Alexandria Real Estate Equities Inc (ARE) 2009 Q1 法說會逐字稿

Good day. Welcome, everyone, to the Alexandria Real Estate Equities first quarter 2009 conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to Ms. Rhonda Chiger. Please go ahead, ma'am.

Thank you. This conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Such forward-looking statements include, without limitation, statements regarding our 2009 earnings per share diluted attributable to Alexander Real Estate Equities common stockholders; 2009 SSO per share diluted attributable to Alexander Real Estate Equities common stockholders, and our redevelopment and development projects. Our actual results may differ materially from those projected in such forward-looking statements.

All forward-looking statements are made as of today and we assume no obligation to update this information. For more discussion relating to risks and uncertainties that could cause actual results to differ materially from those anticipated in our forward-looking statements, and risks to our business in general, please refer to our SEC filings, including our most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q.

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

Thank you, Rhonda, and thanks, everybody for joining with me today are Dean Shigenaga, Pete Nelson and Peter Moglia.

We reported to you -- we're reporting to you once again after our October 30, 3Q '08 report, where we outlined areas swift and mandatory actions taken. And one of the first management teams to do so, as required by the worldwide economic perfect storm, as we discussed, and an update of those actions on February 9 at our fourth quarter and year-end conference call.

And now we're going to give you a report on 1Q '09, where we see the continued structural cracks in the banking and credit systems, to wit, today's announcements of some of the stress test issues that continue the recapitalization of banks and the lack of available debt and lending, although the equity markets have seen some glimmer of progress.

But it's clear that unemployment is increasing in a kind of an unstoppable mode at the moment and the consumer-driven economy has still fallen off the cliff. Deleveraging and savings are now the order of the day.

I thought I'd depart from my usual approach to the quarter and maybe talk about some macro 1Q '09 comments and trends. Our NOI this quarter is up from first quarter '08, even if you do not consider the transactions in South San Francisco, which Dean will impact -- which Dean will talk about in a few moments and their impact. But that set of transactions has true long-term impact and value to the Company. I think you'll see increasing NOI in the quarters and years to come, due to future deliveries of development and redevelopment.

Clearly, there is a somewhat decreasing trend in occupancies since the first quarter of '08 and the flattening of rental rates in most markets, even though we've had positive lease roles. We hope that occupancies should reverse itself in some markets -- not necessarily due to the macro market, but due to -- thank our extraordinary teams and the spaces we have to lease, to wit, the lease we signed recently in the suburban DC market and Maryland, credit tenant, 10-year lease for about 59,000 square feet, which should reverse the occupancy downtrend in Maryland.

It's important to note also, we have declined to take on numerous potential tenants in each of the markets where it has less spaces that are sitting unoccupied to go unoccupied somewhat longer than we would have liked. But that is a function of -- we'd rather be safe than sorry, to use the old phrase.

G&A is up a bit this quarter -- Dean will talk about that -- but will clearly flatten through the year. And so that has a little bit of temporary impact on margins. But the margins are still very strong compared to virtually all other REITs.

You've seen a continued decline in other income since the first quarter of '08, obviously with a fall-off in construction, our construction management income has declined. Interest income clearly has declined, given rates and investment income as well, given the marketplace.

The terms of leases this quarter are skewed a bit, due to a variety of factors. But I think it's fair to say including one large lease that renewed for one year, but traditionally small spaces have a 1 to 3-year lease term; medium-size spaces, 3 to 7; and larger spaces, 7 to 15, and we see that really continuing.

The good news is there is real demand for our buildings. And again, an example is the lease in Maryland we just signed, again, 59,000 square feet, 10-year lease with a credit tenant at an all-in rental rate well above that of the previous occupant.

We made very significant progress in the first quarter on our debt maturities and we'll have more to say about that. And we've clearly paid down our line of credit and have over $600 million of availability. Our term loan is $750 million -- will be renegotiated and will be outstanding -- its outstanding date to be fourth quarter of 2012.

If you look at future demand drivers for our product and really our buildings in this extraordinarily tough macro environment, I think the best thing we can say is we have a huge competitive advantage versus anybody else. We've got the best locations as a first mover. We've got the best buildings; clearly, the best land locations; by far and away the best teams; and the best reputation and franchise value in the business.

Together with huge increases in the NIH and other health science related research, we think that will help drive some future occupancy increases. And we've seen that in Maryland, and I think we'll see additional increases in Maryland due almost directly tied to government spending.

There have been significant movement of institutional and Big Pharma entities who want to be in our critical adjacency locations. And I think we'll continue to see that in Mission Bay, Cambridge, Maryland, and Seattle.

I thought it would be useful to maybe ask a number of questions and then try to answer them to dispel any myths.

And so the first question I have and I'm going to try to answer is -- have we made any progress on our multi-year capital and liquidity plan? Dean will go into great detail, but let me highlight a few thoughts.

As we have highlighted in the press release and supplemental, we were successful in extending over $92 million of debt maturity out beyond 2012. We have reduced debt maturities through 2012 -- 2013 by almost $400 million. We've raised almost $500 million in new capital in one of the most difficult macroenvironments ever experienced, both in the fourth quarter and then in April.

I think when we saw the digital realty convert happen, we immediately mobilized. And within a few days, we were able to execute almost a $0.25 billion, five-year, minimum five-year debt transaction, which we thought was a very, very wise thing to do.

We're also working on other debt extensions and refinancings that will push maturities and so forth out several years. And we've highlighted one of those, and Dean will talk about it, which we're about ready to finalize. And we're working on several lowly-leveraged loans, which could yield cash north of $200 million to $250 million.

So we're actively working on the business parameters of our unsecured facility, and believe we can achieve significant availability when we renegotiate. And again, Dean can speak to that. And also reduction of our dividend to retain the additional precious capital has been something that we thought was -- the Board thought, certainly, was very important.

I think the trends for the future, you'll see more secured and less unsecured debt. Leverage will continue to decrease, but ideally, the ratio between equity and debt is driven, to a large extent, by availability of capital and cost of capital.

And Dean will lay out in detail fashion sources and uses, review our comfort with our key bank covenants, balance sheet details, and importantly, to clarify guidance.

Second question I want to ask is -- have we made any progress on pre-leasing our development pipeline?

The answer is, yes. No real change at the 158,000 square foot Mission Bay West building. It's 100% leased. We're committed to two credit tenants on long-term leases. The newly instituted vertical construction of the 210,000 square foot Mission Bay North buildings -- this, as you know, the lease was signed in the fall, I believe, of last year. And that's now being reported this quarter, as it's just now going vertical.

It's 48% leased to Pfizer on a long-term lease, who is paying for most of the infrastructure. And they have an option to pick up an additional 24% of the building; the balance, we're marketing.

The two-buildings spectacular waterside site in South San Francisco has remained at 16% leased. It's been very frustrating to us because it's an unbelievable view site and very, very attractive, highly flexible lab buildings. We are negotiating the remaining space with a credit tenant and we hope to have good news there. But in this market, you can never be certain until the ink is on the paper.

No change in the 130,000 square foot one-building site in South San Francisco, 55% leased, [Exalexus], who has an option through the end of the year. We'll update you on the progress of that through the coming quarters. And then the 115,000 square-foot single building site on spectacular waterside view on East Lake Union -- 92% leased to Gilead, which is a top tier biopharma company. They have an option to pick up 3% more and 5% retail, we're working on the retail as we speak.

So pretty good continuing efforts, but we hope the East Jamie Court progress can go from 16% to 100% over the next quarter or so.

Now let me turn to East River Science Park, which seems to be a hot button for most people. Again, spectacular waterview site on the FDR. I think in light of my comments should be a backdrop to what's going on in New York, many of the New York office REITs have reported, but there's over 2 million square feet of commercial space that has gone dark just this year, with tens of thousands of jobs lost in financial services and other industries. And obviously, the Mayor has a major effort to diversify the economy, certainly part of the cornerstone of his campaign.

We are negotiating a long-term lease with a 90,000 square-foot lease with a credit anchor tenant. All economic terms and conditions are agreed to, and we're negotiating letters of intent with multiple users for an additional approximately 90,000 square feet, made up of one 3,000 square foot tenant; a 27,000 square foot tenant; a 45,000 square foot tenant; a 7,500 square foot tenant; and a 10,000 square foot tenant.

In my view, although nothing is done till it is done, this is pretty amazing progress in the face of huge headwinds in New York and virtually nothing else getting done in the office sector. At a time when there are 30 holes in the ground in Manhattan where the worldwide crisis has caused shutdowns and virtually eliminated demand, we feel comfortable that we're making good and demonstrable progress.

If you look at kind of the revamped pages 18 and 19 of the supplemental, we've detailed our two significant landholdings, combined Mission Bay and South San Francisco, and Cambridge, where we have received important significant entitlements. And we're moving forward with the approval for up-zoning and moving forward with the entitlement process.

It's also important to note we have quite a number of low-rise cash-flowing buildings, which cash flow is not included in FFO, but is actually being applied to reduce basis.

ARE luckily has in hand the ability to grow in future years, some day when it's possible to do so and the credit markets have repaired themselves from the devastation that has been wreaked upon them. We have superbly located development sites at very favorable cost basis so we don't need to think about how we would go chase distressed deals.

Question number three that I'd ask -- do we have significant exposure to shaky tenants? That's a question that's often asked and a myth that is out there. And I'd say, way far less than virtually any other REIT.

You'll see in page 3 of the press release, we've given you a sector-by-sector breakdown by revenue of our sector tenant base. And when we file our 10-Q here in the next couple of days, we will set forth our top 20 tenants and you can see it will be the strongest it's ever been. And we have extremely low exposure to our top tenants and well beyond that.

27% of our revenues come from Big Pharma; 20% from public biotech, where we have heavily focused on the positive cash flow and profitable companies including the top three, Amgen, Gilead and Celgene. We have not gone after and have minimal exposure to the Valley of Death companies that are between venture capital and product approval where others have a lot of exposure in that area.

17% of our revenues are from product and service companies that produce substantial revenues, companies like Quest Diagnostics, Qiagen, Monsanto, et cetera. 15% of our revenues come from government nonprofits and universities, including the NIH, MIT, Scripps, Fred Hutch, among those in the top 20.

And 14% of our revenues come from very high quality venture and big Pharma-backed private companies where we have virtually no exposure. And that's because of our unique expertise at underwriting and bringing these companies selectively and turning down most in this area. And historically, we've had very few failures and have zero reserve for bad debts. And the balance, 7% traditional office.

The fourth question I'd like to ask before I make one final comment and turn it over to Dean is -- do we have negative significant exposure to future REIT lease roles? And I'd say we feel pretty good about where we are. We're proactively targeting the best tenants with real requirements, which we generally find out about first because of our unique relationships.

In 2009, we've got about 6.9% or 728,000 square feet rolling, the balance of the year; we're projecting up around and about 5%. San Diego, slightly positive; San Francisco, neutral to slightly negative; DC, positive; Massachusetts, positive; Southeast, positive; Seattle, positive, although we're 99% leased in Seattle.

Leased or committed, 14%; last quarter, it was 16%. Negotiated or anticipated, about 37%; last quarter, it was 49%. Redevelopment, only 0.5%, it was the same as last quarter. And too early to tell, about 48.5% up from about 34% last quarter -- 280,000 square feet of the 386,000 in the too early to tell role in the fourth quarter. So we're trying to be conservative in how we think about things.

In 2010, we have 10% of the portfolio rolling or about 1 million square feet. We're guiding to about 5% up. Leased or committed, 5%; we previously said 10%. Negotiated or anticipated, up from 46% to 48% from last quarter. Redevelopment, the same as last quarter, 12%. And too early to tell, up slightly from 32% to 35%. But we feel fairly good about where we are.

And then a big year for rolls -- 17%; 1.8 million square feet in 2011. We're projecting up 5%. Leased or committed at this point, 4%; negotiated or anticipated, 31%. So luckily, almost 35% are in process. Redevelopment, just 6% and too early to tell, 60%.

Let me say one other thing before I turn it over to Dean for some very, very important analytical comments. On March 4, 2009, during the first quarter, the creator of this Company, the founder, and the visionary who really put the whole concept together and the financing together and helped launch us into the Company we are today, Jerry Sudarsky, passed away very unexpectedly. And we just wanted to make sure to recognize him for his extraordinary contributions, from really being a pitcher of the Boston Red Sox to a great scientist, to a great entrepreneur, and a great mentor and leader.

And I think I'll end with, before I pass it to Dean, with his final words is -- perseverance gets you through all environments. And so that's how we plan to go forward. Dean?

Thanks, Joel. Let me just highlight where we're going to head through my commentary. First, on guidance, then through sources and uses; I'll cover our credit metrics and then close out with our operating results.

First with guidance. Let me begin initially with the property in South San Francisco. During the quarter, we leased the 155,000 square foot building located in South San Francisco to a credit tenant. The business terms and economics of exiting the former tenant and stabilization of the property with the credit tenant were clearly the appropriate business decision.

The prior tenant could have paid rent for a few more years based on the cash on their balance sheets. However, we had a significant opportunity to replace this tenant with a credit tenant that we believe will remain in this property well beyond their initial lease term.

Over the expected term of the new lease and the consideration received from the prior tenant from their lease modification, our deemed rent over the term of the new lease will put us ahead of rent under the prior lease. We believe it's inappropriate to strip out the contributions from this property from our results. The new lease will begin contributing to our results in the beginning of April of 2009.

I would like to remind everyone that our guidance includes various broad assumptions. Some of our assumptions are as follows. Rental income and NOR are projected to grow through the year, excluding the impact of the results of the property in South San Francisco. Same property results are projected to be in the 2% range, which is consistent with same property results on average for the last six years -- slightly down from maybe the last couple of years.

Leasing activity is projected to have an increase in the 5% range for 2009 for renewed and re-leased space. In addition, we believe the length of lease terms will, on average, be longer than the length of lease terms reported in the first quarter leasing activity results.

The core of our operations on a normalized basis is projected to deliver positive FFO results as compared to 2008. This is before the impact of the capital raised in 2009 and excluding the property in South San Francisco. Operating margins for 2009 are expected to be in the 72% to 73% range, which is relatively consistent with 2008 if you strip out the property in South San Francisco.

General and administrative expenses on an absolute dollar basis is projected to be consistent with 2008, possibly up slightly but no significant increase is anticipated.

G&A expenses as a percent of total revenues is projected to be approximately 7%, which is really consistent with many prior years in that 7% to 8% range.

Our guidance includes various assumptions, including the amount for the gain related to the repurchase of $75 million of par value of our 3.7% convertible notes. Our accounting and finance team is working through the calculation of the gain, which ultimately, we will run by our accounting firm before we finalize the amount.

To briefly highlight the complexity of the calculation, we are required to determine the value of the notes at the date that we repurchased them pursuant to FAS 157. I'm sure everybody on this call can appreciate the complexity of fair values in this environment. We will be prepared to provide the amount of the gain once it's finalized by our next earnings call.

Also, I want to note that our guidance for FFO was 5.43, representing no change in our guidance from what was issued on April 23. Our guidance issued a couple of weeks ago assumed a smaller convertible debt offering. The final gross amount of the offering was $15 million higher than the -- higher at $240 million. I highlight this as a general reference to our usual conservative projection for FFO per share guidance.

Various other assumptions are included in our guidance and as usual, we do not comment on the details of these underlying assumptions.

Our guidance for 2009 FFO per share diluted and EPS diluted was 5.43 and $2.50, respectively.

Moving next to sources and uses, our multi-year capital plan remains consistent with our strategy, as outlined in the third and fourth quarter 2008 earnings calls. In 2009, we made significant progress in executing our capital plan, including deleveraging our balance sheet. We reduced debt maturities through 2013 by approximately $363 million, including the extension of approximately $92 million of secured debt maturities.

We also completed a follow-on common stock offering and a convertible note offering resulting in net proceeds aggregating approximately $488 million. Our execution on our capital plan clearly indicates that it is inappropriate to assume that all debt maturities will be repaid versus extended or refinanced.

A more realistic and appropriate strategy for our business and capital structure assumes that we continue to execute on our multi-year capital plan, including refinancing, extending and sourcing new loans over the next few years. Opportunistic sales of assets, including non-income producing land parcels, primarily the users and broadly speaking, equity capitalized appropriate, including JV capital.

Our balance sheet capacity and forecasted sources and uses of capital assuming reasonable assumptions for the extension, refinancing, and new debt will allow us to manage our balance capacity through 2012 and beyond. We will continue to aggressively pursue all options under our multi-year plan, as just highlighted.

As of April 30, 2009, we had approximately $536 million outstanding under our unsecured line of credit or almost $600 million of availability. Additionally, as noted in our supplemental package, we had approximately $160 million of cash on hand, including approximately $35 million of restricted cash related to construction projects.

Two-thirds of our secured debt is non-CMBS debt with life companies and banks. The remaining is traditional CMBS debt. In addition, the average debt balance maturing through 2013 approximates $25 million per loan. We believe these are positive attributes of our maturing secured debt, as large loans and CMBS loans are very difficult to extend or refinance in this environment.

We are projecting that we will be able to extend or refinance a significant portion of our secured debt maturities through 2013.

Since January 2008, we have extended several loans aggregating almost $400 million. We are also diligently working on extending or refinancing remaining debt that is maturing in 2009, 2010, and 2011, while we also work on several new loans, including several that may generate proceeds in excess of $200 million.

A key attribute of our asset base is that it consists of very high quality and very well-located real estate with first-in-class client tenants, with north of 60% of our asset base unencumbered as of March 31. This pool of assets will provide for opportunities to secure new financings in the future.

We are very close to closing an extension of one of the two loans maturing in 2009. The key terms related to this loan extension include an interest rate not to exceed 6.5%; nonrecourse; solid loan to value; and a term of four years. Terms will vary from lender to lender, but this is a summary of the loan we anticipate extending this month.

Our total commitments for our construction projects approximate $230 million, which will be incurred over the next year or so. We remain on track to significantly reduce our construction spending in 2009 as compared to 2008. Additionally, we further expect our construction spending to tail off significantly beyond 2009, as significant new development or redevelopment projects are not strategic priorities at the moment.

Our multi-year capital plan also assumes that we will be able to successfully amend and renegotiate our unsecured credit facility to a significant availability level that will consider our business requirements, including a portion of total commitments allocated to an unsecured line of credit and unsecured term loan. Our lenders fully agree that unsecured term loans like ours should be available to us as a component of our unsecured credit facility.

Lastly, our Board of Directors declared our second quarter common dividend at $0.35, representing a forecasted common dividend that will represent our distribution requirements as a REIT equal to 100% of our taxable income. This dividend level will allow us to retain an additional $70 million of cash flows each year.

Moving next to credit metrics. Debt to gross assets were very solid at approximately 49%. Fixed charges are solid at almost 3 times today based on the traditional calculations used by many real estate companies.

Facility covenants are very specific to each company and dependent on the specific terms and definitions of each facility agreement. As such, covenant calculations and actual compliance will vary company by company. As expected, we have operated over many years in compliance with our debt covenants. We believe that our credit metrics related to our facility covenants are solid for our business.

Leverage is solid at the low 40% range. The facility limit is 65%. Our secured debt percentage has been below 20% and the facility limit is 55%. Fixed charges are solid for our business at approximately 2 times. And we expect EBITDA to continue to increase over the coming quarters, as we deliver various redevelopment and development projects and lease up vacant spaces.

Next, turning to our operating results, our team continues to diligently execute across key areas of our business and have generated solid operating statistics during a very challenging macroenvironment. We continue to report positive same property results quarter to quarter for 43 consecutive quarters now.

We also have reported positive leasing activity year-to-year for over 10 years. Same property results were up 3.6%. Leasing activity was solid at 465,000 square feet with GAAP increases of 5.4% on renewed and re-lease space. This is on top of the highest leasing year in the Company's history in 2008 at 2.2 million square feet of leasing activity.

Operating margins were at 75%. Excluding the impact of the property in South San Francisco, total revenues were up 9%; property NOI was up 7%; FFO per share was up 20%; all over the first quarter of 2008. If we were to include the property in South San Francisco, these statistics would have been much higher.

After adjusting for the impairment charges recognized in the first quarter of 2008, FFO per share for the first quarter would have been slightly higher than FFO per share for the first quarter of 2008. The primary drivers behind this relatively nominal but important growth period to period is due to a decrease in other income of approximately $2.5 million, and a decrease in overall occupancy generally since the first quarter of 2008.

NOI excluding the one property in South San Francisco has been stable over the past couple of quarters, and we are projecting stable and growing NOI prospectively through 2009 and into 2010.

Over the last five quarters, we have delivered almost 400,000 square feet of redevelopment space, fully stabilized, including 50,000 square feet in the first quarter of 2009. Delivering these spaces into operations over the last five quarters have resulted in an increase in property operating expenses, but given the nature of our triple net lease structure, these operating expenses are substantially recoverable from our tenants.

Accounts receivable is the lowest it has been over the past five quarters at approximately $6 million, with no allowance for doubtful accounts. We are forecasting the delivery of area spaces in our redevelopment and development projects over 2009 and 2010, which will increase our revenues and cash flows from operations. Our development projects that are scheduled for delivery in 2009 and 2010 aggregate 670,000 rentable square feet at approximately 70% leased or committed, with an additional 20% under negotiation for a total of approximately [90%].

Capitalization of interest was below $17 million for the first quarter, down from the fourth quarter primarily due to the decrease in our weighted average effective interest rate from 5.46% in the fourth quarter to 4.84% in the first quarter. We continue to forecast a reduction in interest capitalization as we complete various construction projects.

Lastly, let me just briefly comment on our 8% convertible notes. We recently completed the issuance of our 8% convertible notes, which may be settled upon conversion with cash, stock, or a combination of cash and stock at the election of the Company.

Accounting for the 8% convertible notes will be different than the accounting for our 3.7% convertible notes. Our 8% convertible notes will be accounted for using the if-converted method of accounting. This means that each quarter, we will separately analyze EPS and FFO per share using the if-converted method.

We anticipate that EPS will be based on our unsecured borrowing rate as of the date we issued the 8% notes. And FFO per share will be based on the if-converted method with approximately 5.0 million shares included in our weighted average diluted share count.

With that, I'll turn it over to Joel.

Operator, I think we're ready for Q&A.

(Operator Instructions). Michael Bilerman, Citi.

Good afternoon. It's Irwin Guzman here; Michael's on the phone as well.

Dean, can you clarify -- there's obviously been a lot of capital activity between the time when you originally gave guidance for the year and your revised guidance today. Can you strip out what portion of the change from the original 6.26 to 5.43 is due exclusively to the capital activity? And what portion of it might be driven by any changes in your operating assumptions for maybe occupancy or other income or any other piece that -- sort of more normal pieces?

Sure. I'll do my best to help you guys understand a very complicated set of assumptions that really underlie our ultimate guidance.

But I'd say that if you start from the 6.26 and move your way down to the 8-K announcements which puts you in the 5.18 range on FFO per share. Really, it stepped down I think over a couple of sequences. First, through the equity offering of common stock went from 6.26 to 5.50, and I can say that that was substantially all related to the capital transaction for the equity offering.

Then we moved that down when we announced the convertible debt offering to a range I believe at 5.18 to 5.20 or 5.22. And that change was purely driven by the anticipated dilution from the convertible debt transaction.

We further then completed and priced the transaction and had a better estimate on sizing and terms. And we adjusted through an 8-K a few days later up to 5.43, at which point we knew a few things -- one, the coupon on the convert, the approximate base size of the deal at $225 million. And internally, we had decided on a repurchase through a variety of privately negotiated transactions -- $75 million of our 3.7% convertible notes. That brought us back up to the 5.43.

Within that entire range of guidance that we had given, I would comment that there's been no significant changes at a high level on property metrics or our outlook on occupancy or our outlook on leasing. Over this very short time period, really spanning I guess about a quarter, as it began with our fourth quarter guidance and then updated twice for really primarily related to the capital transactions.

There's really been no significant movement. Now obviously, underlying those assumptions, various leasing assumptions do move property by property. So I want to be fair that there were some underlying changes property by property, but I'd say at a real big, high level, nothing in any significant way.

But how about the lease modification -- the $0.55 that you had in the first quarter? That certainly wasn't in your guidance to begin with.

It was in our guidance that we issued at year-end.

: Why wouldn't -- I mean, if it's 10% of your number, why wouldn't that call that out as being a one-time number? It would appear as though the Street was able to get the numbers that were [consistent] with the guidance without putting in a $0.55 lease modification benefit in the first quarter.

Yes, actually, what I had highlighted really at the beginning of my comments really was the way we had viewed the transaction. I mean, this opportunity to exit the former tenant, to stabilize the property with a credit tenant what we felt were clearly was the appropriate business decision that gave us the best economics for the property on the long-term.

This consideration was deemed rent. I think if you look at the transaction in total, and the total consideration for the property, both before under the old lease and under the new lease, we feel pretty comfortable that that property is going to perform well on the long-term, and that we made out at the end of the day, we're ahead on total consideration under the new lease.

So I think we view the transaction as an adjustment to tenancy within a building that ultimately was appropriate for the situation. It's actually, in a very odd way, not deemed a termination fee from a GAAP and SEC accounting perspective. It is deemed rent. And the payment and the consideration as a result of exiting the tenant was just a component of the business transaction. It is part of the real estate part of our business.

I'm not doubting why you did the transaction, but I don't think you can -- I mean, it is a -- maybe I'm not thinking about it the right way, but what is the full-year impact of doing this lease modification to your numbers? I know there's obviously a big impact in the first quarter. It's a [mass] number, right? I mean, $0.55 per share is not a small, insignificant impact to FFO. Is there a massive drag in the back half of the year that negates it?

I'm not sure what you mean by drag. We did put the -- we did complete the lease in the first quarter. The lease will be effective in early April. And so you'll see the GAAP contribution from that property prospectively. So you do get that benefit going forward, if that was what you were asking.

Well, but there was a prior rent, then the new rent. Is there a major difference in the GAAP income from that lease?

There is a difference because of the technical accounting, but the total consideration over the original lease that we eliminated and the new lease, over the anticipated term of the new lease will put us ahead on an aggregate basis. So we are going to be ahead.

And you're saying that this $18 million was included in your prior guidance?

Yes, Michael.

Is there any other sort of large or -- I know you guys spend a lot of time in coming up with your guidance, but is there anything else -- I know, it sounds like there's going to be a gain in the second quarter. I mean, is there a magnitude of what sort of discount you bought the bonds at that was embedded in your guidance for that?

Well, as I had mentioned earlier, the actual gain is difficult to determine right now because of the complexity and fair-valuing the convertible debt at the date we repurchased it. I can tell you we've tried our best to nail that down before we got to the call.

But it is very complicated because of the FAS 157 rules, which as we all know from the banking and financial sector, it's been a disaster on the fair value perspective. We don't have those challenges, but it is difficult to firm up the number.

We are working through that. It could be -- I think the risk on our guidance from a gain on the convert repurchase is only to the upside, meaning the gain could only get larger. We've taken a conservative assumption and it's roughly in the $11 million range.

Of what's embedded in there today?

Yes. And to answer your other question, Michael, there is no other significant termination piece anticipated at the moment.

So effectively, this tenant, because he had a long lease duration, paid to get out of the lease, which was effectively the $18 million -- and that's cash that you received?

Well, the reason why I said it's consideration is because we clean up the balance sheet at the property, which included everything from cash to deferred rent to -- trying to think -- there probably was a security deposit, et cetera. It's everything related to the former lease that is included in the number over the two periods.

Joel, can you give us a little more detail about the one large tenant that renewed for only a year during the quarter, in terms of -- if you don't feel comfortable disclosing who it is, the tenant type and whether they're in any of your other buildings (multiple speakers)?

Oh, yes. Yes, this was a tenant in the suburban DC market. I prefer not to say the name, but it is a private company that's owned by an individual who sold his business to a Big Pharma and who netted out something in the range of $2 billion last year. And this is, I think, about an 80,000 square foot property. And they came to us wanting to do a short-term extension as they think about what they're doing.

My sense is that there may even be an interest in buying the building in the future. So we granted them a year lease -- or a year extension on the lease. I wouldn't read anything sinister into it. It actually was kind of a net positive but it certainly is a drag on the statistics.

And Dean, how much NOI or how much cash flow are the low-rise buildings in Cambridge that you talked about? What are they generating on a quarterly basis?

I unfortunately don't have that. Let me just say that some of the buildings are -- somebody is writing down a number in front of me -- so it looks like it's about $1.5 million a quarter.

And just one other question. What are your expectations for other income for the rest of the year? You mentioned that it was all because of the construction management business.

Yes, I think it's going to generally trend much lower than it has in 2008. I think that's a general view for other income.

Okay, thanks. We'll jump off.

Anthony Paolone, JPMorgan.

I guess I'm still a little confused on the lease modification income. Is this the Cell Genesys space that was discussed last quarter?

Correct.

So, in last quarter I think you booked $11 million of lease term fees on that space -- is that right?

Correct.

That was cash, right?

Well, it was the same -- it's the same components this quarter and last quarter. It just was the GAAP rules required that that amount be amortized over the remaining period of the contractual lease term.

And you have to remember, Tony, this was a -- kind of a complex three-way negotiation between the incoming tenant, the company you just mentioned, and ourselves. And the final negotiation and set of parameters kind of integrated both leases into an overall transaction. So it's hard to look at it as a classic -- it was not a classic lease termination, for sure.

Yes, I think almost in the perfect world, sometimes you're fortunate in the sense that you can strike an agreement between three parties, meaning the landlord, the tenant that's trying to get out from their obligation, and the new tenant, almost in a way where you may be able to maintain one set of economics on the lease term and continue it through -- under the new tenant.

But in this particular circumstance with the former tenant trying to get out as quickly as possible to restructure their business as it was going through a dramatic change, and not being able to wait for the pace that we needed to go through with a new tenant of credit, which takes a little more time to work through, as we all know. So as a result, we had to split the transaction apart and ended up with effectively two separate leases, which resulted in the accounting that we're dealing with today.

So does the old lease -- did it end at the end of the first quarter? And I guess it sounds like the new lease began in April? Is that --?

Yes, correct. The tenant actually moved out before year-end, I believe. The new lease signed in the quarter will be effective in early April.

And maybe just to bring it back to just cash, so just we understand the economics, like, what is the new annual lease rate maybe like in the first year compared to the last year on the old lease? And then what was the total cash term fee to get out of it?

Yes, again, I think you have to look at the ultimate consideration we receive from the exiting tenant ends up yielding to us over the term of the incoming lease, plus the current tenant situation more than we would have gotten under the old lease had it continued. That's -- I'm not able to share with you those leases, because we're under confidentiality, but that's the real situation.

So it sounds like you got a big lease term fee that more than makes up for what would otherwise be a reduction in the rent for the new tenant?

Yes, I don't think it was a -- I don't think, again, you can call it a lease termination fee. It really was structured together with the incoming tenant, so the total consideration before versus after would benefit us after to a greater extent than before. That was -- how somebody would look at it from the outside versus the real structure of the negotiations and transactions, that's really what occurred.

Okay. Understood, but then just following up on Michael's point earlier, so then over -- for instance, over the balance of this year and I guess even into the future, it sounds like the rent you'll be receiving will be lower than what you were receiving, had the prior tenant just continued on their normal course. Obviously, you make up for it with that extra cash, but it sounds like the -- running forward, it will be lower than what you would have been at, had this not happened.

Correct, Tony.

Okay. Just switching over to your 2009, 2010 expirations, I think you alluded to still expecting positive spreads on that leasing activity. And if my memory serves me right, going back to, say, 12 months or even 18, 24 months ago, I think the expectation was for about a 5% or so positive spread. So it doesn't seem to have changed much. Is that accurate? Have your rents -- has market rents really not changed much for you all?

Yes, I think that's a fair statement, and let me maybe just give you a little bit of detailed statistics. If you look at leases rolling in '09 -- and I'll just take you through each of them, because it's worth the minute or two.

San Diego leases roll at an annualized base rent of about $30 -- this is triple net. Today's rents are kind of in that range, more or less. The Bay area is about $35, which is what we have rolling. Rents are maybe a little south of that.

Eastern Mass, our rental rates are about $15. So, renewal rates are well north of that. New Jersey and Philadelphia, we just have a teeny amount of space, so that's kind of neutral. Southeast, our current rental rate expiring would be about $21. And there's some upside there, based on prevailing rates.

In DC, $21 -- same thing; kind of upside to neutral, depending upon the circumstance. And Seattle is about $13, so there's significant upside there. But again, it is highly location and facility-specific.

Okay, that's really helpful.

For example, the lease that we just signed in Maryland, suburban DC, with a credit tenant, I think the lease rolling was at $21. And given the complicated infrastructure that the current tenant wants when that's delivered to them, that lease rate will be substantially higher all-in. So that's a function of both market and then, obviously, infrastructure.

Okay. My last question is -- I think you mentioned CapEx spending -- or development spending, I think $230 million left. I was wondering if you could focus it in on just 2009 and lay out your expected development spending and redevelopment spending for this calendar year, as well as just maybe two other buckets -- one for TI's and leasing commissions and the other just on general, like, maintenance -- CapEx, parking lot, roofs, things like that?

Let me do my best with a lot of questions there, Tony. I'd say the CapEx requirements for the remainder of the year is probably, if I recall correctly, just shy of about $200 million. And that is inclusive of all of our construction spending, whether it's CapEx as you had asked about, TI's, redevelopment or development.

Our press release I believe discloses our cost to complete for redevelopment and development projects -- and I'm turning the pages as I speak -- $95 a foot remaining on the redevelopments; about $100 a foot on our developments.

Recurring CapEx, if you look at our 10-K, it gives you a pretty good understanding of recurring CapEx and tenant improvement and leasing costs to re-tenant space. And I think on the recurring CapEx, it has trended over the last five years to something around $0.20, well short of the $0.30 we originally underwrote from the IPO.

I think if you look at the recurring tenant improvement and leasing commissions, I believe that number, I don't have it in front of me, but I believe it's in the $5 a foot range over the last five years, on average. But there is a disclosure on those costs that we've incurred over the last five years on an average for your prospective.

Okay. But the $5 a square foot, you think is a good number for TI's and leasing commissions this year?

Yes, I think if you're thinking about it from an FFO prospective, yes.

Okay, thank you.

Mark Biffert, Oppenheimer & Co.

Yes, Joel, you mentioned that you were negotiating some leases for the East Tower in New York. I was just wondering if you could provide any color on the rent levels that you guys were looking at getting, sort of the TI's costs and in any concessions you may have offered to the tenants to bring them in, as well as the tenant mix, if you can provide some color on that.

Yes. Well, for competitive reasons among tenants, we're the only game in town in the city of Manhattan, other than a small incubator. I kind of don't want to put those out publicly.

But when we underwrote the project back in 2006 and presented it to our Board in June of 2006, our rent assumptions were kind of at the low end of the then-Cambridge rents. And those are what justified kind of our moving forward with the project costs and expected returns. And those numbers were approximately $45 triple net, which at that time kind of was the low end of the Cambridge rents. So I would say that in all cases, we're north of that number.

The type of tenants, I won't give you names for sure. We have from an academic tenant, a CRO, a clinical trials situation. And then two others that are kind of life science but kind of have specialty types of focus. Those are the five that I referred to in my earlier comments.

And so that's probably the comfort level that I'd like to put out there at the moment.

Okay. And how have your yield assumptions changed since now you have more clarity on the rents that you're looking at?

Well, our all-in costs and this number in our supplementals has not changed since the beginning. We are pretty much on target cost-wise. Clearly, building in New York is very expensive. Costs, my guess is, have come down a bit, but we clearly have assumed a stabilization. It would take three years from initial delivery to stabilize and then obviously building out takes some time.

So that's kind of how we thought about that. And our yield parameters were in the high-single digits at the time we presented to the Board.

Okay. And then, Dean, if you can maybe comment or draw on your expected timing. I think you mentioned you looked to do some secure debt. I'm just wondering in terms of -- any issuing any kind of debt, when that time would be, later in this year or next year?

Well, I'll comment maybe first. I think that is, as we speak, we're working on a variety of secured debt transactions. So I would expect to see them almost every quarter.

Yes, I'd agree. I agree. You're going to see us execute on that side. As best we can tell now, you're going to see it every quarter. We have the first transaction for another extension occurring this month.

And I would suspect we're going to be very productive over the next two and three quarters, and obviously, thereafter as well.

Okay, and you had mentioned I think in a 6.5% rate, is that right? Or is it going to be higher than that?

Well, I think every loan will be different. I just wanted to be clear that the transaction that is closest to closing at the following terms, which I highlighted, which was a maximum rate of about 6.5%.

And will every loan be at that favorable rate? Probably not. I think that's a phenomenal rate. I think it's quite likely to be in the range from that up to in the mid-7's. Yes, fairly consistent with what you've been hearing from other REIT management teams of late.

Okay. And then I just wanted to revisit the convert and the way that you're accounting for it, versus putting it in your interest expense, versus putting it in the share count. What was the impetus behind that decision?

Yes, actually, Mark, let me just interrupt one second to go back to your previous question. I think it's fair to say too that in today's world, it is very difficult to get any kind of new debt. And the only reason that virtually any company can access secure debt potentially is because of existing strong and ongoing relationships because the markets still are pretty frozen.

So that's also a reason why these rates are achievable. But if somebody went out without relationships in the market today, I think they'd have a very difficult time getting secured debt.

So, Mark, let me try to answer your question on the convert accounting for the 8% deal. The difference in the two deals had to do with the ability for the company to select the settlement feature, whether it was cash, stock, or a combination thereof, which was the nature of the 8% deal.

And we felt that that flexibility was important because you never know what form of capital would be your most effective form at the time when you wouldn't want to settle the outstanding notes. So that flexibility was an important aspect. And as a result, we're left with the if-converted accounting. And on EPS, you'll see the unsecured borrowing rate going through the P&L.

And on the FFO side, we fully expect that the if-converted quarterly test will show that the shares under the if-converted method will come into the FFO calculation.

That quarterly test -- it is done every quarter. And it could change period to period. But our best guess today would be that that would apply to EPS and FFO -- at least going forward over the reasonable near-term.

Okay, thanks.

Dave AuBuchon, R. W. Baird.

Just want to be clear on the initial guidance that you're giving on the convert gain is $11 million, understanding that it's kind of a rough estimate right now and it likely can go up. But the $11 million should be included in the Q2 number?

Yes.

Okay. And then is the -- will the fourth quarter of '08, the $11.2 million termination fee that you originally got from Cell Genesys, will that be restated at all?

Well, not sure what it would be restated for, Dave. All of our numbers last year were restated for the three accounting pronouncements that were effective on January 1. APB 14 impacted the convertible debt that was issued on an outstanding throughout 2008.

Right. I'm just making sure that the deal that you executed in Q1 relative to Cell Genesys does not supersede the deal that you got from them in Q4?

No, nothing is changing on the accounting for the entire transaction in Q4 related to that project.

Got it. Okay. What was your second generation CapEx in Q1? You gave the rough guidance for the year, but what was it actually for the first quarter? Your leasing commissions and tenant improvements.

Yes, it was pretty nominal. I think the year last year was [$2.7 million] if I recall correctly and I think it's about maybe in the $600,000 to $800,000 range for the first quarter.

Okay. Then next question related to just your multi-year capital plan. And you sold some assets in the first quarter. Can you talk about how much asset sales are going to be reflected in that plan? At least in 2009?

Yes, actually, I guess -- I don't know if this is necessarily a benefit for your question, Dave, but fortunately from our perspective -- but maybe not from yours, because I understand why you're asking the question, to help refine your model -- but from our perspective, we've laid out a multi-year plan that actually has multiple prongs for us to execute on, all of which could be executed on a different levels to ultimately contribute to our capital strategy over a multi-year process.

So I would say that it will be a varying amount of contribution each year from the various buckets that we could utilize. And just as a reminder, gains on our real estate, as we all know, are excluded from FFO.

Are there any -- I guess the other way I'll ask it is -- are there any assets held for sale right now?

No. No, we sold the three assets that were held for sale as of year-end in January, I believe, and as of right now, as of March 31, there were no other assets held for sale.

Yes. We have obviously discussions but under the technical definition of held for sale, we're not at that definitional threshold.

Okay. The redevelopment spending to date, you gave what you expect to spend for the balance of the redevelopment pipeline, but can you give the number that you have actually spent to date on the 586,000 square feet?

Dave, I'm going to have to get back to you on that. I don't have that with me.

Okay. Last question is related to the line of credit, you have in the supplemental that you have capacity of $1.9 billion. Does that include the accordion feature?

The $1.9 billion is -- excludes the accordion feature and it's basically $750 million of a term loan fully drawn. And then a $1.15 billion of capacity under the revolving credit line, of which that is only partially drawn.

Right, okay. Got it. I think that's it. Thank you.

That's all the time we have for questions today. I'll turn the conference over to Mr. Marcus for any additional or closing remarks.

Okay. Just thank everybody for tuning in and we'll talk to you in the second quarter. Thanks again so much.

Thank you. That does conclude today's conference call. Thank you for your participation.