Alexandria Real Estate Equities Inc (ARE) 2007 Q4 法說會逐字稿

Good day and welcome, everyone, to the Alexandria Real Estate Equities fourth-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 Rhonda Chiger. Please go ahead, ma'am.

Good morning and thank you for joining us today. This conference call contains forward-looking statements, including earnings guidance within the meaning of the federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

And now I would like to turn the call over to Joel Marcus. Please go ahead.

Thanks, Rhonda, and welcome, everybody. With me today are Jim Richardson, Dean Shigenaga, and Pete Nelson. I'm going to skip my macro comments on the broad Life Science industry and try to get right into the meat of the presentation.

Starting with earnings guidance and dividend policy, we are pleased with a truly stellar operating performance for the Company in 2007 given obviously the macroeconomic environment, the residential real estate subprime crisis, the broad debt crisis, creeping inflation, the economic slowdown and what now appears to be a recessionary bear stockmarket. Our total return performance of over 711% from the IPO through the 12/31/07 is among the best in the REIT universe, and we're very, very honored and pleased about that. And we are also pleased about our total positive return performance in 2007 of over 4% when REITs were down approximately 20%.

Similar to 1998 when we were one of the few companies to post a positive return, we also -- Dean will talk about our unbroken streak of positive same-store results quarterly and our positive GAAP rental rate increases on an annual basis. We are enormously proud of these accomplishments, and I think we believe and have continued to believe that ARE is a safe payment for all investor styles with our really unique business model, multiple platforms for growth, continuing high operating margins, excellent collectibility of rents, no bad debts, strong tenant base with substantial credit, a well diversified tenant base within the broad Life Science sector, and I think Triple-A quality buildings and Triple-A quality locations in the best diversified coastal submarkets. And now with increasingly international exposure, our FFO increased 9% on the fourth quarter and overall about 10% last year.

I wanted to get to initial guidance right away. I would consider this initial guidance in light of the deteriorating macro situation, as I said, the creeping inflation which is worse than in the bear market, our initial guidance is cautious, but we feel very comfortable for 2008 guiding at $6.10 per share diluted, which is approximately 7% growth over 2007 and will combine with our dividend we feel is a good benchmark.

As you can see from the press release and the supplemental, we have sold numerous assets since the beginning of '07 in excess of $136 million and over $500,000 rentables were a feat at a nice net gain and obviously to be reinvested in our very accretive redevelopment development pipeline, which should yield I think -- begin yielding strong cash flows in 2009, 2010 and 2011.

As such, our initial guidance for 2008 also contemplates a continuing strength of opportunistic and also significant sales of assets. Our strategic objective is to be aggressive in future sales of assets, shrinking the asset base a bit for gains, but recycling that precious capital into our future value-added programs, as well as obviously to finance our international expansion. I think we are very fortunate that we are one of the very few REITs that can almost double our asset base from our crown jewel development pipeline we have in hand today. So we look for significant future earnings growth in the 2009, 2010, and 2011 years, driven by in particular Mission Bay, which both myself and Jim will talk about -- Cambridge, East River and International.

On the dividend policy, as you see from the press release, the board increased the dividend about 5.4% this past year. We would consider the board to consider similar increases in '08 given one of the lowest payout ratios in the entire REIT universe.

On the operating statistics, it was a very successful year by all measures both operationally and financially, again strong, consistent, reliable and predictable. Overall occupancy has maintained itself in a very stable fashion. We will talk a little bit more about that. There has been a smalls slide quarter to quarter, but that is due primarily to a significant acquisition because of development land where we had to buy an office building that is about 25% vacant. And remember when you see the occupancy statistics, they are not rent weighted.

We had a strong leasing quarter. Jim is going to detail that at 12.4%, the full year at 9.8%, and a $1.5 million lease, which is again very, very good. Dean will detail same-store again strong at 3.5 and 3.7 for the year. We delivered timely, on-time, on budget a little over 250,000 square feet this year out of the redevelopment pipeline with our usual strong yields. We delivered our flagship building at Mission Bay on-time and on budget with strong yields on cost and the first Silver LEED certified Core and Shell lab and office building to Genentech in California. We have continued to expand our crown jewel development pipeline by over 2 million square feet this year and initiated four new projects.

I want to talk a little bit about Mission Bay, and Jim is going to talk as well. We initiated the second building, and we have a 50,000 square foot anchor tenant. I think because of very strong demand, it is likely we will kick off potentially two more buildings with anchor tenants this year. And again Jim will highlight that in a little bit more detail.

In South San Francisco we're making good progress on the construction side of the two buildings we're building on the water next to Genentech, 162,000 square feet, and in discussions with our possible first tenant. The 135,000 square foot building in the heart of the South San Francisco corridor where we signed an anchor tenant for 65,000 square feet. They have the right to take the balance of the building during this year, and we are hoping that is the case.

In South China we kicked off two buildings under construction near Macau. Our anchor joint venture tenant for about 50,000 square feet. The balance will be delivered in kind of a text flex fashion, Core and Shell with we're working on our leasing team, and we hope that will be producing income starting in '09. Our tenant fit out -- well, the Core and Shell is moving forward very quickly, and we will start our tenant fit out pretty soon.

We are likely to start another Mission Bay like project in China this year with our first two buildings coming out of the ground potentially by year-end at another Triple-A location.

In Seattle we kicked off our first building. Again, Jim will talk about this in the Lake Union area. We think we have the best available product in the market when it comes online.

A bit about East River. We hope to begin delivery of space right around Valentine's Day of 20010 and thereafter. The second building will be about six to nine months behind. We have kicked off this unique and pioneering effort in New York City this past year. We are hiring for completion of our internal leasing team is underway, and we hope to finalize the contract with our external leasing team by the end of March. The large institutional prospective tenant for about 150,000 square feet is at 400,000 square feet. West Tower has advised us that we will know more at the end of February, so we will see what happens in our next quarterly call. But we are working on preliminary stages of numerous sized requirements for the East Tower office and office/lab for about -- well, the total tower being 300,000 square feet, and we have I think reasonably good preliminary interest. No leases to announce at this point.

Again, our formal marketing and leasing launch will be in the second quarter, and we are continuing our joint venture discussions with the minority partner, which we are likely to conclude this year.

Status of other international development matters, Edinburgh, we are in the final stages of due diligence for the purchase of a number of lots. We will probably start our first building there sometime probably in the first quarter of '09. In Bangalore we're working through preliminary due diligence, contract negotiations and site work for up to 8 million square feet and potentially could kick off a small early part of that development later in the year.

Continental Europe, as I reported last time, we are working through the final stages of due diligence and negotiation regarding a modest investment in a joint venture and a key cluster location on the continent, a city center location. Jim will highlight acquisitions and dispositions, but we anticipate being very active on the asset sales side and not really on the acquistion side. And just again to note, the one significant acquisition in the Cambridge market was made in order to complete our land aggregation in East Cambridge as opposed to buying a stabilized income producing asset.

And finally, moving on -- well, two items, the balance sheet and the capital plan, which Dean will detail, but we ended the quarter and the year with a continued strong and flexible balance sheet. We are well advanced in resolving the debt maturities in '08 and '09 as Dean will highlight.

And then finally, we continue to build value and future cash flow. The key acquisition at Cambridge was necessitated by the need for a critical development parcel which completes our significant East Cambridge acquisition. As I said, this was not an acquisition for existing lab product. The building we acquired was 74% occupied and all-office.

Significant new short-term developments at Mission Bay, again Jim will highlight any international acquisitions and progress, which will brain our potential international development pipeline to something north of 12 million square feet. But we are obviously very mindful in our capital plan to be very disciplined about how we commit capital over the coming two years, assuming the capital markets will be closed.

And I think finally we're well-positioned in this downturn, and we feel good about our position at year-end on our go-forward game plan for 2008.

I would like to turn comments over to Dean Shigenaga.

Thanks, Joel. Again, our results for the fourth quarter and year ended December 31, 2007 reflect the strength of our unique roadmap for growth and our continued ability to execute and deliver consistent and predictable results period after period.

The fourth quarter of 2007 represents our 42nd consecutive quarter and growth in FFO per share diluted, excluding D-42 charges, our 42nd consecutive quarter of positive same property growth on a GAAP basis, and our 10th full calendar year with positive leasing activity.

As Joel had highlighted, our fourth-quarter FFO per share diluted results were $1.46, up 9% over the fourth quarter of '06.

Let me quickly cover a few important item starting with our guidance for 2008, then our balance sheet and our 2008 capital plan, and then I will cover our solid fundamental operating results.

First, with our guidance, our guidance for 2008 was based on various assumptions and is reflective of the ongoing strength of our core operations balanced by our cautious tone on the overall microenvironment. Our cautious view of the volatility in interest rates, including LIBOR and the forward LIBOR curve and the impact of asset sales since January 1 of 2007 through this month.

As I will highlight shortly, our unique roadmap for growth continues to generate consistent and predictable operating results, which is a key component to our guidance for 2008. From our solid leasing activity year after year to positive same property performance quarter after quarter to our solid quadruple net lease structure that provides for the recovery of the majority of our OpEx and major CapEx to our unique ability to underwrite the Life Science industry and client tenants, these key attributes have proven to be an important component to our strong and consistent operating performance and will provide for a solid base for our growth into '08, '09 and 2010.

We have also witnessed a unique interest rate environment recently with a significant amount of volatility with movement both up and down in treasuries and LIBOR in 2007 and more significant volatility in the short period to date in 2008.

As result, we remain cautious about the interest rate environment over the next 12 to 24 months.

In addition, our asset sales in 2007, sales to date in 2008 and future opportunistic asset sales will have a dilutive impact on FFO per share. Since January 1 of 2007, we have completed the sale of primarily noncore income producing assets aggregating over 500,000 square feet and a few land parcels with an aggregate sale price of approximately $136 million. The net proceeds from these sales were used to reduce the outstanding borrowings under our revolving credit facility.

Again, the majority of these assets were noncore assets, generally with solid yields due to our low-cost basis. However, due to the declining borrowing costs on our credit facility, these sales will have a dilutive impact on FFO in 2008. More importantly, the net proceeds from these sales will be reinvested into our value-added redevelopment and development programs and will yield much higher returns.

Our initial guidance assumes minimal acquisitions and a continuing program to opportunistically sale noncore assets. G&A is projected in 2008 to be in the approximate 7% to 8% range of total revenues. Our guidance is based on various assumptions, including the key points I just summarized and is $6.10 for FFO per share diluted and $3.27 for earnings per share diluted. Although we are not providing guidance at this time for 2009, 2010 or 2011, we feel good about the overall growth going forward given our redevelopment and development programs and solid and consistent quarter to quarter same property performance and positive year-to-year leasing activity.

Moving next to our balance sheet, as of year-end, we had approximately $1.1 billion outstanding under our $1.9 billion unsecured term and revolving facilities. Our debt to total market cap was approximately 45.1%, and our unhedged variable-rate debt was approximately 23% of total debt.

Consistent with our ongoing policy to mitigate our risk to variable interest rates, we will continue to evaluate opportunities to execute additional interest rate swap agreements to extend contracts that are ending in 2009 and thereafter.

Moving next to our capital plan, we have been and continue to be good and disciplined stewards of our precious capital. Our capital plan going forward will continue to include a variety of sources of capital, particularly including opportunistic sales of noncore assets.

As noted in prior calls, our $1.9 billion unsecured credit facility contains unique features that provide borrowing capacity for nonincome producing assets like our land, our embedded development pipeline and our active ground up development projects. We believe our credit facilities provide important capital for our business as we continue to focus on strategic value-added developments.

A significant capital need is our East River Science Park project development in New York City. As we noted in prior calls and as Joel just highlighted, our goal is to bring in a minority partner. We will also be seeking project financing for this project.

In December of 2007, we completed a nonrecourse preconstruction loan for a development project in the Longwood Medical submarket of Boston. We really believe this is a positive sign in this challenging capital environment.

We continue to work with various lenders on our debt maturities in 2008 and 2009. We have four loans maturing in the current year, the largest maturity of $76 million is due in October of 2007, and we're close on a term sheet for this refinancing.

The second largest loan totaling approximately $34 million was paid off in January and a third loan approximately $32 million is at the very early stage of refinancing with the life company as our target lender.

We're also focused on our 2009 debt maturities and anticipate certain refinancing opportunities in late 2008 and early 2009 ahead of contractual maturities. Combining the loan maturities in 2008 and 2009, plus two other key loans under discussion with life companies, we have an estimated total opportunity to generate proceeds of up to $200 million in excess of current loan balances.

Our run-rate for construction-related redevelopment and development items was approximately $90 million for the fourth quarter. Again, our capital plan going forward will continue to include a variety of sources for capital, including opportunistic sales of noncore assets, joint venture opportunities, project financing and secured debt from life companies.

Moving next to certain important stats reflecting our strong fourth-quarter performance, same property results continue to be positive quarter after quarter for 42 consecutive quarters, and we are 3.5% on a GAAP basis and 9.7% on a cash basis with increases in same property results driven by both increases in rental rates and occupancy.

A couple of items driving our cash same property performance for the quarter included free rent in 2006 related to a couple of leases we acquired from MIT in the Tech Square transaction and a few larger rent steps in 2007 and a few leases. Same property occupancy was solid at approximately 95.8% at year-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 and in order to prevent significant increases in same property performance as a result of redevelopment activities.

Our leases contain key provisions that contribute to our strong and consistent operating results quarter after quarter. As of quarter-end, approximately 88% of our leases were triple net leases, and an additional 9% of our leases require our tenants to pay the majority of operating expenses.

Guidance for growth in same property performance for 2008 remains in the 3% to 4% range on a GAAP basis. We continue to expect increases in same property rental rates to be the primary driver of same property performance, while we also expect same property growth through an increase in occupancy.

Next let me briefly cover a few key operating stats. Occupancy for our operating asset base was solid at 93.8% as of year-end, and our year-end occupancy was slightly impacted by approximately 58,000 square feet of vacant office space related to a property we acquired in Cambridge in the fourth quarter that had both an operating and future development component.

Occupancy as of year-end without this office vacancy would have been about 94.3%, really reflecting an increase in occupancy in both Eastern Mass and our total operating asset base as compared to both the third quarter of '07 and the fourth quarter of '06. We continue to forecast an opportunity to grow internally through an increase in overall occupancy through 2008.

As mentioned in prior calls, certain assets, including a significant portion of our fourth-quarter acquisitions, consisted of office vacancy and embedded developable square feet that contains space for future redevelopment and currently, as I mentioned, contains vacancies. These spaces have a negative impact on our overall occupancy stats, our operating margins and operating results, but clearly provide for future growth through our value-add redevelopment program. These assets will also have an impact on operations until we complete our redevelopment.

With that said, margins continue to remain very solid at approximately 75% for 2007. Going forward on a prospective basis, we're projecting margins to be in the 74 to 77% range.

Straight line rent adjustments for the quarter were approximately $4.6 million. Going forward, a good run-rate is about $4 million per quarter. Capitalization of interest for the quarter was approximately $16.6 million and really reflects our ongoing efforts with our important value-add development and redevelopment projects, including our strategic effort to move along preconstruction activities for our indebted future developable square footage. The increase in capitalized interest over the prior quarter is primarily due to a significant increase in construction activities related to our ground up development projects, including the East River Science Park and preconstruction activities related to projects in Cambridge.

With that, I will turn the call over to Jim.

Thanks, Dean. I will start with some brief comments on the overall health of our markets. The conditions in our core markets continue to be generally strong and are trending positively. Vacancy rates are low and continue to move incrementally downward as new supply remains very modest. Threats to supply shock appear to be very nominal as well. Absent obviously a major pharma restructuring or a merger, new development opportunities are really limited in these core locations.

Tenant demand is very diverse and fairly robust. Much of '07 and the current activity thus far is in the 5 to 30,000 square foot range. Each of the markets do have larger requirements in the 100,000 square foot plus range, and with the limited opportunities in the Class A sector, we expect a number of these transactions to land in 2008.

Rents are also expected to continually and generally rise on an incremental basis and are either stable or increasing in every one of our core submarkets.

User activity has also continued to increase in the academic, institutional and governmental realms of our client base. And there is a continued migration of technology companies to the brain trust cluster locations. A recent substantial commitment to the Southlake union area by both Amazon and Microsoft are great examples of this phenomenon.

Values remain high with very few land opportunities in these markets, in these core markets, subtracting a substantial interest in pricing power.

And I guess finally, kind of a broader comment, the market conditions in the Class A or high-end text space sectors in our core markets have really seemed to maintain their relative strength, although transaction velocity appears to have slowed on both the leasing and sales side.

So turning to leasing performance, in the fourth quarter, this as highlighted by both Joel and Dean, represented a continuation of our very consistent solid activity with 432,000 square feet of new leases at 12%, 12.4% mark-to-market rental rate increases consistent with our impressive performance on a quarter by quarter and year to year basis.

Consistent with my previous remarks, the diversity of users in the intermediate size in these markets in our premier locations and the diversity of the offerings provides the opportunity for this consistent performance. The transaction size ranged between 10 and 20,000 square feet. We had 10 transactions in the quarter, and in the smaller segment, 4 to 10,000 square feet, we had another 10 transactions, again exhibiting the diversity of the activity that we have been experiencing.

It was also reasonably well distributed across the country with about 57% of the transactions occurring on the East Coast and the remainder on the West Coast, as well as in our core regions, Massachusetts, Maryland and the San Francisco Bay area comprised about 82% of the transactions in the fourth quarter.

There is just a quick footnote. The average lease term for the 200,000 square feet of new and renewal leases was lower than our typical rate at 2.8 years, which was primarily the result of a large short-term renewal for a user that is in the process of programming its longer-term requirements. Overall for the quarter the average lease term was nearly six years.

So in all, the fourth quarter closed out another very strong year of leasing activity and achievements characterized by nearly 1.6 million square feet of total leasing activity; mark-to-market increases at the top end of our projected range of 10%; very balanced activity with about a 55/45 ratio between leases on new space versus redevelopment and development product; a 60/40 ratio between East and West Coast leasing; and very good distribution among all the regions with Maryland performing particularly well with nearly 30% of the activity. And the result was occupancy on a year-over-year basis increasing by 70 basis points with strong gains in San Diego, the Bay Area, the Southeast region and Seattle. We had a decrease in occupancy in Maryland year-over-year, which was due to the addition of a single user building within our Shady Grove Life Science Center complex. But we have had good and varied activity on that building and expect to have it committed in '08. And both Joel and Dean have commented about the newest acquisition in Massachusetts and the impact of the existing vacancy on the decrease in occupancy there.

For the site significant volatility in the Capital Markets in '07, our performance quarter to quarter continue to exhibit the extraordinarily unique operating model and value proposition. As we enter into '08, we anticipate and are confident that the consistency we have demonstrated in the past three years in particular will continue.

As we talk about '08, we've got 846,000 square feet that is rolling over, currently scheduled to roll over with the Bay Area and Massachusetts each representing about a third of that space. As we project out and look today, about 60% of that inventory is leased or in late stage negotiations. And of the remainder, about 15% of that total is from one asset in South San Francisco that will ultimately go into redevelopment, leaving about 30% at this stage unresolved. Again, we project gains on rollover ranging between 5 and 10% for calendar year '08.

Let me turn to Mission Bay. As we talked last quarter, 1700 Owens has been extraordinarily successful. We are now at approximately 96% leased and/or committed. We have kicked off development on 1500 Owens, and as Joel mentioned, we've got an executed LOI for about 40% of the building and have good substantial interest on the remainder. We are well advanced in discussions with several large institutional users for significant portions of the additional four buildings that are most advanced in our pipeline. And, as a reminder from last quarter's call, these four buildings will allow for approximately 900,000 square feet of additional space.

The recent expansion of our target market in Mission Bay has really been well-received in the broad technology community for the reasons that we had originally projected, which include the lack of high-quality large campus environments in the Bay Area generally; the proximity of a highly educated technical labor base; the accessibility via both public transportation and robust freeway system; the 24/7 live work community preferences that have really evolved up in the Bay Area; and then very importantly and obviously the proximity to premier academic research engine, which is UCSF.

So while certainly much hard work lies ahead, Mission Bay is really beginning to take shape as we had hoped at the outset of our investment in this premier cluster location.

I am going to talk a little bit about development, although Joel hit many of these items already. In addition to the activity at Mission Bay, we have initiated a new development project in Seattle in the fourth quarter. This is in the midst of our Eastlake neighborhood of operating assets. And it really was initiated in response to the significant growth of our tenant base and the dearth of alternatives in the broad South Lake Union market area. The project is 100,000 plus square feet, and we are in discussions and negotiations with several large users comprising more demand currently than the building could accommodate.

So in the context of the aforementioned current volatile capital market environment, we initiated this project in response to real and substantial demand and are highly confident that we will do substantial levels releasing.

On the acquisition side, I want to highlight two in the fourth quarter. The first is the one that has been mentioned, the 370,000 square foot historic office building with a variety of office and technology users upon acquisition was about 74% occupied. It has the adjacent land parcel that can accommodate nearly 400,000 square feet of new development, and it is a part of our larger project in Cambridge.

We are in the process of redeveloping parts of the new building to optimize its positioning for future tech related and office lab requirements. We also acquired a joint venture interest in a property in the Longwood Medical area of Boston with $70 million in cost through a $62 million acquisition loan, and we're in the middle of the design entitlement process for the project, which ultimately should include about 350,000 square feet.

We have had substantial preliminary tenant interest in this market, which is the densest institutional clinical research and academic submarket in the country. Our objective is to commence construction in the fourth quarter of this year with Shell completion and tenant occupancy targeted for late 2011.

So consistent with all of our major external growth initiatives, each of these projects we believe are in the best science and technology submarkets in the country. We made great progress on the disposition side of noncore assets in our various regions. Our objective, just to remind listeners in these transactions, is to reduce leasing exposure, capture embedded gains, enhance our balance sheet flexibility, and importantly, to match fund franchise enhancing opportunities.

In '07 we concluded the disposition of a variety of buildings and land parcels totaling $73 million and subsequently an additional four properties in the first quarter this year at $63.5 million. These assets in the first quarter included buildings in San Diego and the East Bay market of the Bay Area. We had determined that the the East Bay submarket no longer fits our franchise growth profile and are pleased with the financial outcome of these sales given the turbulent capital markets.

We will continue to consider and advance additional noncore sales. Thus far, we have not observed a substantial diminution of value in these noncore transactions. In the event that that dynamic changes either broadly or relative to specific assets, we will defer appropriately.

So just quickly in conclusion, the fourth quarter was a very active and -- concluded a very active and successful year for ARE, further distinguishing ourselves as the premier global developer and operator in this niche. We increased the operating portfolio by 12%, the land bank by nearly 15% and our scope of operations in two new countries, while at the same time have continued a very disciplined focus on creating a best of class operating platform and extraordinary experienced people.

So with that, I think we're ready to go to questions. So, to the operator for Q&A please.

(OPERATOR INSTRUCTIONS). Steve Sakwa, Merrill Lynch.

I just want to circle back on the disposition question just to make sure I understand it. You sold 136 since the beginning of '07, and it sounds like 64 or so of that was in Q1 '08. Does your guidance of 210 assume additional acquisitions, and if so, can you just give us kind of a range of what you think that dollar figure may be this year?

Steve, could you clarify that? There was some static when you asked your question whether it was acquisitions or dispositions that you were referring to.

Sorry, on the disposition front, you said you sold $136 million since the beginning of 2007, some of which occurred in the beginning part of '08. I'm just trying to figure out whether your expectations of 610 include further dispositions (multiple speakers) beyond the $64 million?

Yes, the answer is absolutely yes. I am not sure we can easily quantify that for you, especially given some of the accounting rules related to assets held for sale. So I am not sure I want to give precise numbers. But I would say it is significant. So the answer is yes.

Then maybe just talk a little bit more about what you are hearing from tenants just in terms of the decision-making process, Joel. It sounds like maybe in some cases things are taking a bit longer or at least we are hearing that in other sectors. I mean what is your experience in dealing with folks trying to commit the space, and if they are pushing out, maybe just give us a little bit of color there.

Well, maybe let me give you a couple of my impressions and ask Jim to give you maybe more specific ones. I think we're still seeing pretty good velocity and transaction making -- or decision-making and transactions regarding I would say more institutional type users. But I would say the smaller size tenants probably have taken a little bit more time. But I would say fundamentally we have not seen a significant shift in slowdown, but I think there is clearly a focus on cost issues given the macro market, but Jim can highlight that more in-depth.

Yes, I think that is right. Steve, as I look back at our stats over the last several years, it has been strikingly stable at how consistently we have done these leasing transactions in the size range I described. And I would say that there really has not been a significant slowdown there. There is a steady-state of those transactions. We have the right kinds of spaces and the right locations for those tenants. And so I have not seen a dramatic slowdown there.

I think on a larger tenant front I think Joel is exactly right and cost is a key consideration. The flipside is that there are a few legitimate Class A opportunities where these tenants want to be. So while the transactions seem to be taking longer, they are not evaporating. Ultimately, as I indicated in my remarks, I think they are going to be done. And I think you will see a number of large institutional transactions done this year in our markets by us as well as others.

Okay. And then if I can just ask maybe one follow-up final question of Dean. Can you just maybe in summary format just kind of walk through kind of the exact capital needs this year and kind of those sources if you can just put them in buckets given the large development and redevelopment pipeline you have got. If you could kind of sum it all together?

Yes, I think one of my comments during the call, Steve, was our fourth-quarter run-rate on construction spending was approximately $90 million. I think if you had to forecast out into 2008, that that number will grow through the four quarters to slightly above $100 million a quarter. As

far as sources of capital, I think we have touched on it in different aspects during the call. But asset sales will continue to provide some important capital for us to recycle into the Company. We have got our credit facility, which is $1.9 billion, plus the $500 million accordion that will provide important capital.

I mentioned loans that we could -- that we're in the process of refinancing that over the next four quarters looks like we can tap about $200 million of additional equity, which is in excess of -- proceeds in excess of current loan balances, and that will also provide an additional source of capital. Joel had highlighted our ongoing efforts with joint venture opportunities with New York, and project financing will also play an important source of capital for us.

So I think that is the menu that we're looking at at the moment, and we will continue to pursue all aspects of that capital plan.

Okay. That is helpful. Thanks.

Anthony Paolone, JPMorgan.

Just following up what you are seeing in the environment out there and how that ties into your guidance, can you put some parameters around -- you talked about your 610 being cautious. What do you think are the biggest drivers either on the upside or downside to that number as you look at the environment out there?

Well, I think it is pretty clear that interest rates could be an important driver, and my sense is if inflation starts to ramp up, the Fed has got to address that in a reversal of it's current thinking. So that is certainly an important factor.

I think a dominant factor is assets sales that we're looking at. I think we have had very good success over the past couple of months, especially with stabilized assets. Jim mentioned we exited a market that we have long been thinking about, but we chose kind of an opportune time in the East Bay we think, which has the possibility to be a little weaker than some of our strong core markets at cap rates we felt were very, very acceptable.

So I think the assets sale program and velocity is something that certainly has a material impact on that issue, and then I think, as Jim said, clearly leasing issues to be a little cautious on the rate of leasing, not necessarily the success of leasing, but kind of how we are leasing both in rolls and on delivery. So I think those are several components that certainly make some sense.

But if you look at core growth, we feel very good about the same-store growth, very good about lease roll growth, very good about again the core operating fundamentals of what the Company is trying to do. And really I view 2007/2008 as kind of transition years where we are really exiting a number of noncore assets in some noncore submarkets and really putting much more emphasis on capital into critical core locations, for example, Cambridge, Longwood Medical Center, our international operations, Mission Bay, etc. So those are just kind of a potpourri of items.

I mean it sounds as if variable-rate, debt or interest rates are a big factor. Can you give us what your LIBOR assumption is in your 610?

Well, it is Dean here. As we have all witnessed, LIBOR has moved so dramatically in 2008, it has actually been very surprising for most of us. And so we are not any better honestly at forecasting the curve, so we tend to watch the LIBOR curve that is forecasted out by others and make some adjustments to that. So we tend to be close to that, and from time to time we will make different assumptions to soften that impact.

Yes, again keep in mind that some of our assumptions are based on a -- we're into we believe at least I think the knowledgeable people on the economy believe we're into a recession. We cannot be so foolish as to believe that that cannot help -- well, it will clearly impact everybody's operating assumptions. So we would rather be cautious than overly optimistic.

Okay. In terms of the portfolio in light of substantial dispositions, can you characterize what portion of the portfolio is kind of in that $200 a square foot roughly price point that seems to be more akin to conventional office versus some of the stuff you have bought or have developed in recent years, which seems to be double or so that in many instances in terms of per pound pricing?

It would be hard to do without going building by building. A lot of it really is driven off of market rents and -- so the markets that have the highest triple net rents and those properties are the ones the derive the highest values. And so I would say generally whether there are core or noncore suburban markets, truly suburban markets have lower valuations. That does not mean that they are neither core or noncore. It is just the reality of kind of the real estate economics.

So yes, it would be hard to tell you that all of our noncore assets would fall into that pricing range or the converse.

Maybe a different way to think about it, then what about just, say, noncore assets or assets that are still heavily weighted toward conventional office that you might contemplate selling. Like what portion of the portfolio is that?

Well, I would not think that is significant. I think the sale decision actually relates sometimes we may have assets we think are important in somewhat of a more suburban environment, but have made a decision or our thinking I have to be careful here on discontinued operations accounting or are thinking of a decision-making tree that would enable us to, say, exit maybe a suburban or non-dense urban market because we feel the future is brighter in the dense urban market than it is in the suburban market as far as future increases in rental rates and valuations.

I think that maybe is more the analysis as opposed to -- I mean we don't have a huge number of pure office -- in fact, the buildings we sold in the East Bay were by and large all lab/office buildings. But we have looked at the overall submarket as one we felt the timing was right to exit. And I think in some of our markets that are not necessarily the ones we are as highly focused on like Mission Bay, like East Cambridge, like Longwood Medical Center, I think we are more likely to think about alternatives in those markets over the coming quarters than we would have in the past. But that does not mean they were not historically maybe relatively core if you follow my kind of thinking.

Okay. And then just the last question. I know the China project is fairly small in terms of dollars. But I just want to reconcile I think in your commentary you mentioned a 40,000 square foot lease and then the rest of it as being marketed?

50,000 square foot requirement, which may expand, but that is the current tenant requirement of the joint venture tenant we have. So that is 50 out of 280.

And I thought, did something change there because I was under the impression that it was a majority committed with only a small amount that you had to go out and market?

No, no, I don't think we ever said it. We always had a 50,000 square foot requirement from our joint venture partner. That could grow over time, but that was the initial situation.

Okay. Thanks.

Michael Bilerman, Citigroup.

[Irwin Gussman] is on the phone with me as well. I wanted to go back to the guidance question. At 610 it sounds like your interest rate forecast, given with current LIBOR at 3%, you have $350 million of hedges that are coming due this year at LIBOR at 450. And then you have $650 million of pure floating-rate debt, which obviously just went down 200 basis points. Granted some of that affects -- positively impacts cap interest. But I'm trying to understand why -- how much higher you are expecting LIBOR to go in your forecast for you to be more cautious on your guidance? I would think this would be a huge boon for your guidance.

Well, actually, Michael, those are good questions. I think if you look at our LIBOR schedule, I'm sorry our swap schedule in our press release, whatever is burning off in the current year has already been extended and with a replacement contract, and that does show up in the swap disclosures in our supplemental. So there is no real benefit anticipated by swaps burning off.

And in point of fact, there will likely be, as Dean said, additional swaps placed on the unhedged variable-rate portion, which would then limit our exposure either positively or negative to future swings in interest rates.

So what are you assuming in your guidance for LIBOR? What sort of curve are you using for the year? It obviously has a dramatic effect on underlying FFO.

We're staying very close to the curve, Michael. I don't have the curve that is in our model with me. But we have taken the curve, and honestly and like every company you have probably spoken to in this earnings season, I think from what we hear from the companies that were providing us the curve, they were getting calls daily trying to figure out where the curve was headed because it was moving significantly through the month of January. And we were monitoring that very closely.

So we have taken one of the curves that were provided most recently before we finalized our release and have used that as a basis for our model and have adjusted that back just slightly.

Okay. Maybe we can talk a little bit more off-line because I'm still a little bit confused to why it would not be a big benefit for you given relative to where you were in 2007.

Yes and I think, well I think relative year-to-year, yes, there has been an improvement. But also keep in mind that 100% of changes in our borrowing costs do not drop 100% dollar for dollar into the bottom-line results as a result of our capitalized interest and our ongoing construction activities. Whether it is a benefit in interest rates or a detriment to rates, it does not drop one to one to the bottom-line.

Right, but it does drop. And I can understand that, but there should be some pickup that you're getting.

Yes, and I think what we were also highlighting there is a pickup in interest rates, but what we also highlighted very carefully was the takeaway that our asset sales have been dilutive to our FFO results for 2008 or will be dilutive for our guidance for 2008.

Well, I guess just maybe circling back on guidance, 90% of your leases are triple net. You only have 8% rolling this year. 70% of that is already put away. We have had a discussion about interest rates. What else are you being cautious on, and what else may you have pulled back for your growth forecast to be lower than your sort of high single digit, low double-digit growth?

Well, let me say this. I think at 610 we're looking at guiding the street as we said initially and cautiously at about 7% core growth.

Now what could add to core growth or above core growth would be obviously redevelopment and development deliveries. Obviously the impact of leasing. But I think, as initial cautious guidance this year in a market that is, frankly, one that not too many people have seen before if ever, we thought it is important to be more cautious than less cautious as our initial guidance here.

So people can second-guess should the Company be guiding at 8% or 9% in a recessionary year in a bear market; I would argue that I would rather be at 7%, and as the quarters go on and the year matures, that we have upside benefit as opposed to downside guidance. So that is just how our thinking is at a 30,000 foot level.

Right. Joe, who is the buyer of stabilized lab space assets today, and what sort of cap rates are people buying at?

Yes, the example of the East Bay sale was I think a cap rate that was in the 7 range, and it was a very well-known, well-respected local developer that teamed up with a pension fund. And I think we have seen that at other locations, that combination of -- I think similar in San Diego as well.

So I think that is the kind -- I think it may be less for the product type, although this particular developer has had some experience with the product type. But I think looking for assets that have good income, there is decent credit there, although there are maybe medium-term or short to medium-term roles that we were not interested in absorbing I think they felt comfortable and maybe going into the market with that thinking.

I think [Irwin] has some questions.

Good morning. My question is on the redevelopment pipeline. Could you disclose what percentage of it is preleased, specifically for the part that is delivering in the next 12 to 18 months?

Could we? I'm not sure I can -- I don't know that we have time to go through each of those.

Maybe another way of asking it, is it looks like the deliveries of your redevelopment pipeline are now a little bit more weighted towards 2009, whereas before they were sort of an even split between '09 and '08, and I'm wondering if that is --

Well, that -- yes, I know -- well, I think that is simply because we have added a couple that will come through in '09, but I think by and large -- well, Jim can give you some highlight there.

Yes, I think again through '08 and '09 I would say we have got probably a third of it that we're negotiating or committed on, and the balance of it is too early to say at this stage.

Okay. And my last question is, can you -- you disclosed the $1.1 billion of debt principal that is being capitalized. Can you break that out into the components of land, development, CIP, and redevelopment expense?

Well, we would just refer you to the number on the balance sheet, which is kind of an aggregate number. I think we would like to just leave it at that.

Philip Martin, Cantor Fitzgerald.

I just want to talk a little bit about the international portfolio. Obviously we have seen some incremental growth over the last 12 to 18 months, and I would have to assume tenants and countries must be getting more comfortable with your capabilities and they are getting more comfortable with you as a Company. Is this generating better-than-expected opportunities for you than you thought?

Yes, the answer to that question is there are I guess the good news and the bad news. The good news is there are more opportunities out there on the horizon. The bad news is there are more opportunities out there on the horizon. So we have to be I think pretty judicious and disciplined about which ones we go after.

We felt Scotland was a big advantage both cost-wise and ultimately yield-wise because there is a significant scientific capability and commercial capability and governmental investment in the sector and an ability to acquire just absolute triple-A location at a very low cost basis. So we felt that was compelling.

The other transaction in Europe we are looking at is a city center location where we were actually invited in based on our reputation and brand. So we feel very good about it.

We have had dozens of inquiries come to us from multiple locations, many of which we have just either turned down or deferred.

In Asia, as I say, we have been working kind of long and hard on the South China transaction because of our tenant relationships. We have been working long and hard for well over a year now on India. It is just a challenging and difficult process there, but we hope to be successful. And then we have some new opportunities emerging very significantly in different key locations in China, which we believe those two countries contributing one half of the world's population to be not only huge ultimate consumer markets but obviously great demand markets.

So we're trying to be judicious and thoughtful about how we choose our spots, and clearly we're focused on Canada as well.

Does that make sense at some point in the next year or so to have an Alexandria, a larger Alexandria presence in terms of an office? Internationally are those in your plans?

Well, we do. We have an operating office on the ground in South China. We will have an office on the ground in Scotland. We will have an office on the ground in Canada. So I think in locations where we are developing and really have a base of operations as opposed to a passing investment, we will definitely have a carefully in the Alexandria style efficient low overhead kind of operation, but one that is hopefully highly effective. And I think Dean has taken account of that when he gave his guidance and G&A of about 7% to 8%. So I think that is correct.

Okay. And is a tougher credit and financing market leading at this point to -- it does not sound like it right now in your guidance -- but do you see it leading to a potential increase in acquisition opportunities in your core markets? Or is the demand from -- well, do you see the disruption in the credit markets leading to some better opportunities here for you?

Yeah, I don't know that I feel like we will see more of them. You know it is certainly conceivable if things continue this way that yields will improve to the buyer. And so that could, in fact, so the spreads basically will improve as there is less demand for product. But I have not seen that manifest itself yet at all. I mean the sale that Joel gave a little bit more color on that we did in the East Bay and San Francisco I think is evidence of that kind of a secondary submarket with leases that were relatively short-term and cap rates down in a 7% range I think shows that there is still a lot of demand notwithstanding the uncertainty in the credit markets.

So yes, maybe if it continues for another 12 months or so, that will be different, but I have not seen a significant shift yet.

Okay. Okay, and my last question, and Jim, you did explain this pretty well. In terms of the leasing in the fourth quarter, the average leasing was 2.8 years. That was one larger lease, but you are not seeing any trend towards shorter leases in this environment here that was just really an exception?

Exactly. You know, you could go quarter to quarter. I think you have to look at maybe a longer-term horizon to evaluate that in our case because there are unique situations that arise, but that is exactly the right analysis.

With no other questions in queue, I would like to turn the call back to Joel Marcus for any additional or closing comments.

We just thank you very much for taking time this morning, and we will look forward to giving you further updates on our first-quarter call in early May. Thanks, everybody.

That does conclude today's call. Again, thank you for your participation, and have a good day.