleasing or leasing preleasing for developments in mission-based south San Francisco, Toronto and New York City as well as Cambridge and carefully manage in a prudent way our balance sheet. This quarter demonstrated our continuing enhancement as I alluded to last quarter on occupancy, rental rate growth in each of our key life science cluster markets.

Want to move to earnings now. It was a real strong quarter at a 1.45 per share diluted FFO growth and Dean will talk a little bit more about that. We look forward to another strong quarter in fourth quarter of '07 as well as '08, continued solid margins at about 75% among the highest margins in the industry. Our guidance is reaffirmed and Dean again will detail that more in his comments, but with an almost 11% growth rate at 561 we wanted to be a bit conservative given a variety of accelerating asset sale activities.

As we look into 2008 and we'll give specific guidance as we do each year for 2008 during our February fourth quarter and year-end conference call, we look forward to having a strong growth year heavily fueled by same store growth, delivery of a good size number of our redevelopment and hopefully some international contributions as well,l and in '09 and '10 we look for a very strong contribution to our growth from the Crown Jewel Development Pipeline Mission Bay, south San Francisco, New York, Toronto and International. The board has increased the dividend 3% in the second quarter and we'll likely set another increase for the fourth quarter. ARE continues to have one of the lowest payout ratios, (inaudible) about 56%, so we're very pleased with that.

On the operating and financial performance side, again, it was a very strong quarter with excellent same-store growth and Dean will talk about that with both upticks in rental rates and occupancy stats. Again it was -- I would characterize the quarter as being predictable, reliable, consistent and very solid. It was a very strong leasing quarter. Jim will detail the numbers there and give you color, but at almost a 0.5 million square feet with almost 7.5% GAAP rental rate increase, again one of the strongest quarters we've had. We delivered three spaces in properties, about 48,000 square feet out of our redevelopment pipeline on time and on budget, and on the development side we now almost have almost 1.5 million square feet in active development with the pipeline behind it of almost 7.5 million square feet.

We delivered our first building at Mission Bay, 90% occupied or committed and with Merck as the anchor client and kicked off our second building where we look to have very significant institutional demand. We signed a key lease and Jim will talk about each of these items in our single tenant building development in south San Francisco, a key anchor tenant this quarter, and as you see from the press release we kicked off our first development in China, two buildings, 280,000 square feet and we hope to have more good things to say about China at our next call. This is all with our joint venture partner both in the land and as a tenant for part of the facility.

Moving to East River Science Park, we are working very intensively with 150,000 square foot anchor institutional tenant for 50% of the West Tower. That is preceding very well. We're working on a letter of intent with a U.S. headquartered European pharma firm and a number of other very positive discussions and activities. We do have ongoing joint venture activities, but we're holding any forward movement on those pending finalization of the 150,000 square foot anchor tenant deal which we hope to land. Jim will talk about the executed ground lease in Toronto and then likely we will close and kick off the development in Edinburgh, Scotland during the first quarter or two of 2008 and as I said we have likely one more entry into Europe through a novel joint venture structure.

External growth we were very active this quarter. Jim will detail the acquisition and disposition activity and then finally on the balance sheet, probably among the most important future positive attributes of ARE during this stormy capital market environment is a strong and flexible balance sheet and Dean will highlight I think our very adept ability to finalize our credit facility arrangements well before the market took a downturn in August. We have also post third quarter reporting we have brought back down the variable rate, debt exposure and again Dean will highlight that as well. So without further adieu let me turn it over to Jim for a review of the real estate operations.

Thanks, Joel. Just a couple of observations and comments before I get into the specific performance metrics. The core market, as I commented last quarter remain very strong and balanced. There have been a number of announcements made recently relative to large biotechnology, forced reductions as well as perspective M&A transactions. I just thought I'd comment very briefly on a couple of them that are in our core markets. Amgen, as we've alluded to in the past indicated that they will be downsizing in south San Francisco. Their research emphasis which may put up to 300,000 square feet on the sublease market. It is at this point a little bit unclear how restricted or encumbered that space will be. On a worse case basis this really moves the south San Francisco vacancy into the mid to high single-digits, which, by any measure remains a very healthy market environment. Metamune is being acquired by AstraZeneca, which from all indications that we can tell at this point will accelerate and expedite Metamune's growth plans in the I-270 corridor and we're actually seeing that come to fruition currently which is a great trend for that market.

Vacancy in all of our core markets remains at healthy single-digit levels which is phenomenal given the fact that we've made great progress on the leasing front with our rollovers the next 18 to 24 months very manageable with good upside potential. I'll comment in a moment about that. The acquisition market really has yet to exhibit in our specific niche the much anticipated slowdown or cap rate expansion. As we've indicated many times in the past, our interests and efforts really remain in the densest clusters in bi-coastal markets for quality assets and triple A locations, so we anticipate that any near-term impact from the credit crunch will be relatively muted. We're at the front-end of a number of non-core dispositions in several markets which is going to give us a better window into any fundamental changes on the value side, but there does appear to be a lot of capital in the market. Liquidity appears to be relatively abundant for quality commercial product.

Turning to leasing, Joel mentioned another very solid quarter with 445,000 square feet of successfully concluded leases. We're on pace to equal or surpass our 2006 performance level, 60% of the space was renewed or released with the remaining 40% previously unoccupied. This quarter the geographic distribution was roughly 50/50 between the East and the West Coasts with a very strong performance in Seattle which exceeded 30% of the total activity and then consistent with prior quarters this year, 2007, we continue to make very good progress in Maryland, now increasing occupancy to over 92%.

I think what's interesting to note is the diversity in balance in our geography, size and submarket location and the quarter's leasing performance. The average size of the leases that we did approached about 11,000 square feet. Nine of those leases were for space greater than 20,000 square feet, 12 leases fell within 5 to 15,000 square feet while 16 leases were between 2.5 and 5,000 square feet. And we think this is relevant because it really shows a great diversity of the demand in the markets as well as our ability to service the broad spectrum of this industry which is an absolute essential and key component in our best of class platform and again as Joel mentioned, our rent growth came in again within full year projection of 5 to 10% at 7.4% which is consistent with the year-to-date performance at 8%.

Going out on future lease rollovers 2007 about 350,000 square feet remaining. It's very equally distributed over our four largest markets and as we sit here today, 65% of the space is either committed or anticipated to be successfully resolved while the remaining 35% is yet unresolved and most of that unresolved space remains in small increments and primarily East Coast locations. We anticipate and expect to conclude the year as we initially projected with rental rate increases between 5 and 10% over 2007.

As we look to 2008, 740,000 square feet will be rolling over with the Bay area in Massachusetts having about 60% of that space. At this point in time about 60% of that entire rollover is either leased or in late stage of negotiations or we anticipate successfully resolving 15% from one specific asset will be going into redevelopment. Just very briefly, that particular asset is an aggregation of old industrial buildings that have been converted over time into cheap lab space utilized by many generations of early stage users in south San Francisco. Amgen was the most recent tenant. They acquired a south San Francisco-based company and had no future needs for those older dilapidated buildings and the project is on a very high profile corner of Forbes and East Grand Avenue and we originally purchased it to tie it in as the cornerstone of our larger East Grand Project. So we're in the middle of the entitlement process on that site and right now, again, that represents about 15% of the rollover in '08. So at this time we have just about 30% that is unresolved and consistent with this past year we look to see our gains on rollover between 5 and 10%.

Let me talk a little bit about Mission Bay. Joel mentioned we are at 90% plus lease or committed at 1700 Owens. We have initiated construction on 1500 Owens which is several parcels north of 1700. Our foundation and infrastructure is in process and we've had very good preliminary leasing interests from a variety of large institutional and commercial users, so we're very encouraged by that activity and we've got another four buildings encompassing about 900,000 square feet that are fully entitled. As many of you have probably noted that we formally listed the project with a broad emphasis on the science and technology sectors which really is consistent with our overall cluster development strategy which emphasizes intellectual capital. The Silicon Valley and the San Francisco Peninsula probably have the broadest and deepest technology base in the world. Since really 2000, San Francisco itself has become one of the most desirable locations for the technology labor base. There have been recent moves and expansions into the city by Yahoo, Google, Intuit , Microsoft, Sales Force.com, Wikipedia, amongst others and it makes it pretty clear that this knowledge base is resident in San Francisco and is a very good complementary base to the Mission Bay holdings that we have. So as I mentioned, we just initiated a marketing effort in this expanded regard and we've had a lot of very interesting early interest, none of the prospective tenants that I referenced above broadly for 1500 Owens are from the tech sector so this is an addition to that interest we've had in that new building we just kicked off.

Turning to the development side, Joel talked about East River. I briefly touched on Mission Bay. We're making great progress and we're going to continue to advance the additional entitlements for the balance of the project to ensure that if, accelerated deliverability to support tenant requirements is necessary, we can deliver. In south San Francisco we are in middle of development on three buildings totaling about 300,000 square feet. Subsequent to the end of the third quarter we concluded a significant prelease that Joel referenced in one of the buildings to a premier south city-based biotechnology company with a very robust preclinical and clinical pipeline. The lease is for half the building with short-term expansion rights exercisable over the balance of the building over the next 12 months. So good activity generally speaking of South City, notwithstanding the aforementioned Amgen situation.

Joel mentioned and we mentioned in the press release as well that we signed a ground lease in Toronto and we anticipate commencing construction later this quarter on a project that will be 750 plus thousand square feet and this is the final phase of a very high quality institutional and commercial project that's right dead center in the heart of Toronto's Medical Discovery district. It's substantially institutional market, but it does have a diverse early stage commercial component and we are in discussions with several very large use on a prelease basis as we sit here today. So on the development side bottom line is that we've really got some solid activity generally across the board and a substantial portion of the product that we have in development is scheduled to be delivered in 2009 and 2010. So in addition to the prospects that I referenced generally here that are in the market now, we really believe we'll be delivering into a relatively strong market several years out.

Let me turn to acquisitions and dispositions. We made significant inroads in the third quarter in affirming and strengthening our position as the dominant lab space landlord in San Diego in its best submarkets. We purchased eight properties totaling more than 500,000 square feet and the overall strategy here was really opportunistic and also offered us the opportunity to upgrade the overall quality and depth of the portfolio while simultaneously enhancing occupancy. The Class A buildings that we acquired are generally leased to single tenants for medium and long-terms and as I mentioned, very good locations. Post closing these transactions are our five largest tenants in San Diego are now Scripps, Syngenta, Amylin, Biogen Idec, and what was formerly Cardinal Health. Other notable tenants in San Diego portfolio include Merck, Smith and Nephew, Genzyme, LabCorp, and [Dak&Dickinson] as well as dozens of additional diverse biotech and biopharma companies that may be less recognizable names but also have bright prospects.

In addition to adding a number of these Class A lab buildings in superior locations, we simultaneously have been implementing strategies and tactics to optimize the overall quality of our franchise assets in the region which will be reflected over the next several quarters as we advance the potential disposition of several existing assets which will effectively reduce leasing exposure, capture some embedded gains and complete this overall portfolio enhancement effort. As we've looked at this thing, when we complete the repositioning process, our overall investment in the buildings that we added to the San Diego portfolio after accounting for gains from the disposed assets we'll approximate $190 million in a blended yield on the assets that we ultimately will hold will be north of 7% on a cash basis and 8% on a GAAP basis.

We also in the quarter sold certain land parcels under several buildings in Cambridge to MIT and leased them back on a long-term basis at a favorable return on cost. We realized a gain on sale of the aggregated parcels. This served to further develop our relationship with MIT in this critical Cambridge market environment and allowed us to access additional capital at a favorable long-term cost. To close things out of the disposition side, we are very well advanced on a set of noncore dispositions in a number of our submarkets that we anticipate will conclude over the balance of '07 and into the first quarter of '08. The market response has been favorable and we anticipate proceeds from this set of assets ranging between 125 and $150 million.

So before turning it over to Dean here just in conclusion, as is probably obvious from our press release, the third quarter was a very busy quarter with significant progress on virtually all planks of the platform, acquisitions, development, leasing, dispositions and capital matters. The net result being an increase in the size of our operating portfolio of more than 800,000 square feet, growth in the overall development pipeline of more than a million square feet, very strong continued leasing progress increasing our overall occupancy in the operating portfolio by 80 basis points and then continued strengthening of the stellar balance sheet through the selective dispositions I mentioned as well as the selective equity offering and with that I'll hand it over to Dean.

Thanks, Jim. Our results for the third quarter in the nine months ended September 30, 2007, reflect the strength of our unique road map for growth and our continued ability to execute and deliver consistent and predictable results period after period. The third quarter of 2007 represents our 41st consecutive quarter in growth and FFO per share diluted excluding D-42 charges our 41st consecutive quarter of positive same-property growth on a GAAP basis and steady progress on our 10th full calendar year as a publicly traded company with positive leasing activity. We reported third quarter FFO per share diluted of $1.45 which was up 10% over the third quarter of 2006. We have excluded gains on land sales during the quarter from FFO. We consider NAREITs white paper on FFO and noted that NAREIT recommends that companies disclose how they treat gains on land sales in their calculations of FFOs and some companies may choose to exclude these gains from FFO while other companies may choose to include these gains.

Let me take a moment to highlight important capital and balance sheet matters before I review our operations for the quarter. During the quarter we completed a $200 million secured loan. Overall we're very pleased with the efficiency of the pricing which is very similar to pricing on our credit facility. As Jim and Joel mentioned, we also completed the sale of several real estate assets which generated approximately 41 million in proceeds and we have another asset classified as held for sale as of 9/30. The proceeds from the loan and asset sales were used to fund the majority of the acquisition activity during the quarter. Our average monthly run rate on construction -- our quarterly run rate on construction-related activities for our active development projects was approximately $40 million for the quarter or approximately $160 million on an annualized basis. The total developable square footage under active development will grow over the coming quarters and our capital plan going forward will continue to include a variety of sources of capital. In September, we raised approximately $217 million pursuant to a very successful follow-on offering with the majority of proceeds to fund our development and construction-related activities. This amount includes proceeds from the exercise of the over allotment option.

As Joel had pointed out, I wanted to also mention our strategy to amend our facility with an overall increase in capacity, key and unique provisions and improved covenants was a great strategy and timely as it was completed well before the overall debt crisis. Through a recent amendment we increased the capacity to 1.9 billion with an accordion for an additional $500 million. We added key provisions and terms that were unique features of unsecured facilities in the marketplace. Our facility now includes borrowing capacity for nonincome producing assets like our land, our embedded development pipeline and our active ground up development projects. Our facility also provides borrowing capacity for unencumbered assets -- excuse me, encumbered assets and better covenants from a borrower's perspective. We also were able to negotiate longer-terms, four years and five years on a revolver and term loans respectively and we have a 12 month extension on the revolver and term facilities at our election. We believe our credit facilities provide important flexibility as we continue to focus on strategic value ad development opportunities.

As discussed on prior calls we will continue to selectively sell certain noncore assets over the coming quarters that may generate proceeds of approximately 150 to $200 million. This target range is slightly lower than the range provided in our second quarter earnings call due to the completion of certain asset sales during the quarter. We will also provide -- we will also continue with our discussions on project lending opportunities. Moving to debt matters, as of quarter-end we had an outstanding borrowings on our totaling and approximately $880 million under our 1.9 billion unsecured term and revolving facilities. Debt to total market GAAP was approximately 44% and our unhedged variable rate debt was approximately 21% of total debt as of 9/30.

As Joel had briefly mentioned in October we executed additional interest rate swap agreements totaling approximately $200 million in notional amount. These contracts increase our notional amount in effect to 750 million through early 2009 with certain contracts extending into 2013. On a pro forma basis as of September 30, these additional interest rates swap agreements lower our unhedged variable rate debt to less than 15% of total debt. Consistent with our ongoing policy to mitigate our risks to variable interest rates we will continue to evaluate opportunities to execute additional interest rate swap agreements. G&A expenses as a percent of total revenues was approximately 8% for the quarter and our projection for the next four to six quarters remains in the 8 to 9% range of total revenues.

Next let me highlight certain important stats reflecting our strong third quarter performance. Same-property results continue to be positive quarter-after-quarter for 41 consecutive quarters and we're 4.1% on a GAAP basis and 8.6% on a cash basis. With the increase in same-property results driven by increases in rental rates and a solid increase in same-property occupancy. Same-property occupancy was solid at approximately 94% as of quarter-end. Our policy has been to exclude 100% of properties under partial or full redevelopment from our same-property statistics. We believe this methodology is appropriate in order to prevent significant increases in same-property performance as a result of redevelopment. Our leases contain key provisions that contribute to our strong and consistent operating results quarter-after-quarter. As of quarter end approximately 89% of our leases were triple net leases and an additional 4% of our leases require our tenants to pay the majority of operating expenses. This important lease provision allows us to recover a significant portion of our operating expenses including potential increases in operating expenses. In addition, approximately 90% of our leases provide for the recapture of capital expenditures including and not limited to roof replacements and HVAC systems and approximately 94% of our leases contain annual rent steps that are fixed generally in the three plus ranged or based on CPI. Guidance for growth in same-property performance for 2007 and 2008 remains in the 3 to 4% range on a GAAP basis and we expect increases in same-property rental rates 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 has increased over the prior quarter by approximately 80 basis points to approximately 94.1%. During the quarter we delivered our first building at Mission Bay. This project as previously mentioned is currently about 90% leased or committed. However, actual occupancy as of quarter-end was approximately 70%. Certain spaces are currently under construction with target delivery to tenants in the next quarter or so. Occupancy in the San Francisco Bay area excluding this building would have been 94. -- excuse me, 97.4%, up from our second quarter occupancy of 96.7%. We continue to forecast an opportunity to grow internally through an increase in overall occupancy in the coming quarters. As mentioned on prior calls, certain assets contain spaces for future redevelopment and currently contain vacancy. These spaces have a negative impact on our occupancy statistics, operating margins and operating results but clearly provide for future growth through our value add redevelopment program. These assets will have an impact on operations until the completion of redevelopment. Margins continue to remain very solid at approximately 75% for the quarter and we're projecting margins to be in the 75 to 77% going forward. Straight line rent adjustments for the quarter were approximately 4.5 million and going forward we expect a 4 million straight line rent adjustment per quarter going forward. Other income was relatively consistent with the last couple of quarters. Going forward our projection for other income is in the 3 to $4 million range.

Capitalization for interest for the quarter was approximately $15 million, and reflects our ongoing efforts with our important value add development and redevelopment projects including our strategic effort to move along our preconstruction activities for our embedded future developable square footage. The increase in capitalize interest over the prior quarter is primarily due to a significant increase in construction activities related to our ground up development projects including East River Science Park and preconstruction activities related to projects in Cambridge. Going forward we expect capitalization of interest to gradually increase quarter-to-quarter as we continue our progress on our ground up and preconstruction development activities. Our redevelopment program is also an integral part of our unique road map for growth. This program generally involves the conversion of nonlab space to lab office space at very attractive yields. It's important to note that we do not place vacant leasable lab space into our current development program. Our current forecast reflects the delivery of over 370,000 square feet of redevelopment space over the next four to five quarters.

Next let me briefly comment on an accounting proposal on convertible debt. During the quarter the FASB took a project from the EITF focused on the accounting for convertible debt instrument that may be settled in cash upon conversion. The proposal under consideration by the FASB will increase our noncash interest expense related to our convertible debt if adopted as proposed. The FASB may make a final decision on the overall accounting for convertible debt instruments in the fourth quarter. With the new rules possibly in effect in the first quarter of 2008.

Moving to guidance briefly, we are planning this short guidance for 2008 in our fourth quarter and year-end earnings call in February of 2008. Due to the pending FSP on accounting for our convertible debt instruments and our ongoing evaluation of the timing and -- timing of potential important asset sales in 2008. However, it is important to highlight that our results for the quarter and the nine months in 2007 reflect the stability and consistency of our operations, our unique road map for growth continues to deliver solid operating results, same-property results have improved in 2007 over 2006 both in occupancy and in rental rates and our projection into 2008 for same-property results is in the 3 to 4% range. Leasing activity for the year has also been solid and we forecast leasing activity to be in the 5 to 10% range for 2008. Operating margins remain solid and overall occupancy has improved and is projected to continue to improve over the coming quarters. In 2008 our unique road map for growth is projected to deliver over 370,000 rentable square feet from our active value add redevelopment program and we also expect to deliver some space in 2008 from our properties undergoing ground up development. So we are comfortable with our ability to continue to grow in 2008 and look forward to significant developments beginning to come online in 2009 and 2010.

Our guidance for the year of 2007 is $5.61 which is net of the impact of a D-42 preferred stock redemption charge that we recognized in the first quarter. Our guidance for 2007 on a normalized basis to exclude the D-42 charge represent a very solid increase of approximately 11% over 2006. Our FFO per share guidance for the year remains at 5.61 as Joel had mentioned as we continue to evaluate the timing of potential asset sales. Lastly, our EPS guidance has been updated for 2007 to $2.50. With that I'll turn the call back to Joel.

Thank you very much and the operator, we'd like to open it up for Q&A, please.

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to Anthony Paolone with JPMorgan.

Great. Thank you. Joel, could you talk a little bit about your decision to start development in Toronto without any preleasing given you got a lot of other projects on your plate and how you go about just adding another when it sound like you do have some good activity there. Why not just wait?

Yes. That's a very good and important question and I'm going to ask Jim to comment in a moment, but sometimes timing is dictated by matters beyond our, perfect control and we want a competitive RFP that the MaRS center put out and so the exact timing of the groundbreaking is one that really is dictated by that process but nonetheless I'll ask Jim to comment since he's spent a good deal of time and effort on that matter and I think if you look at Toronto, though, it is a very important institutional market and that I think gives us substantial comfort.

Yes. Tony, Joel's exactly right. This is as I mentioned the last or the second and last phase of a large project that in total would encompass over a million and a half square feet and in a addition to the reason that Joel described the time frame to build this product and get it up and meet market demand is such that it also warranted moving ahead of time this direction. There are a number of requirements in the market right now that we are negotiating on. As I described and it's pretty important that we simultaneously move forward with development in order to capture them within the time frames required. Institutional transactions take longer to put together sometimes. There can be more bureaucracy involved in negotiating and so doing it simultaneously is pretty important, but I think generally speaking the first phase -- this phase is roughly doubling the size of the project. The first phase was completed in 2005 and is fully leased and has a combination of institutional users as well as a lot of smaller commercial users that are in that marketplace. So we feel pretty good about the relative level of demand as we see it today.

You may want to talk about rental growth.

Yes. And the Toronto office market may be in a sense not unlike Manhattan, although for different reasons. Just in the time since we have kind of been negotiating the ground leases really improved fairly dramatically. So we're seeing office leasing rates that kind of far surpassed what we had originally anticipated when we agreed to move forward with that project. So we feel pretty encouraged about that, just about the overall broad market health in Toronto right now.

To what do you think your capital investment in the project will be, your yield and when you think it will start to work its way into earnings?

I think it would probably be in the 2010 time frame that I described earlier and right now we're looking at costs between 250 and 300 bucks a square foot on the shell and if we anticipate yields to be in the same range that we're looking at other development projects in kind of key primary cluster markets.

Rental rates would be north of I think the 30 buck triple net range. So we're looking at double-digit yields and we've been approached by a number of project lenders as well and obviously there are opportunities if we can -- if we're fortunate enough, which we think we will be, to manage some significant preleasing to get some attractive nonrecourse project financing on that project.

And Jim, when you were talking about expiring square footage I think for '07 and '08, I think that was the time frame you were speaking to but just looking at the balance of this year, the 343,000 square feet that are expiring in the fourth quarter here, how much of that is addressed?

65%.

Okay. And then in terms --

Also remember, Tony, that there is a component of about 10% of that that's month-to-month as well. So that is a pretty large percentage that I think we feel pretty favorably addressed.

Okay. And then the projects in south San Francisco that you said you've got a half a building leased out, how many square feet is that?

The total project is 135,000 square feet or that building is 135,000 square feet.

Okay. Great. Thank you.

Thank you very much.

We'll go next to John Stewart with Credit Suisse.

Thank you. Jim, if I heard you correctly, it sounded like you're going to get a 7% cash yield eventually on the acquisitions you did in the third quarter. So I guess the question is what's the going in yield and what's the up side? How do you get there?

I guess the very simply we've got some embedded gains in what I would call noncore assets in San Diego that when we take those and credit them back against the allocated price for the new San Diego assets brings us down to kind of a total investment in this restructured piece of the portfolio that drives that 7%. If you were to just look at it -- if you were not to consider those embedded gains, it would put you in the low 6s on a cash basis.

Going in?

Yes.

Okay. And then, Joel, I imagine you don't want to count your chickens before they hatch, but can you give us an indication in terms of where the rents are coming in at the East River Science Park?

Yes. I think as I said, we presented to our board about a year ago on a pro forma basis kind of the midrange of what we felt Cambridge Lab rents were and at that time they were in the mid-40s. So we presented about $45 triple net rents as kind of a benchmark. I think today they hit about $65 triple net.

And that's what you're looking at in New York?

At the moment, correct.

I guess, Joel, can you maybe touch on MIT's decision to exercise the option to acquire the land in Cambridge during the quarter?

Yes. When we entered into the joint venture with MIT at Tech Square, part of the transaction was an option on certain additional parcels and we entered into that transaction simultaneously and we fully expected them to exercise that option within I guess a 12 month period. We are discussing with MIT another transaction in the broad area having nothing to do with our land but where they may take the land portion, we may take building portion on a potential redevelopment. So as I said, when we were fortunate enough to have been picked out of three or four final bidders who were all willing to pay I think the top price and I said our dollars weren't any greener than anybody else, I think the decision by MIT both because of the relationships and the platform have led to this next incremental relationship and I think you'll see he more over time.

Okay. That's helpful. Thank you and then lastly, Jim, can you touch on Mission Bay I guess specifically. Are you seeing any impact from the Amgen sublease space that you talked about and likewise to the extent that you can quantify any demand you're seeing from nonlife science users at Mission Bay?

I would say to answer your first question I haven't seen any impact from the Amgen decision. As I mentioned, I'm not sure that it's entirely clear what they have to offer yet and how competitive that will be for somebody that truly wants to take a couple of buildings and kind of control their destiny and have a head quarter location, so it remains to be seen. We haven't seen that impact Mission Bay, much less south San Francisco in a significant way yet and then I guess your other question was what nonlife science user activity we've seen and again, we just started this a couple weeks ago and we have seen large transactions. There are a number of large transactions that are looking for homes kind of all along the Silicon Valley up into San Francisco and they're now in our radar screen. I wouldn't want to get more specific than that right now, John, but just suffice it to say we expected there to be a lot of interest and demand and it looks like that is the case.

And the names are blue chip names.

Thanks a lot.

We'll go to Steve Sakwa with Merrill Lynch.

Good afternoon.

Hi, Steve.

Hi. Couple questions. I guess just on the San Diego I just want to be clear. Was that portfolio all lab science-based currently or is that largely office that you may convert into lab office down the road?

It's virtually all office lab space.

Okay. Secondly, Joel, I was just looking at the development page and I was just wondering if you could comment on the cost for the China project. I understand construction costs are lower but at $45 a foot I just wasn't quite sure if the product's different. Why is that number so low relative to some of the other markets?

Yes. That's a really good question. We're building two buildings that are more or less kind of tech flex buildings. So in the states that number might be, you know, 3X that number but because of what you can do in China the numbers are just a lot cheaper, costs are a lot cheaper, et cetera. With respect to the tenant that we have who is our joint venture partner who will be taking part of the premises there will be additional infrastructure built in for their pharmaceutical-type operation so, that will add to cost but there will be a return on that but essentially that is the shell ready cost in China and we would expect that to be true of another development that we're looking at in a very significant way. That's just that market.

Okay. So for a piece of it it will go higher to the extent that there's actual build-out. You'll get an extra return on that?

That is correct.

Okay. And maybe, Dean, I understand the concept of capitalized interest and want to make sure we're looking at our model going forward. If you look at your balance sheet you've got close to $700 million that you label properties undergoing development and land held for development. Are there other things on the balance sheet that maybe aren't in that line item that are part of capitalized interest that would get us to 15 million per quarter and sounds like that number is going to be going higher over the next couple of quarters.

Good question, Steve. Actually there is. The line item on our balance sheet of approximately 700 million titled, "properties undergoing development and land held for development" really represents our cost basis related to our active development projects as well as our basis and our land held for future development or the embedded pipeline and another large piece of the capitalized interest basis resides in rental properties net on our balance sheet. Net relates to our redevelopment projects. So the active redevelopment square footage on Page 16 of our press release, almost 800,000 square feet and the reason for that has more to do with the administrative burden of transferring the portion of redevelopment basis that's undergoing redevelopment from period-to-period as we move assets into redevelopment, complete spaces and push it back into operations. So anyway the short answer to your question is the basis sits in those two accounts and that is broken out from time-to-time in our supplemental or Qs or Ks.

Yes. And I guess, Steve, if you look at Page 16 in the supplemental, an example of one that Dean just alluded to that's a pretty big one that I think you guys may have toured is building 200 at Tech Square which is sits in the redevelopment pipeline because it is obviously an existing building but gutted and then redeveloped as office lab, so that's almost like a development but is a redevelopment.

Is there a way to get a figure, I guess, a dollar figure that's associated with that so we could kind of add those two buckets together or is there a way to think about a blended cost per foot that we could apply to that 800,000 square feet?

Not other than probably the simple math, Steve, of doing reversing up into the basis from the capped interest number on a quarterly basis and some applied or implied capitalization rate.

Okay. Thanks.

Go next to Michael Bilerman with Citigroup.

Sticking with cap inti guess you get back to about a 1.1 billion with total cost. My understanding is that 700 that sits on the balance sheet you're not capping interest on all of your land. You're capping interest on the land that you deem on Page 18 to be in preconstruction phase. Is that right?

That's correct.

That is very true, Michael. In fact, if you look at Page 18 we do highlight that 5. -- almost 5.4 million square feet of the 7.4 million embedded pipeline is undergoing preconstruction activities that qualify for contamination.

So not all that 700. So maybe it's 500 of the 700? That still leaves 600 million which seems too high of a number for your redevelopment pool and so maybe you can just put it into those buckets in terms of how much is actually in the active redevelopment mine, how much is in the active development pipeline, how much you have in land and then I guess there's a fourth bucket on maybe future redevelopment that you're holding? I think that's Life Science Square is up in the operating assets, but it's not actually in redevelopment?

Yes, you're right, Michael. I think our construction activities have become more complicated as a result of expanding our development activities, especially as you highlight in Cambridge where we do have certain assets that do cash flow a little bit and we're moving forward with entitlements and our preconstruction activities. So we do have capitalization ongoing. It is probably a little too complicated to go through the buckets on the call, but let us think about a way to make that a little clearer in our supplemental package going forward and we'll see what we can do with our disclosures.

Yes. It obviously is a very big number and it's a big impact and it's a unique piece of your road map for growth, so I think understanding it and getting our arms around it is an important thing. Jim, on the acquisition of Carr's former Life Science assets in San Diego, I think as you mentioned 340 million you'd net down to 190 by selling 150 million of other San Diego assets. Is that the way to understand it?

No, no. I just -- those were just the San Diego assets. There were more assets acquired in the quarter that go into 347 number that are not San Diego assets.

Okay. That's a broad number. And so the 190 you referenced was what?

190 was just the San Diego -- was San Diego assets that we acquired during the third quarter. Whether they were through the Carr America transaction or otherwise.

Okay. And then thinking about the 150 to 200 of dispositions, the majority of that lies in San Diego or is that in other markets?

No. It was 100 a quarter to 150 million it's in several different markets, some in San Diego and mostly on the West Coast, though, Michael.

And how far in the process are you in terms of marketing those assets?

In those, that bucket of assets, ta 125 to 150, we're pretty far down the road that's why we're cautiously optimistic that fourth quarter and then first quarter of '08 we'll be able to pull those all together.

And the 125 to 150 rolls up to the 150 to 200 that Dean was referencing in terms of all noncore asset sales?

Yes. Correct. Yes.

Okay. And I assume the balance happens a little bit later into next year?

Or really serendipitously because they're a Hodge Podge of smaller assets, one of which was completed this quarter but several others we're looking at hopefully completing over the coming quarters.

You talked about a 100,000 square feet in San Francisco which I guess was light lab that Amgen was the most recent tenant. Does that 100,000 on your embedded future redevelopment on Page 18, is that the same 100,000 you're going to move or is it in addition to the 100,000 you already have listed there? You talked about 15% of next year's roll which was --

No, No. You're right. I'd have to go back and see the specific. It would be on the development.

Yes. My guess is it would be in middle column total embedded development square footage, but not undergoing preconstruction.

You're viewing as development rather than redevelopment space?

Right. Because the buildings are going to be razed

Right. It's going to be scraped and completely new structures..

Okay. On the ground leases to MIT what's the rate on the ground lease?

6%.

Okay. And when you talk about New York, $65 net rent, is that net of your ground lease payment to you or what would that net down to if you were to include your ground lease?

Those would be triple net not including there's kind of small ground lease payments that kick in. They're very small and also obviously not including only X which at this point we can only use as a benchmark of other Class A buildings in New York.

So what are you thinking about with such a dramatic increase in net rent what are you thinking about overall return on the project?

Well, if you look at our current costs which we seem to be on target on budget on time of 500 bucks which are 450 and hard 50 and soft and that includes a number of build-outs on a variety of floors but excluding any heavy build-outs by specific tenants, I think those numbers look to be pretty favorable.

Okay. On the 1700 Owens that delivered in the quarter you said it was 70% occupied. When did the building become operational in terms of rent paying?

Those were leases that were actually completed and there were other build-outs ongoing where the leases were obviously either signed or were committed in general up to 90%, but your question is when did the 70% come online?

Well, when if the building delivered, I assume you've already started collecting some rent, some income off the building and you've stopped capitalization on that space. I assume you're still capitalizing on the 30% that remains.

A portion of the 30% because some of it is -- some of it has been built out. Some of it is undergoing construction. So it's a little shy of 30%, Michael.

Right.

And timing on our delivery.

Timing on the delivery of the 70%, I'd have to -- I don't have --

Yes. I don't know that we know the specific date whether it was midquarter or not.

Okay. I was just trying to understand what the impact is.

Yes. We can check.

Okay. Thank you.

Thanks, Michael.

We'll take our final question from Philip Martin with Cantor Fitzgerald.

Good afternoon, everybody.

Hi there.

Joel, you had mentioned India in a limited way. Can you just define what you mean by limited way.

Well, we have for quite a while we have not made any formal announcement but there have been dozens of articles circulated all over India and the world about our being selected to do a large project in Bangalore which is kind of adjacent to the very famous outsource location called Electronic City and those discussions and negotiations with the government are proceeding, but I think one way or another we will have a presence on the ground in India in 2008 and look to begin some effort at development in that country. I won't want to characterize the extent or effort, but it will be some limited effort that we will have a limited presence there. We believe it's a huge market and there is a very strong pent up demand for space in that market, quality space, which is not now being met and so clearly that's something we want to address and we actual I had started this effort in the early part of 2006.

That's primarily tenant driven or is it---

Well, I think it's partly tenant driven and it's partly driven by the electronics and outsource industry that is really thriving and being really outgrowing the capability that's kind of currently being delivered there.

Okay. Okay. If you look at --

It won't be a big effort in terms of our either financial or personnel commitment, but it is one that we want to start a on the ground physical presence this year, this coming year.

Okay. Okay. When you look at the international presence for Alexandria, 12 months out, what might your development pipeline look like there in terms of size, the incremental growth over the next 12 months?

We think, I mean set the capital markets and the macro markets aside for the moment because we'll have to obviously move cautiously and prudently based on overall market conditions and capital market conditions, but I would say it wouldn't be inconceivable of having a pipeline in Europe over a period of time that would be somewhere between 1.5 and 2.5 million square feet and then in Asia something in the range of potentially anywhere from 2 to 10 million square feet.

Okay. And then --

That doesn't mean something we're going to just build and deliver instantly, but that would be -- instantaneously, but that would be a forward multiyear pipeline.

That might be more visible by the end of next year, early '09.

I would think that would be the case.

Okay. Secondly, the rents in China, can you give us some indication where those are?

We're undertaking a pretty in depth study of some of the centers, major population centers have some statistical information and relevance, but there is not a big leasing market yet in China. So that information isn't like here in the U.S. or in the western world, but clearly what we've said and hopefully maybe I'll have more to report it next quarter, so remind me and we may be able to share with you the results of our study that we are undertaking for south China, but I think it's fair to say that we believe that our risk adjusted returns overseas but particularly in China ought to be many hundred basis point above what we could achieve here in our domestic market.

And that's even on an expanded pipeline if your pipeline expands? You think that could be sustained?

Well, we would certainly hope it would be, but I mean again time will tell. We would certainly look at, I think mid-double-digit returns would be our hurdle at the moment. How that would evolve over time I can't tell you. I would hope it would be more positive because land is pretty hard to get, especially, you know, there is very tight constraints on land accumulation and speculation. So you really have to go in, especially in China, where you really have a tenant or -- something that the Chinese want beyond -- they don't really need capital and they don't really need development expertise. They really need tenants.

Yes, okay. Last question, on the development and redevelopment pipeline, preleasing, is there a range that you can give us as to -- and I'm looking at the 1470 development pipeline, call it 1.5 million square feet and the 795,000 on the redevelopment.

Yes.

Preleasing range?

Well, in the development pipeline I think we said on the first building in Mission Bay we just kicked off we obviously don't have any preleasing, but I think as I characterized and Jim characterized we've got extremely strong.

Activity.

Discussions going on at the institutional and commercial level, but it's actually much stronger than we would have thought previously. In the 162,000 square feet, that's two buildings in south San Francisco on the water. We have no preleasing. It's likely to be a mini Campus. It's right next to Genentech, so that would be an obvious target, but no preleasing there. The third building, 135,000 square feet, I think both Jim and I addressed we signed a 65,000 square foot anchor tenant to that building with an option on the balance of the building. So we hope that will be fully committed. In China probably about 25% is spoken for and we hope more of that and then in New York we hope to have in the-- over the coming couple of months a tenant secured for the West Tower which would be 50% of about 300,000 square foot West Tower.

That's the 150.

Right. On the redevelopment I'm not sure I want to go through each and every one of those.

No.

I really think they're case specific and so we could do that separately. Our big target is the obviously building 200 at Tech Square is our big effort. We signed a major tenant there so far for several floors approaching 50,000 square feet, so that's about 1/3 and we're working on the balance and have I think extremely bright prospects to have that done over the coming few months.

Okay. Now that's fair enough.

And run rates that would exceed our projections.

Okay. No. That's fair enough. Okay. I appreciate the time.

Okay. Good question.

At this time I'd like to turn the conference back over to Joel Marcus for any closing or additional remarks.

Thank you. Sorry we ran a little long, but we appreciate your tuning in and we'll look forward to highlighting the fourth quarter and year-end in early to mid-february. Thanks again.

Once again that does conclude today's conference call. Appreciate your participation. You may now disconnect.