Alexandria Real Estate Equities Inc (ARE) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Alexandria Real Estate Equities first quarter 2008 conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Rhonda Chiger. Please go ahead, ma'am.

Thank you for joining us today. This conference call contains forward-looking statements including earnings guidance within the meaning of the Federal Securities laws. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our annual report on Form 10-K and our other periodic reports filed with the Securities and Exchange Commission. Now I would like to turn the call over to Joel Marcus. Please go ahead.

Thank you, everybody. And welcome joining me here today are Jim Richardson, Dean Shigenaga and Pete Nelson. I want to start off the call where some brief macro comments. As all of you know the liquidity crisis and debt crunch which certainly came to a forefront during the first quarter actually has benefited the pharma sector. Those companies with cash forwards have found better strategic buy on opportunities now when they don't have to compete with players who are debt financed. As an example our number one tenant Novartis is making a complex acquisition of Alcon, a Swiss company actually owned by Nestle for about $37 billion in total consideration and that Company produces everything from contact lenses to surgical equipment to pharmaceuticals.

Our number two tenant, GlaxoSmithKline announced the acquisition of another one of our key tenants in the Cambridge market. Sirtris Pharmaceutical, a very cutting edge anti-aging company for more than $700 million and so while striving to cut SG&A, more and more the multinationals are increasingly interested in making investments in the area of biologics, Pfizer announced a new R&D center for cancer biologics and I think this bodes very well for the Biotech sector and really are both great tenant based and asset based. On the Biotech side, generally the first quarter of '08 was positive, our top ten tenant Genentech got approval for Avastin for advanced breast cancer in addition to the already approved colon and non-small cell one cancer indications.

And then finally, on actually yesterday, California awarded $271 million in grants to build 12 new stem cell centers in the state. The universities and research institutes that are receiving the money have said they would spend an additional $560 million on laboratory construction, the resulting total of about $831 million would add nearly 800,000 square feet of research space to house some 2200 scientists so that's all pretty good news in what is otherwise a pretty tumultuous capital markets environment.

Moving on to earnings guidance and dividend policy, the first quarter was really a classic ARE quarter, all financial and operating metrics were really humming during one of the most tumultuous quarters in the countries history and ARE has been a great safe haven for all investor styles. This was our 43rd straight quarter of truly remarkable performance on top of being the number two performing equity REIT out of all publicly traded equity REITs from our IPO in May of '97 through 12/31/07 with a compounded annual growth rate of 22% on a total return of 711%.

As you know from the press release, the first quarter after noncash impairments and for stock redemption charges, the supplemental adjustment we're up 7% at $1.48 diluted share and Dean will talk more about that and we reiterate guidance after the supplemental adjustment of about 6.07 per diluted share and again Dean will comment on that and also the noncash impairment charges. On the dividend policy, the Board will consider increases in the dividend during this year at a rate likely to be somewhat less than the growth in FFO has been past policy and ARE reported continuing very low payout ratio at about 53.2% which positions us well for this -- for future dividend increases.

On the operating and financial performance side, again, a 40 -- the 43rd straight quarter of positive same-store growth with both rental rate and occupancy increases 3.6% on a GAAP basis and 7% on a cash basis. Jim is going to comment in depth on the leasing side but all I'd say is that it was an absolutely stellar leasing quarter again during a tough macro quarter of 570,000 square feet with GAAP rental race increases exceeding 14% on renewed and released space, really a very very strong quarter. Occupancy tipped up -- or ticked up very strongly at about 100 basis points in virtually all the submarkets and the assets sold were fully occupied and didn't really have much to do with that, it was really based on strong leasing. We delivered on time and on budget about 103,000 square feet out of the redevelopment pipeline at very solid yields.

Let me turn for the moment to the development pipeline and the supplemental. The 158,000 square foot Mission Bay kickoff, our second building, has a 50,000 square foot institutional anchor and Jim will comment on very significant additional demand for space at Mission Bay. In South San Francisco, the 162,000 square foot two building campus on the water we're working on several transactions and we'll have more to report next quarter. And the 135,000 square foot building under construction, 65,000 square foot leased with the balances auctioned. In South China, we do have the 50,000 out of the 280 committed to our joint venture partner and we're working on assembling our leasing team as we speak.

On East River, the first to deliver 300,000 square foot East Tower, which is to be delivered in the first half of space will come on board first half of 2010, we expect to sign our first lease shortly for about a floor and a half with a European biopharma firm and we have currently working on LOIs and RFPs in excess of 400,000 square feet we're at the term sheet stage with our joint venture partner and so good things are happening. And then in Seattle the 115,000 square foot building fully committed.

On the disposition side, we sold six properties as you know from the release, 70 million with a very sizable $20 million gain and as we I think alluded to last quarter we have exited the East Bay of San Francisco, a market that we sought to get out of for some time. We finally found the right opportunity and so with a nice sale fully occupied buildings but with somewhat near term lease renewals coming up over the next couple years it seemed like a good time to exit. And then timely on the balance sheet and capital plan and Dean will detail this more in a moment, we continue to have a strong and flexible balance sheet, a hallmark of this Company, with very significant drive power to meet the growth and capital plan certainly for this year and next year. Essentially virtually all 2008 maturities have been handled and we continue with our high-end strong margins. So, Dean, take it away.

Thanks, Joel. Our results for the first quarter of 2008 reflect strength of our unique road map for growth in our continued ability to execute and deliver consistent and predictable results period after period. The first quarter of 2008 represents our 43rd consecutive quarter in growth in FFO per share diluted. Our 43rd consecutive quarter of positive same property growth on a GAAP basis and a solid start toward our 11th full calendar year with positive full leasing activity. For the first quarter of 2008, FFO per share diluted was $1.48, up 7% over the first quarter of '07, after the supplemental adjustments for non-cash impairment and preferred stock redemption charges.

Let me quickly cover a few important items starting with our guidance for '08. Non-cash impairment charges our balance sheet and our 2008 capital plan and then I'll cover some key items on our solid fundamental operating results. Our guidance for 2008 after supplemental adjustments for non-cash impairment charges related to assets held for sale and certain investments and is reflective of the ongoing strength of our core operations as shown in the operating results for the quarter. We continue to generate consistent and predictable operating results which is a key component to our updated guidance for 2008.

From our solid leasing activity year after year deposit of same property pressure formats quarter after quarter to our solid quadruple net lease structure 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 us all a base for our growth through 2008 and into 2009 and 2010. Our updated guidance assumes no acquisitions and assumes the sale of at least two additional assets which are currently held for sale. Other opportunistic sales may occur over the next 12 months but no additional properties qualify as held for sale as of quarter end.

Our updated guidance based on various assumptions include the key points I just summarized is FFO per share diluted of $6.07 after supplemental adjustments for non-cash impairment charges and earnings per share diluted of $3. Our guidance for FFO per share diluted after supplemental adjustments really represents a solid increase of 7% over 2007.

Next turning to non-cash impairment charges. During March of 2008 we recognized non-cash impairment charges related to two vacant assets held for sale as of quarter end. One asset located south of Boston is an older industrial building in a submarket with no life science tenants. This property was acquired about ten years ago and is the only property we own in this particular submarket. The other asset is a vacant office building located in the scientific research zone in San Diego. We believe the capital markets have placed some pricing pressures on vacant office properties and that non-office location as reflected in our sales price at below our book basis. And in the sales of other office properties we track from time to time.

In comparison, there have been very limited sales of life science facilities to show any meaningful trend in values for life science properties. Pursuant to SFAS 144, our impairment charge of approximately $4.6 million reflects our anticipated sales price less cost of sale which is primarily commissions and legal fees. As of today we expect to complete the sale of these two assets in the coming quarters and we have no other assets identified for -- as held for sale at the moment. I should point out that we will consider opportunistic sales in the back half of the year if a sale of one or more properties makes sense for the Company.

We strongly believe that the charges related to the two assets currently held for sale are not any indication of valuation for our well performing life science properties. The significant gains on our sales of properties we have recognized over the past year and in the first quarter of 2008 highlight the strength of the value of our life science real estate. Also in the first quarter of 2008 we recognize non-cash impairment charges primarily related to certain publicly traded nontenant investments consistent with every quarter our investment committee, which includes our Audit Committee Chairman, performs a diligent review of our investments for impairments. The accounting rules for our investments and publicly traded securities requires us to consider trading prices during the most recent six-month period in our quarterly investment review process. I should point out that the publicly traded companies that were written down this quarter continue with their life science focus business plans.

More importantly, our historical performance with our investments speak for themselves as our investments have performed very well over the years. I should also point out that in the near future we do not anticipate any impairment charges related to investments or real estate, again, we have sold several assets over the past couple of years at a significant gain and our investment in life science companies have performed very well over the years.

Now turning to balance sheet and capital matters, as of year-end we had approximately $1.1 billion outstanding under our $1.9 billion unsecured term and revolving facility, debt to total market cap was approximately 44% and our unhedged variable rate debt was approximately 21% of total debt. Our pro forma debt to total market cap is approximately 41% based upon recent trading prices of our common stock this week around $105 per share. 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.

Moving next to our capital plan. We have been and continue to be very good and disciplined stewards of our precious capital. During the quarter we completed the offering of our Series D convertible preferred stock and raised important capital for our value-addded development and redevelopment programs. Our net proceeds from this offering were approximately $242 million including the exercise over the over allotment option.

Our decision to raise this important capital was maids at a time when the capital markets had shown many weeks of deterioration post Bear Stearns. It was a tough decision to make during that environment but we clearly believed that it would be more prudent to raise the capital in order to maintain our long-term strategy of having a strong and flexible balance sheet. This strategy is fairly consistent with our early and timely decision to increase the capacity under our credit facilities over a couple of key amendments in 2006 and 2007. Our $1.9 billion unsecured credit facility contains unique features that provide borrowing capacity for our non-income producing assets like our land, our embedded development pipeline and our active ground-up development projects. The advance rate on development projects under our facility is very similar to the advance rate on traditional construction financing.

A significant current capital need is our East River Science Park project in New York City and our cash usage projections are conservative since these projections assume we fund 100% of the requirement for East River Science Park. As Joel had highlighted, our intent is to bring in a minority partner and project financing for East River which will reduce our capital needs for this project to approximately 20% of the total capital requirement. During the quarter we completed the refinancing of a $76 million loan with an existing lender extending the maturity date to December 2011. This interest rate on this loan is approximately 4.3% and this financing represented the last important debt maturity that we had for 2008. We are also focused on our 2009 debt maturities and plan to refinance these loans ahead of their contractual maturities. We continue to have refinancing opportunities that will generate proceeds of up to $200 million in excess of existing loan balances.

Our run rate on construction activities for the first quarter was approximately 80 million to $90 million and our run rate going forward through 2008 is approximately $100 million per quarter. Again, our capital plan going forward will continue to include a variety of sources of capital, including opportunistic property sales as appropriate, joint venture opportunities, project financings and secured debt.

Next turning to same property results. Same property results have continued to be very positive quarter after quarter for 43 consecutive quarters and were 3.6% on a GAAP basis, 7% on a cash basis with the increase in same property results driven by both increases in rental rates and occupancy. Same property occupancy was solid at about 95.3% at quarter end, up from about 94.3% at the end of the first quarter of '07. Our policy has been to exclude 100% of properties under partial or full redevelopment from our state property stats as we believe this methodology is appropriate in order to prevent significant increases in same property results as a result of redevelopment activities.

Our leases contain key provision 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 8% of our leases require tenants to pay the majority of operating expenses. Guidance for growth in same property performance for 2008 remains in the -- the 4% range on a GAAP basis and we 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 move to a few key operating stats. Occupancy for our operating assets realized solid gains this quarter to 94.8%, up from 93.8% as of year end. Our occupancy level and operating stats remain slightly impacted by significant vacant office space related to property we acquired in Cambridge in the fourth quarter that has both an operating and future development component. We continue to forecast an opportunity to grow internally through an increase in overall occupancy through 2008.

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. With that said, margins continue to remain very solid at approximately 73.5%, again, margins were impacted by spaces with embedded future redevelopment and development opportunities and recently acquired -- the recently acquired office building in Cambridge with significant vacancy. This building was acquired with the purchase of a key development parcel in Cambridge. Operating margins have been in the 74 to 75% range over the current and prior quarter excluding these future value-add opportunities and the office building. On a prospective basis, we are projecting margins to be in the 74 to 77% range.

Straight line rents for the quarter were approximately $3 million and going forward we're projecting 3 million to $4 million per quarter. Capitalization of interest for the quarter was approximately $17.2 million, and reflects our ongoing efforts with our important value-add development and redevelopment projects including our strategic efforts to move along our preconstruction activities for our indebted future developable square footage. With that, I'll turn it over to Jim.

Thank you, Dean. So let me take you through some quick broad market commentary before you get into specific leasing performance. In that context the general conditions that I described during the year-end call have continued to prevail over the first four months of 2008 and those are vacancy rates remaining low while threats to supply shock remain very nominal. Tenant demand is diverse and fairly robust across a wide of array of both sides and industry segments with the academic institutional and governmental base continues to be most active. Rents are either stable or increasing in every one of the core markets that we're in. Sales transaction activity is very limited given the aforementioned state of the capital markets, however, we haven't really seen any evidence of any real significant valley erosion in the core markets that we're in.

We are encouraged by the consistent demand we have seen from emerging stage companies in most of our markets and as we have mentioned many times in the past, this is critical for the growth and health of the commercial component of the life sciences business over the long term. And then finally, we have not observed an extension of transaction time lines due to the capital market disruption from a leasing perspective, however, as is probably fairly obvious, the larger the transaction, the longer it takes to negotiate and conclude particularly given the complex nature of our facilities.

Turning to leasing performance, as both Gene -- or both Dean and Joel have mentioned, the first quarter was a very strong start to the year for us with 570,000 square feet of new leases which represents one of the strongest quarters we have ever had, 14.1% GAAP rental race increases on new and renewal leases also reinforces these positive threads in our core markets. The activity was heavily distributed to the East Coast by about a three to one ratio and our core regions of Massachusetts, Maryland and the Bay Area accounted for the majority of the leasing activity.

About two-thirds of our leasing was represented by new or renewal leases with a balance in previously vacant or redeveloped space. And I think importantly, much of the activity was comprised of small and medium sized leases with terms ranging -- lease terms ranging from three to five years which resulted in an average lease term of just over four years. As both these guys have mentioned, occupancy for the quarter was up by 100 basis points led by strong gains in the Bay Area, Massachusetts and the Southeast.

Building on a very strong first quarter performance, we have also made really good progress on resolving the balance of the 2008 rollovers, contrasted with the 846,000 square feet of rollover that we had scheduled for 2008 at year-end, that number has now been reduced to something just north of 500,000 square feet, and importantly, about approximately 25% of this remaining balance has been leased while an additional 50% is in active negotiations in anticipating successful resolution. And on the heels of our 14% plus positive rent growth in the first quarter, we're very comfortable with our prior 5 to 10% guidance range for calendar year 2008 and we hope to push the top end of that range.

I want to comment on how we see 2009 unfolding from a leasing projection perspective. We have about 850,000 square feet of the current operating portfolio rolling over in 2009 and as such, we are very focused on ensuring advanced resolution to the greatest extent possible and prudent and toward that end, we have made very good progress already, about 10% of that space has been resolved and released, about 40% of the space we're in current negotiation and anticipating as well a successful conclusion, two-thirds of the unresolved rollover in 2009 actually occurs in the second half of the year, and I want to point out that the region that has the most significant exposure, which is the Maryland region, representing about 30% of the total, has had great progress to date, about 20% of that Maryland specific rollover has been resolved with another 50% in active negotiation and anticipated to be successfully renewed or released. And we anticipate lease rate increases that rollover to fall within our typical 5 to 10% range for 2009.

Let me talk specifically about Mission Bay. As noted on our prior call, 1700 Owens is stabilized at 95% leased and or committed. The steel has been erected now at 1500 Owens and as Joel mentioned, we have a lease executed for about 40% of that building with a premiere institutional user and we have had really strong activity interest on the remainder of the building, as I noted, the steel has just been erected.

Moving onto other parts of Mission Bay, we have an executed LOI from a very prominent user for more than 100,000 square feet in our Mission Bay North campus and we are in late stage negotiations with another user for most or all of the Tower building on our Mission Bay East campus. The prospects are coming from a variety of geographic locations with complementary but varied space use requirements from all segments of the life science sector as well as the newly emerging technology realm. And toward that end we have continued our proactive and innovative marketing program to the broad tech community and have serious interests from several large users interested in unique features and characteristics of the Mission Bay project.

Turning to development. Joel also indicated and we mentioned on our call last quarter that we have commenced construction on a new 115,000 square foot project in Seattle in the East Lake submarket. We have a fully executed LOI and are negotiating a lease with a single tenant for the entire building. The leasing on our new project in South San Francisco has been a bit slower than we had anticipated due to some specific submarket factors unique to South San Francisco, which is primarily that the current demand is relatively light as total supply results and only a 8% vacancy rate really is a demand driven issue. That said, we have had very good activity in the small and midsized user segment and anticipate some successes to be communicated in a subsequent quarter. So overall we remain very bullish relative to the ultimate prospects for this building which is really a unique waterfront oriented Class A project adjacent to Genentech's Campus up in South City.

On the disposition front, as has been noted so far in 2008 we have concluded the sale of six properties for a total consideration of approximately $70 million and I do want to remind everyone that what our objective here is in these transactions, which is to reduce leasing exposure, capture some embedded gains, enhance balance sheet flexibility and/or to match franchise enhancing opportunities. We are currently in escrow on two additional properties as Dean mentioned that should close within the next few quarters.

So let me just quickly close, from a real estate operations and development perspective, the first quarter was another very solid quarter for the Company with progress on multiple fronts. We had strong continued leasing performance, we have made key success on leasing and commitments within the development pipeline, we've made solid progress on the disposition front, and we've made continued progress in the expansion of our international platform relative to both opportunities and operations. We are certainly sensitive to the uncertain economic times that lie ahead, but we are cautiously optimistic about the near term future given the progress that we have made to date and described in our opening comments here, specifically on the leasing side including strong visibility on the resolution of our 2009 rollovers. We continue to believe that the unparalleled locations of our development assets and the consistent substantial entitlement progress that we're making allowing for sequential delivery as market demand dictates should really make us a unique player in this niche. Finally, our deep knowledge and engagement in each of the markets that we're in, allowing the Company to capitalize on the best opportunities with absolutely the best people. With that I'll turn it back over to Joel.

Operator, we'd like to open it up for Q&A now.

Certainly. (OPERATOR INSTRUCTIONS) We'll take our first question from Michael Bilerman with Citi.

Hey, guys, Irwin Guzman is on the phone with me as well. Dean, you touched on a little bit on the security side and talking a little about the gains you've experienced and currently at least on the public side on a $5.6 million investment you're sitting on a total basis of $28 million, so almost five times your basis. Can you talk a little bit about the spread of how many investments that goes over and then also talk about the private side of it where you got $56 million invested, how many investment that goes over sort of what you think the embedded mark-to-market is today just to give us a little bit more color on these activities.

Yes, I think broadly speaking we probably have rough -- very rough numbers, maybe 100 investments or so in private and publicly traded companies. All of our investments, keep in mind, in the public companies from what I can recall originated from an investment in a private entity that has gone public and we still hold the security. So that's kind of the mix. As far as embedded value on the private side, I think if you can look at the historical performance, the embedded value in the public securities we hold, I think that's a pretty decent indication of some really embedded value on the private side, which the accounting rules require us to account for on historical cost basis. So I think there's reasonable upside embedded there.

And when you look at you generated $22 million of gains in terms of liquidation over the last three years, what sort of return has there been on your sort of initial capital?

I think -- it's kind of hard to tell because each investment varies.

Is this a 2X type business for you on a 3X? Just try to--?

Yes, I think if you looked at an IRR based valuation, you would get probably into the high teens or low 20s.

Okay. Irwin had a few questions as well.

Sure.

Hi, Joel. Maybe you could -- you outlined in some detail the level of leasing you've accomplished in the ground of developments but can you talk about the redevelopment inventory specifically the inventory that you're going to be delivering by the end of the year, it looks like a little over $100 million worth of investment, can you talk about the lease strength in those assets and so the level of activity that you have for the remaining space that's not leased/

Yes. Let us do that. One moment. Okay. So I guess if you -- let's -- bear with me one second. Yes, there is a small -- a small redevelopment going on in kind of North of San Diego, there are a couple of activities, nothing to report there of significance, so I would say that's kind of quiet. I'm going to have Jim run down the San Diego ones because those are ones that are actually pretty active here.

Yes, we have a couple of assets that have turned over over the last year or so that we're redeveloping and that have in the San Diego market specifically and I would say just on a quick look, about half of that space we're in negotiation or have leased and so we're making very good progress down in San Diego, and just kind of looking through the balance, we have some pretty good activity in Massachusetts as well where we've got, I think, four assets that are in redevelopment there and it looks like just, again, kind of off the top, it looks like probably 30 to 40% of that space we're in pretty active negotiation on. So it's pretty -- it's spread across the portfolio.

Yes, if you look at maybe two large opportunities, one would be the Tech Square opportunity, we have some very good leasing ongoing at the LOI stage or beyond, so you'll be hearing more about that, so I think that market, there's some good things happening, and then in the -- in the Gaithersburg or Shady Grove market there's some very good activity on that. So I think you'll see that as these come forward with completion of the construction and FIT out and delivery, that there will be some pretty good things happening. I think we got a pretty strong occupancy quarter on redevelopments delivered this quarter.

And on the international front, you've spoken in the past about bringing in a JV partner to help fund the developments in China and India. Is that something you're still looking at doing and what type of a partnership are you looking for in terms of percentage ownership from the third party and in terms of your share of capital investment versus the partner's share?

Yes, I think it's too early for us to really make that call. I think over time we clearly think that those are markets that contain half the world's population and so they deserve a lot of effort, although they're a little bit, you know, they're still in the early and vital stages, so I don't think -- I mean, I have an idea of how we want to structure and fund it, but I don't think we have really spent, I would say, any great amount of brain power doing that because we really need to assemble our pipeline in a fairly dramatic way before we then take the next step on the funding plan.

And would that -- would that partner, would the purpose of that partner be just sort of capital or would it be also local expertise?

No, actually we're going to have the local expertise. We have operating teams on the ground everywhere where we are, so it would be likely a capital source only.

Thank you.

You're welcome. Thank you.

(OPERATOR INSTRUCTIONS) And we'll take the next question from Anthony Paolone with JPMorgan.

Thanks. Can we go through some of your developments, and particularly at Mission Bay, some of those you gave square footage and others you just said, for instance, like someone looking at an entire building, can you just maybe go through square footage specifically? Like I think, Jim, you mentioned a tower -- a building, I think in East Campus that you're talking with somebody about?

Yes, those would be in the embedded -- in the preconstruction, not under active development, so just everybody knows, but go ahead.

So on those specifically, Tony, the -- we have a couple buildings on the North Campus parcel that each of them is 105,000 square feet. That's the intended developed -- totally developed size and so we have a signed letter of intent for one of those buildings. And then the other one that I mentioned, we have another building that's on the West Campus that's a tower building, which is approximately 240,000 square feet as currently designed and we've got a user for a majority of that work and placed us in negotiation with on an LOI. As Joel said either of those are in the active development pipeline. They are substantially through the permitting process and enough so that we can be negotiating very specifically with tenants.

Okay. And then on East River Science Park, what's -- how many square feet is 1.5 floors?

It would be somewhere between 30 and 40.

Okay. And then as you think about like the 115,000 square feet in Seattle that you're negotiating on and some of these Mission Bay assets where you've got letters of intent and even East River Science Park, can you put some probability or just assess the risk of that moving from a letter of intent to an actual lease and kind of what needs to happen.

Well, I think if you go back on the active developments, the 158,000 square foot building at Mission Bay, I think Jim confirmed we have a 50,000 square foot anchor institutional tenant with a signed lease, South San Francisco, the building, 135,000, we have a signed lease for 65 plus that tenant has an option or right to take down the balance this year. South China, we are joint venture partners committed to 50,000 square feet there and in East River, as you -- or we just said, we have about 30 to 40 that will be signed shortly and the balance, I would say it's hard to say, but those are kind of 50/50 on the remaining 400,000 square feet of demand. And the Seattle is a signed LOI and in lease negotiations so I would put that probability at extremely high.

Okay. That's helpful. In terms of just general operations, can you just talk about whether or not there's been any real change in the behavior of tenants or prospective tenants in leasing in terms of either pushback on rents or concessions or time to make decisions, et cetera?

Yes, I don't think so. In fact, I think I commented at the outset that there really hasn't been an extension in transaction time associated with this capital markets challenge that everybody is dealing with. I really believe that as we have said many times, that our industry marches to the beat of a different drummer and we have -- we're really encouraged at the diversity of the activity both from a size perspective, from a market perspective and then from various industry segments, it's really been encouraging. So and rents have not gone in the wrong direction. In every single market they're either stable or they have been increasing. Now, I will say that I do believe that we have very uniquely located assets locations and so this may not translate well into secondary locations but at least in our portfolio it's been pretty much the same as it has.

Okay. And then last question. With respect to the investment portfolio, can you just go through the strategic rationale and benefit of engaging in that business given what seems like, you know, quite a few relatively small investments and kind of going through the brain damage to make each one of those and what you derive from that?

Yes. We started this effort, you know, it personally started it with our Chairman, former Chairman, Jerry Starsky back in 1996 so it's been now 12 years and we've established I think an unparalleled knowledge base and really proprietary capability to analyze and understand and even target if you look at what we call the horizontal space which are really all the critical technologies emerging and then you look at the vertical spaces below those which are the particular disease targets or particular areas of focus within, say, a cancer area, that has given us the ability to avoid tenant defaults, has given us the ability to target desirable tenants like Sirtris which was just announced being bought by GlaxoSmithKline, we have a great relationship with the management team and the founders out of MIT and because of our sector knowledge and expertise to a large extent, that tenant came to us because of that. So the financial success that we have had is really secondary to the strategic desirability of doing what we do and I would say of all the things we do in the Company, the real estate research, proprietary real estate research, we really do coupled with the sector research and capability is really not only second to none but indispensible to our success.

Okay. Thank you.

You're welcome. Thank you.

(OPERATOR INSTRUCTIONS) Our next question will come from Philip Martin with Cantor Fitzgerald.

Good afternoon, everybody.

Hi, Phil.

Joel, you've talked a bit about this at the outset of the call and -- but I -- if you could just go through it a little bit more and even a bit more detail possibly, but the business models and the growth strategies of your tenant base, it sounds like they remain as healthy if not a bit healthier and on target, and I just thought you'd -- if you could address that a little bit more? Given the economic downturn and just trying to gauge the strength of this tenant base and again to Jim's comment about beating to a different drummer, or marching to a different drummer.

Yes. Thank you. That's a great question. Well, as you know, we have a -- kind of a multifaceted tenant base that's made up of big pharma and we mentioned two of the big tenants, which are Novartis and Glaxo. Clearly we focused on the institutional side which Jim mentioned is a very fast growing area and I mentioned in my comments the rather dramatic amount of dollars flowing out of a really huge budget deficit time in California out of the CIRM program that looks to build quite a number of facilities and employ quite a number of people so in addition to big pharma which right now accounts for probably about 20% plus of our rental base, the institutional side is approaching about 15% and that's a very fast growing area. Traditional office is a bit of a sliver, private biotech companies but unique ones, Sirtris was one of those just a year ago is about 12% and those are where we have this unique and special way to underwrite.

Another big sector which is between 15 and 20% of net effective rents is essentially product and service companies. These are Quest Diagnostics, Labcorp, very strong companies that sell into or out of this industry so very diversified tenant base and then public biotechs account for a little less than 30% of the Company's revenues heavily made up of many of the big cap companies including in our top 10, Genentech, Amylin and others. So we have sought to try to craft this asset base and the tenant base in a very diversified, I think very healthy and really among the best players and I think that's really served us well and made this, 10 years of really outstanding performance. It doesn't happen automatically. It really is done through tough pick and shovel work and I think the diversity and the way we have lined up our tenant base and kept it at the highest levels is really a great credit to how we have performed. So I don't know if that's helpful, but.

No. Yes, very helpful. I mean, even from the demand standpoint, have you seen any letup in demand for potential new product -- projects or new space needs, expanding space needs? Does that continue to be pretty robust across your tenant base and even in terms of new tenants?

Yes, I think the answer is yes, I think Jim spoke to the fact that if you look at the biotech sector and the number of small to medium leases and again, if you pick the right horse, two companies that have performed extraordinarily well that started in very small space, now Mylan Pharmaceutical which started in 2000 square feet with two people in Cambridge is now a multibillion-dollar equity market cap and I think Roche just announced, I think it was Roche, that they're stepping up their investment there. Also Sirtris was again started in pretty small space.

So that segment of the market, I think, again, if you pick the very high quality companies, that tends to have good, constant demand and with the relationships, that has certainly benefited us on the leasing and occupancy side. I think big pharma is a little different. They are much more strategic about what they do. So you have to be -- you have to have the relationships and you have to be in the right place for them to work with you. Otherwise, sometimes they just do it off their own balance sheet. I think one of the fastest growing sectors is clearly the institutional sector as we have alluded to and then obviously growth in the public biotech sector selectively has been very important for us as well. So I think, again, with the right selectivity, each of the sectors have their own unique growth and future opportunities and locations, sometimes matters in the different regions but clearly the best locations as Jim said is what really matters and a landlord who has deep understanding of the platform, the physical platform, and also the scientific side of it, is pretty indispensable to that.

Okay. Okay. And then on the leasing side, Jim, I mean, certainly a very good leasing quarter here. The space that was leased, and I know -- a break down was given, but would you characterize this as pretty -- I mean, would you characterize it as pretty typical space within your portfolio or was there some anomaly that led to such a good leasing quarter? And what do you expect going forward? I know you said 5 to 10% range, for leases over the next 12 to 18 months, but I'm just trying to get a sense of what specifically drove this this quarter, this good leasing quarter?

I don't -- I think without going lease by lease it would be hard to give you an absolute conclusion. I think some of it is timing, certainly, but it was spread over, well, I mentioned three primary geography or locations, but it was spread over a lot of buildings and a lot of space resulting in that average lease size that was, I think, just slightly more than 10,000 square feet. So I don't -- I don't think there was anything unique and special about the rollover and in how we resolved it in the first quarter. I think, as I mentioned, it looks very good for the balance of the 2008 rollover and I think I would probably interpret that more as just broadly good quality space and locations and then this fairly consistent diverse demand that both Joel and I have talked about as opposed to a unique set of assets that happen to be rolling serendipously at the right time.

And then is it fair to assume that there's some real pricing power in this portfolio?

I think with respect to unique locations, that's absolutely true. I mean, some of the assets in Cambridge, for example, or certainly Mission Bay, I think people make decisions and obviously there are a variety of opportunities, but if you want to be in the best locations, then there is clearly some pricing power in the best locations. And, frankly, lesser quality tenants go to secondary and tertiary locations, which is fine, but I'd rather be in the AAA locations.

Yes. Okay. Okay.

I would also say, Philip, that, one of the things that we've mentioned many times on calls is we have fully integrated operations, particularly in these three markets that we talked about so we're very close with these tenants. I mean, we're working on transactions now that might be three or four years out, really trying to strategize the Company to renew them, expand them, expand them, et cetera, so if we were trying to navigate this thing from 3000 miles away it would just be a whole different ball game. So we're on the ground in those spaces with those tenants every day and so I think pricing power gets built into that and just our overall success.

Okay. Okay. Thank you very much.

Thank you.

Our next question will come from Dave AuBuchon with R.W. Baird.

Thank you. Can you detail a little bit more the assets that you sold in the East Bay just at first glance and crunching the numbers, it looks like it's a fairly low price per square foot, $170, and I know you said they were fully occupied assets, but were the near-term lease rollovers one of the reasons for what I would think is a discounted price for those assets?

I wouldn't say it was a discounted price, Dave. The -- I think I might even have talked about this on the last call. I think on the stabilized cash flow was like a low 7s cap rate. The buildings were substantially populated by a good quality user, but if there was near-term lease rollover exposure and, we just felt like it was a market that was thin enough that we didn't want to try to sort through that exposure, so I don't -- I think that the cash flow itself, and I have to go back and look, I don't have it in front of me, might have been such that the rents were low, low enough that even at that cap rate it drives a lower per square foot cost.

Right, and these are, Dave, East Bay and the Alameda region, these are somewhat older buildings, these are not Class A buildings, I would say they're probably Class D buildings by and large. And they are dated buildings as well.

And, obviously, there has been a tremendous amount of disruption in the credit markets over the last three or four months in your marketing your assets I assume right in the middle of that. Was pricing in line with your expectations.

It was. Actually, it was. I mean, we've been looking at doing this for a little bit and -- but we had several interested parties, they liked the cash flow, they actually liked the -- every buyer seems to have its own interest and there were a number of buyers that like East Bay, that like Alameda specifically, think it's a good long-term growth area so, yes, we did, I think -- I think in light of the credit market situation, I think we did pretty well there.

Yes. It was a high quality local developer with a pension funder, so, you know, they didn't rely on outside debt.

And then my last question, I believe, Jim, I think you said that there was some -- a tech company interested in one of the Mission Bay buildings. Any particular reason or reasons why they would select Mission Bay versus South San Francisco maybe?

Versus South San Francisco? Yes, I think there's a lot of reasons but I don't know that the it trade-off would necessarily be South San Francisco. That's much more of a life science driven market, but it would be down through the Peninsula into the Silicon Valley and as I think I've noted on prior calls, there's been a lot of migration of some of the tech sector into San Francisco because of the labor base, the 24-7 quality of life, Mission Bay in particular has so many different transportation routes into that area at relatively kind of low hassle rates, and you can get a campus environment and a waterfront -- essentially a waterfront view and you've got all of that intellectual capital that's resident there with UCSF et cetera, so there are a lot of amenities resident in Mission Bay and being in San Francisco that you can't get in the Silicon Valley necessarily. That has been the draw but I would say primarily it's the labor base.

Absolutely and I think just one FYI on the tech side. If you look at an interesting static this week, I'm not a video game player, but Grand Theft Auto, which is the number one video game ever, sold a $0.5 billion in sales in the first six days. There are companies in the broad and diverse tech sector that have a lot of cash.

Let's not take two, then. And then last question, and I think you -- I believe you said this was in the Mission Bay East, the 240,000 square foot building?

Mission Bay West. If I said East, I meant West.

You did say East originally.

Mission Bay West and 240,000 square foot the total building size?

Yes.

Very good.

So operator, any other questions?

Yes. Our final question will come -- it's a follow-up question from Anthony Paolone with JPMorgan.

Thanks. Just on the redevelopment that was put back into service in the first quarter, can you give us just a sense as to--?

Which one?

The redevelopment.

Oh.

That was put back into service in the first quarter.

Yes.

How much all in costs and roughly what the yield was on that, just to give us an update on how those are going?

Yes. I think the incremental spending was probably in the 80 to $100 range on average. And it was substantially stabilized upon delivery into operations.

But just trying to get a sense, like do you calculate after you put that 80 to $100 a foot into the properties like what you're all in basis is into those assets and when you bring it back in, what the yield is on that basis?

Correct. We do look at our leasing activity across all aspects on an all in cost basis and so the anticipated yields that we target on redevelopments being in the double-digits is what we expect to and have historically been able to perform at.

And so that I think the actually -- what actually happened in these five properties, San Diego, San Francisco, the Northwest, there's a small thing in Florida which is not very relevant, and then in -- in Maryland, I think you could say fairly that the yield on the incremental dollars was within our range and I think given some of the basis that we have in some of these assets, the overall net over the term of the lease would be consistent with the target range we have given to you.

Okay. And then just one last question on the future development pipeline. I noticed from last quarter in Seattle your future development pipeline I think went from 595,000 square feet to 843. Was that just an increase in density? Because I didn't see you buy any more land, it seems.

Yes, you're correct, there weren't any land acquisitions during the quarter but what we do from time to time is carefully review our embedded opportunities and in certain circumstances we're not comfortable with projecting the opportunity as we evaluate ultimately what we will do with a particular project. So this was as a result of the very thorough review that went over probably about six months and we drew some conclusions that we were comfortable with the future development opportunities in Seattle and classifying as such.

Okay. Thanks.

Thank you.

I'll now turn the conference over to you for any additional or closing remarks.

Luckily we've done it in less than an hour or so. I want to thank everybody for joining and we'll talk to you come second quarter. Thanks again.

This now concludes today's conference call. We thank you for participating and hope that you have a great day.