Alexandria Real Estate Equities Inc (ARE) 2009 Q3 法說會逐字稿

Good day, and welcome, everyone, to the Alexandria Real Estate Equities third-quarter 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, and good afternoon. This conference call includes forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933, as amended, and Section 21-E 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 Alexandria Real Estate Equities' common stockholders; 2009 FSO per share diluted, attributable to Real Estate Equities' common stockholders; the business plans of certain tenants and the expected impact of the conversion of our unsecured convertible notes.

Our actual results may differ materially from those projected in such forward-looking statements. Factors that might cause such a difference include, without limitation, our failure to obtain capital, debt construction financing and/or equity or refinanced debt maturities; increased interest rates and operating costs; adverse economic or real estate developments in our markets; our failure to successfully complete and lease our existing space held for redevelopment and development in our markets; our failure to successfully complete and lease our existing space held for redevelopment and new properties acquired for that purpose; and any properties undergoing development; our failure to successfully operate or lease acquired properties; decreased rental rates or increased vacancy rates; or failure to renew or replace expiring leases, defaults on or nonrenewal of leases by tenants; general and local economic conditions; and other risks and uncertainties detailed in our filings with the Securities and Exchange Commission.

All forward-looking statements are made as of the date of this call, 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 welcome, everybody to the third-quarter call. With me today are Dean Shigenaga, Senior Vice President, Chief Financial Officer; Peter Moglia, Chief Investment Officer; Steve Richardson, Senior VP, Regional Manager of the Bay Area; Tom Andrews, Regional Manager of the Massachusetts region; and Krupal Raval, Vice President of Capital Markets.

Let me start with a couple of macro comments. During the nine months through the end of September, we've acted very deliberately and decisively regarding the macro financial breakdown that started to take place or at least took place over the last 12 to 15 months. Today, our balance sheet is in very good shape. Our operations and financial performance has really remained very stable, with our core being very stable.

But the macro current environment still continues to be marred by many troubling trends, including too much government interference, general hostility to business, too much government spending and credit markets still being very challenged.

Some of the important key accomplishments for the first nine months of 2009 by our undisputed first-in-class team include assets of disposed of or teed up for sale, $55 million approximately. Total debt and equity capital raised $844 million approximately. We reduced our convertible debt outstanding on the [3-7] notes about $75 million. Principal reductions on secured debt, approximately $239 million. Extended or refinanced secured debt, approximately $159 million. And reduction in our line of credit, approximately $177 million. So we've been very busy.

Looking at the Life Science industry, it's in relatively good shape, and it's pretty clear the only truly effective way to control health care costs is through the pharmaceutical and biotech industry and the products that have the potential to prevent, detect, treat, and cure disease, not a new government plan.

If you look at the November 2 Time magazine, one of the top stories there was the early victory for the Bio Pharma industry on the critical 12-year exclusivity quest for Biologics, and that provision is in both the House and Senate bills.

The NIH, as many of you know, increased the 2009, 2010 budget by $10.4 billion and we are seeing direct benefits. Alexandria client tenants have received approximately $385 million of the $4.3 billion distributed through 11/2009, about 8.8%.

Moving on to earnings and financial results, and Dean will certainly go into much more depth. We are pleased to have reported $1.13 a share diluted FFO.

Moving on to the balance sheet, both progress and ongoing implementation of our multifaceted capital plan. This quarter we reduced secured debt obligations by about $104 million. We have no further debt maturities this year and minimum maturities next year approximating $24.5 million.

As most of you know and from the bullets on the press release, we did raise $233 million in the equity offering. You will see us keep an increasing amount of cash on the balance sheet over time even though it will have a somewhat dilutive impact to earnings.

And also a bit of a dilutive impact to earnings, we did close after the quarter's end, $120 million ten-year secure financing with a top-tier life insurance company on a pool of six assets at a rate of 7.75%. This was started in the late summer of '09 and we're likely to do a series of additional 10-year secured debt financings with even better rates.

For the nine months ended in September, we sold three properties aggregating about 64,000 rentable square feet to a Life Science user at a gain. And as you can see from the press release and supplemental, as of quarter end, we have four properties with an aggregate of about 269,000 now classified as held for-sale. This will obviously also have a dilutive impact on earnings. These assets are not in our best adjacency locations, and are programmed to monetize some of these assets and enhance. The deleveraging process will be ongoing.

We also, obviously, are looking at recycling further assets as time goes on. And after the end of the quarter, one property was sold for -- a small property of 47,000 square feet to a Life Science user for $6 million at a gain. These sales are based on dollars per square foot, not on cap rates.

We're also reviewing selected sales of some of our non-income producing land parcels as well as joint venturing of other parcels with Life Science users, where we might put up the land and they might put up the capital at a very, very low cost of capital for build-to-suits, primarily institutional entities. We expect in the first quarter, hopefully, to announce our first build-to-suit on university land.

We also expect fee development for institutional third parties in North America and Europe over time, which will create a new source of ongoing revenue.

Let me move to occupancy. Overall, relatively steady at about 94.4%. Remember those numbers are not rental weighted. In a continuing tough macro environment, we see somewhat positive signs in San Diego for future leasing. Steve will talk about the San Francisco market. Tom will talk about the Massachusetts market.

In the Southeast, it is showing weakness, but we're working hard to turn that around. And we're seeing very positive signs in the suburban DC market with the NIH stimulus money. And Seattle has been relatively steady.

Same-property results, we are pleased to report again about a 1% GAAP increase and about a 4.3% cash increase. And our best-in-class teams in each of the regions are working hard to protect both occupancy and rental rates in, again, a very tough environment.

On the leasing side, once again we had a solid leasing quarter with about 450,000 square feet. And on the renewed or re-leased space, an average GAAP rental rate increase of about 5.6%. Year to date we're up about 5% on 1.35 million square feet of leasing. Again, an amazing statistic given what everybody has been through over the last nine months.

The remaining rolls for 2009 are about 246,000 square feet, about 24% are leased or committed. About 44%, we anticipate to resolve favorably. 32% marketing. And none are going in for redevelopment.

For the 2010 rolls, about 974,000 square feet, we have about 23% leased or committed. 27%, we anticipate resolving favorably. Potentially 13% might go into redevelopment for change of use and 37% too early to tell.

And on the '11 rolls, about 1.76 million square feet. About 10% are leased or committed at this point. 35%, we expect to resolve favorably and 55% too early. Don't know about any redevelopment at this point; depends on what's on the ground. We do have some interesting opportunities in Cambridge for redevelopment in 2011, but we will look at that as it comes closer.

On the redevelopment and development leasing, on redevelopment in the third quarter, we delivered 31,000 square feet at about 50% leased. And 2009 year to date, we've delivered 118,000 square feet out of redevelopment; 78% leased.

On the development side, we've updated the supplemental schedule on page 26. And Steve will give you better commentary for San Francisco Bay assets.

Let me give you an update on New York City. As you know, we did announce previously and certainly again for the third quarter the anchor lease to Eli Lilly and Company for about 100,000 square feet of rentable. Another 50,000 square feet is being committed for foodservice, conference and other core services. And we expect those to be finalized over the coming quarters. We're in negotiations with our vendors there.

And we are negotiating right now, amazingly enough, it wouldn't seem logical in a market that's a new market, but we have over 300,000 square feet of active negotiations on the remaining about 150,000 square feet, so we are very encouraged with this new product in New York with no competitive product outstanding. And at rental rates that exceed our projections in June of '06.

And then as Dean noted in the supplemental, we will deliver the build-to-suit to Gilead in the first quarter of 2010.

Finally, before I close, on the client tenant base, page 20 of our supplemental package details our top 20 tenants, 45% of annual base rent. It is by far and away the highest quality, strongest and most diversified in the Company's history. And again, our best-in-class tenants here conduct -- it's important to remember their core business in our assets and our facilities, and not what traditional office does; this is far more stable. So we feel very good about our current credit position.

Out of the top 11 big pharmas, all but two are our client tenants, and we hope to make the other two client tenants in the not-too-distant future.

In closing, we've built many opportunities for long-term growth through our platform, both through the internal growth of the operations, coupled with redevelopment and development. We don't need to go out and acquire or search for distressed assets. We are benefited by still solid demand in our markets and in our best adjacency properties, as well as a benign supply outlook.

So let me turn it over to Tom Andrews, who runs our Massachusetts region with the important updates there.

Hello, everyone. I'm Tom Andrews. I have responsibility for the eastern Massachusetts region as Senior Vice President and Regional Market Director. Let me take a few minutes to provide an overview of the Massachusetts Life Science real estate market and discuss how Alexandria's overall corporate strategy is being implemented in this important region.

As you are likely aware, the eastern Massachusetts region contains one of the densest concentrations of Life Science research activity in the world, anchored by premier universities and teaching hospitals, leading biotech companies and cutting-edge startups, and now including a lengthy roster of international pharmaceutical companies. Accordingly, Alexandria has assembled an approximately 3 million square-foot operating portfolio, consisting of 36 top-quality Life Science properties in key submarkets within this region in addition to over 2 million square feet of development and redevelopment inventory at irreplaceable locations in Cambridge and Boston.

In contrast to the significant weakening of office, R&D and industrial markets over the past 18 months, the approximately 17 million square-foot eastern Massachusetts Life Science market continues to enjoy stable and predictable fundamentals. On a Class A lab space which makes up about three-quarters of the 8.5 million square foot Cambridge market, has an availability rate of 11% with nearly 200,000 square feet of positive absorption year to date.

While the 5.4 million square foot suburban lab market has an approximately 9% availability rate, with absorption this year only slightly negative.

It's worth noting that nearly 90% of the Cambridge Class A availability consists of lab-ready shelf space. Much of that is in a building with very large floor plates that cannot be readily subdivided to less than 80,000 square feet. So options for existing high-quality lab space in Cambridge are very limited for tenants right now.

Achieved rents in the highly desired East Cambridge, Kendall Square submarket remain within about 5% of their 2007 highs. We are currently tracking nearly 500,000 square feet of tenant requirements in the market, most seeking space in Cambridge or the Route 128 NW submarket.

We expect that this rough market equilibrium will continue through 2010 based on the following factors. On the demand side, we expect to see reasonable demand characteristics as a result of the following positive trends. First, mid and large-cap pharmas which have entered the region over the past several years will continue to expand their local research base as they seek to collaborate with top academic scientists and entrepreneurial biotech firms.

It's worth noting that approximately 15 international Pharma companies now have research operations in eastern Massachusetts compared with just two or three such operations in 1990.

Second, the regions for medical colleges and their associated teaching hospitals and other academic institutions and research institutes have begun to benefit from the $10 billion boost in NIH funding under the federal government stimulus plan. As we have seen in other regions, new demands from the institutional research sector is leading to positive absorption in our market.

On the supply side, as Joel mentioned, growth in supply has been and will be subdued with limited construction underway and very little likely to commence for the foreseeable future. In fact, the limited new supply may be offset by the removal of some obsolete product in our market, as some landlords with constrained capital may be compelled to mothball obsolete facilities that are getting very tired and old. In our view, all of the above factors will result in continued rough equilibrium in the region's Life Science real estate market through 2010.

Our eastern Massachusetts asset base, as in other key cluster regions, consist of high-quality assets in strongly desired locations.

The about 60% of our 3 million square-foot regional operating portfolio is located in Cambridge and in the inner suburbs of Boston, and it's anchored by Technology Square, the 1.16 million square-foot seven-building project which houses units of Novartis, MIT, GlaxoSmithKline and Pfizer, among many others.

The remainder of the regional portfolio is located primarily in Lexington and Waltham on the Route 128 Beltway, where our leading tenants include divisions of Johnson & Johnson, Bristol-Myers Squibb, and Life Technologies; and in Worcester, adjacent to the thriving U-Mass Medical School.

These premier locations and facilities have enabled the regional team to consistently maintain high occupancy rates even during challenging market conditions. Our current occupancy rate in the region, excluding 250,000 square feet of properties undergoing redevelopment, is 94.7%. And we have seen promising leasing interest for much of this available space. In fact, in Cambridge, our occupancy rate is 96.8% compared with a sub-90% occupancy rate for the balance of the Class A lab market in Cambridge.

Looking ahead, we are negotiating lease extensions on 40,000 square feet of the remaining 48,000 square feet of 2009 rollovers. Our 2010 rollover has been reduced to a modest 170,000 square feet, nearly all of which is under discussion for renewals or new leases. And in fact, just in the past two weeks since the end of the quarter, we have reduced this rollover to 99,000 square feet with the completion of three new lease extensions.

In 2011, we have over 750,000 square feet of scheduled rollovers and we've begun renewal discussions with many of these tenants and are confident that we will retain most of them.

In addition to the effective management of our operating assets, Alexandria's best-in-class regional team has made great strides in positioning the Company for future growth in the region. Our largest ongoing value-add project in eastern Massachusetts is located on multiple sites along Binney Street in Kendall Square in Cambridge.

Located in the eastern part of Cambridge close to downtown Boston, the Kendall Square commercial district abuts MIT, the MIT campus, and is a short subway or bike ride from Harvard. MIT and Harvard are two of the leading universities for Life Science and technology research, each with a long and successful history of translational collaborations between academic scientists and industry. Working with local venture capitalists and experienced entrepreneurs, the universities have created leading biotechnology companies such as Genzyme and Biogen Idec, and well over 100 small and medium-sized Life Science firms in Cambridge alone. This fertile science and technology ecosystem has subsequently attracted substantial investment by leading international pharmaceutical companies such as Novartis, GlaxoSmithKline, and many others.

Just earlier this year in February, the Cambridge City Council approved Alexandria's position for a significantly increased zoning density on its Binney Street holdings, enabling the future development of up to 1.7 million rentable square feet of office and laboratory space on multiple adjacent sites. These sites currently hold income-producing, low-rise buildings and surface parking lots, which we believe will eventually be replaced by high-quality life-science facilities in this desirable land-constrained location.

We will continue to advance our entitlement efforts for this land assemblage, including the procurement of a planned unit development special permit under the city's zoning ordinance. And we have previewed our development plans to a number of prospective build-to-suit tenant candidates in the market.

Immediately adjacent to the Binney Street sites, we are transitioning from design activity to construction-related activities with respect to the conversion into laboratory and office space of an approximately 90,000 rental square-foot portion of an existing office building, known as Athenaeum Center. The balance of this approximately 369,000 square foot property is substantially leased.

Delivery of the office laboratory conversion space is scheduled to occur in phases over the next one to two years. And we are negotiating letters of intent on significant portions of this space as we speak.

Elsewhere in the eastern Massachusetts region, design activities are ongoing at Longwood Center, our approximately 350,000 rentable square feet Life Science development located on an acre parcel in the heart of Boston's Longwood Medical Area. This project is partnered with a local development and investment group and has been entitled under the city of Boston's site planning review process.

The LMA is a compact and vibrant district which is home to world-renowned medical and academic institutions, such as Harvard Med School, Brigham and Women's Hospital, Dana-Farber Cancer Institute, Children's Hospital of Boston, Beth Israel Deaconess Medical Center, and Joslin Diabetes Center, among several others. Fully entitled land sites are extremely scarce in the Longwood Medical Area, and we believe that Longwood Center is well-positioned to accommodate expected growth within the district in the future.

Among Alexandria's nearly completed value-add projects in this region is the conversion of an approximately 175,000 square-foot office building at 200 Tech Square in Cambridge from office to laboratory use. This space has been substantially leased to Sirtris Pharmaceuticals, a GlaxoSmithKline company; the Novartis Institutes for BioMedical Research; and a unit of Pfizer. Another suburban building conversion recently resulted in a 59,000 square-foot long-term lease to a research division of Johnson & Johnson.

In fact, much of our suburban portfolio consists of properties acquired at very low basis, converted from other uses and leased at strongly accretive rents to Life Science companies.

Now over to Steve.

Thank you, Tom. This is Steve Richardson, Senior Vice President, Regional and Market Director for the San Francisco Bay Area. During the next few minutes, I will provide an update on the San Francisco Bay Area's Life Science market and how signs of improvement referenced during the last quarterly call are actually manifesting themselves in the market.

The vacancy rate declined from approximately 13% during the spring this year to 9% anticipated for the end of 2009. And the core San Francisco to Stanford lab market is unfolding as expected. We're tracking demand of approximately 300,000 square feet in the market right now.

Alexandria has captured numerous challenging tenants making space decisions during this environment, including a very prominent biofuels company in South San Francisco. This company in particular is backed by top-tier Blue-Chip venture capitalists and most importantly, utilizes the key infrastructure delivered in Alexandria's high-quality laboratory facilities.

The tenant and the clean technology market segment as a whole represents a tremendous growth opportunity not only for our company in this submarket, but also for the entire nation as we seek to diversify our energy sources and capture the leadership positions in the new industries of the 21st century. As referenced in last quarter's call, we continue to make good progress on our rollovers for 2010 and into 2011. We were, however, disappointed with an important credit tenant's 11th-hour decision to not consummate a large lease transaction for approximately 162,000 square feet in South San Francisco. This decision was the result of executive management dissolving the entities slated for occupancy in our facility. We do expect the setback to be short-term in nature. And as one of only two large blocks of space in this cluster, we believe we are well positioned for future growth in 2010.

The facility mentioned above is also a very high-quality corporate headquarters type of facility featuring a pretty spectacular waterfront location with very attractive and distinctive architecture and adjacency to the large Genentech-Roche campus.

The senior management team believes it ultimately makes sense as a single-tenant campus, and we are continuing our construction activities to prepare the property for occupancy and delivery. It is important to remember that South San Francisco is one of the countries most dense Life Science clusters, notwithstanding Tom's comments about Cambridge, of course. But, with more than 50 Life Science entities located in a very compact area.

Alexandra's portfolio of operating facilities in the submarket consists of nearly 1 million square feet and is approximately 96% leased. Our tenants include Genentech-Roche, GSK, Theravance, Exelixis and a number of other promising companies.

Finally, Mission Bay continues to provide promise with the Blue-Chip companies seeking 40,000 to 50,000 square feet and Pfizer's rapid sublease of its 100,000 square-foot facility to one of the top-tier mid-stage biotechnology companies, Nektar Therapeutics. Alexandra will effectively be out of significant blocks of space with these two transactions, and we are hopeful continued demand and favorable capital markets will enable us to consider a fourth Mission Bay facility.

Thanks, Steve. Since the beginning of the unprecedented financial economic and banking crisis, we have significantly increased our balance sheet, liquidity and flexibility and extended our debt maturities. In 2009, there has been some improvement since the depth of the crisis in 2008 and overall liquidity for publicly traded REITs and some improvement and optimism in the overall consumer, financial and banking environment. Even so, we remain cautiously over the real estate industry, the economic banking and financial environment.

Let me move quickly to balance sheet matters. We have reduced debt by approximately $240 million since year end. We've extended and refinanced approximately $160 million of secured debt. Our weighted average remaining maturity of our debt, excluding our credit facility as of 9/30, was approximately five years, representing a significant increase since year end.

As you may have noticed on page 5 of our supplemental package, our tenant receivable balance remains very current at approximately $3.8 million and again represents the lowest quarter-end balanced since approximately mid-2006.

Let me move to sources and uses next. Our balance sheet capacity and forecasted sources and uses of capital, assuming reasonable assumptions, will allow us to manage our balance sheet capacity beyond 2013.

Our capital plan includes the following sources of capital. Approximately $652 million of availability under our credit facility, approximately $102 million of cash on hand, approximately $80 million of annual free cash flows. Approximately $40 million of non-strategic assets under contract, letter of intent or negotiation for sale at a gain. Approximately $120 million of new secured financing that we announced that we completed in of course. About $75 million related to two additional new financings under term sheets at an interest rate of approximately 7%. $80 million to $100 million of a multi-property loan that is being prepared for marketing in 2010. In addition, we anticipate being successful in closing additional new secured loans in the $75 million to $100 million range each year going forward. And asset sales in the $50 million to $75 million each are going forward as well.

So, through 2013, the sources of capital that I just identified above approximate about $1.9 billion. It's important to keep in mind that this list is not exhaustive and other sources of capital may be utilized to meet our capital plan, in addition to making appropriate adjustments to our plan from time to time as necessary.

Next, moving to uses of capital, our construction spending forecast for 2010 is in the low $200 million range. We have an estimate of about $95 million of secured debt repayments, net of about $170 million of refinancings or extensions. We anticipate a successful renewal of our credit facility at two-thirds or three-quarters of its current $1.9 billion capacity. We expect to repay our $3.7 convertible debt. And through 2013, the items identified above are meaningfully less than our sources of capital that I just walked through.

So, I kind of want to highlight a couple of the areas of our capital plan in particular. Our adjusted capital expenditures for 2009 reflects a meaningful reduction of spending when compared to 2008, and we expect a meaningful reduction in capital expenditures from 2009 going into 2010.

While our spending is forecasted to be lower in 2010, we have added certain redevelopment and development projects to our 2010 construction forecast, including certain projects that were added in the second quarter and third quarter of 2009.

Over the past few quarters, we added three buildings to our active redevelopment projects, aggregating 169,000 square feet. Two of these buildings are pre-leased and the third building is under negotiation for a full building user.

Our total expected construction spending is estimated to be approximately $320 million for 2009 and again in the low $200 million range for 2010.

Our adjusted CapEx plan includes critical tenant infrastructure costs related to key leases with Roche, USSF, Gilead, Eli Lilly, Novartis, and Pfizer, among many others.

Our forecast also assumes some investment in our buildings from our tenants and opportunities for incremental landlord investment with accretive and incremental returns. Our forecast also includes a potential new development project with an institutional user in one of our existing Life Science cluster markets representing approximately a $25 million to $30 million total combined investment from both the landlord and the tenant.

Our capital plan also assumes a successful credit facility renewal. Discussions with our key line lenders reflect a continued improvement in the facility renewal market. Existing line lenders are providing significant and larger commitments to strong relationship borrowers with new line lenders stepping up for significant commitments up to $200 million each.

Spreads or pricing over LIBOR is tightening and represents a range from the low 200 basis points to 275 basis points over LIBOR, which is really down from the 300+ basis point range that was in the market about six to nine months ago.

Term or tenure has lengthened to about three years with near-term expectations that borrowers will likely push beyond three years real soon. We will begin formal discussions with our lead lenders in the third quarter of 2010 regarding our amendment to our line of credit. We continue to expect facility renewals to reflect the overall improvement in the market, further supporting our ability to successfully amend our facility in late 2010.

Moving next to credit metrics, highlighted on both page 7 and page 12 of our supplemental package, you may have noticed our net debt to adjusted EBITDA was presented and shown at approximately 7.3 as of 9/30. Our debt to gross assets was approximately 44%. Our unencumbered NOI represents a large portion of our operations at approximately 60% of total NOI. And again our weighted average interest rate for outstanding debt was approximately 4.85%.

Briefly, our facility covenants are very specific to each company and Alexandria specifically and really are very dependent on the terms and definitions under the underlying agreements.

As such, our covenant calculations and compliance will vary company by company. We expect, as you have expected, we have operated in compliance with our debt covenants over the years. And we believe that our credit metrics related to our facility covenants are solid for our business.

To give you some perspective, leverage is very solid at right about 40% plus or minus 40%. Our facility limit is 65% for leverage. The secured debt percentage for the Company has been about 15%, and the facility limit is about 55%. Fixed charges have been solid for our business at greater than 2 times as of 9/30. And the facility limit is about at 1.4 times.

Our targeted capital structure will focus on debt to EBITDA fixed charges with our target over the next few years to be at or slightly better than our current net debt to adjusted EBITDA and fixed charge coverage ratio.

Our capital plan over the next several years, as outlined earlier, is manageable under conservative and reasonable assumptions. Over the next several years, our goal will be to balance key debt and balance sheet metrics with capital from both debt and equity, broadly defined. To be clear, equity capital will include recycling of free cash flows, selective sales of income and non-income-producing assets, opportunistic JV capital and common equity.

Our joint venture capital will be primarily focused on key opportunities to work closely with institutional users with strong capital positions on development of our strategic land parcels.

Next, let me move to an important and required GAAP accounting matter. Capitalized interest for the third quarter, assuming the conversion of our 8% notes, was approximately $17.9 million, based on a weighted average effective interest rate of 5.16% and a qualifying cost basis of construction and related projects, aggregating $1.3 billion.

Our construction activities are highlighted beginning on page 24 of our supplemental package and includes approximately 641,000 square feet under active redevelopment, 980,000 square feet under active development, 5.3 million square feet undergoing preconstruction activities, including entitlement and design activities, and approximately 1.1 million square feet related to new markets and other projects.

Just as a reminder, GAAP requires capitalization of snow interest while activities are ongoing to bring an asset to its intended use. We have two significant and strategic land development sites undergoing preconstruction activities. These sites consist of approximately 2.3 million developable square feet in Mission Bay, San Francisco and 2.1 million square feet in the Cambridge, Eastern Massachusetts market.

Our entitlement efforts for these projects as well as others include regulatory approval, mapping, conceptual design, schematic design, permitting, construction drawings, costing and many other critical items.

Due to the significance of the entitlement efforts at Mission Bay and Cambridge, we expect these efforts to continue into 2010 and 2011. This represents 83% of the $5.3 million developable square footage undergoing preconstruction activities. These activities will ultimately create significant value for these projects and are necessary for the vertical construction of additional state-of-the-art Life Science facilities.

Similar to my comments on our last earnings call, I am forecasting a slight decline in the amount of capitalization of interest each quarter as certain redevelopment and development projects are completed and placed into service.

I'm also forecasting certain parcels to complete preconstruction activities that will also result in some decline of capitalization of interest. These declines will be offset by increases in qualifying bases as we advance construction activities on certain projects. Our forecast also assumes ongoing preconstruction activities in Mission Bay, again, and Cambridge through 2011, with no significant drop-off of capitalized interest related to this 4.4 million square feet of preconstruction activities, specific to these two significant land development projects.

Our revised forecast for capitalized interest for 2010 averaged approximately $16 million to $17 million per quarter. I should also point out that during 2009, and as highlighted on page 5 of our supplemental package, we completed preconstruction activities on certain land parcels resulting in an increase in land held for future development from 1Q to 2Q of '09. This land represents land that is not undergoing any construction activities and, therefore, there is no capitalization of interest associated with it.

Taxable income projections for 2009 and 2010 reflects that our taxable income and projected dividends will allow us to distribute at least 100% of our taxable income. Consistent with historical dividend increases, our core operations will provide for growth in our quarterly dividends at the appropriate time in the future and as authorized by our Board of Directors. We continue to have one of the lowest payout ratios within the real estate sector, allowing us to retain and reinvest precious capital.

Briefly, let me comment on some operating statistics. Our first-in-class team continues to diligently execute across key areas of our business and have generated solid operating statistics during a very challenging macro environment. We continue to report positive same-property results quarter to quarter and have reported positive leasing activity year to year for over 10 years now. Same-property results were up 1% and 3.7% for the quarter and for the nine-month period to date. Leasing activity was solid at 450,000 rentable square feet with GAAP increases of 5.6% on renewed and re-leased spaces for the quarter; and 1.4 million square feet or up 4.9% for the nine months to date. Margins have remained very solid at 73%.

In closing, let me briefly cover our guidance for 2009. FFO per share diluted was provided at $5.52. And earnings per share diluted was $2.69. Our guidance for FFO per share diluted remains consistent with our guidance update that we provided on September 24 of 2009.

The sum of our quarterly FFO per share diluted results will be higher than the full-year 2009 FFO per share diluted results due to the partial weighting of our shares this year. The sum of FFO per share diluted results for the four quarters is expected to be approximately $0.18 higher than our guidance for the full year of 2009 of $5.52.

So in short, we reported a $1.89, $1.59 and $1.13 for the first three quarters of '09, for a sum of $4.61, which leaves an estimate of $1.09 per share on a diluted basis for FFO for the fourth quarter. Again, the sum of the fourth quarter or four-quarter results will be $0.18 higher than our full-year FFO guidance of $5.52.

Let me provide some additional color on our assumptions for the full-year guidance for '09. Again, I want to remind everybody that our guidance is based on various underlying assumptions, including the following. Same property results are projected to be in the 2% range. Leasing activity is projected to generate to 5% steps in rental rates on new or renewals. Margins are projected to be in the 73% to 74% range. G&A expenses are projected to be lower in the fourth quarter. Capped interest for the fourth quarter is projected to range from slightly down to flat when compared to third quarter of 2009. Other income is projected to be at approximately $1.5 million for the fourth quarter. And as Joel had highlighted, our cash on hand will likely increase in the coming quarter and continue through 2010 and thereafter.

And again, selective asset sales of non-core both income and non-income producing assets will continue through the coming quarters and year. With that, I will turn it back to Joel.

Okay, operator, if we could open it up for Q&A?

(Operator Instructions). Michael Bilerman, Citi.

I may have missed it. Joel, what happened with the East Jamie Court lease that you had that I think was moving to execution?

Yes, Pete did cover it, but I'll have him repeat what he said.

Hey, Michael. We had a lease fully negotiated waiting for execution. And unfortunately, the executive management team of that large credit organization ended up dissolving the entity that was going to take that space. So everybody had worked very hard, including members of the team of the Company and they were as disappointed as we were.

And so what's the backup? You have here marketing, moving former 16% tenant to another property. What does that -- I couldn't understand what that meant.

Yes, this is a pretty special property. It's a very high-quality next-generation type of space out there in that South San Francisco submarket. So it really lends itself to a single-tenant user in a campus setting right on the water. So, we're finishing up some critical construction activities and will be looking for that single-tenant type user.

So what does this moving former 16% tenant to another property -- what does that mean?

We actually did have a lease in place in that property. And as part of the negotiation that we worked through very carefully with the other tenant, we did relocate that tenant to another one of our facilities.

Okay. And maybe just sticking with page 26 in the sup, you have some new disclosure here of some incremental spend, which looks like you are spending another about $94 million on the development pipeline. Can you just talk about what that is and what sort of return you are getting on that capital? And how does that factor into your sources and uses as you thought about it sequentially having to come up with another $100 million?

It does, it was included, Michael, in my overview of sources and uses. And I think again, if you think back to the second-quarter call, we had a very conservative and reasonable assumption from sources and uses with incremental asset sales and incremental new financings.

But, covering your other question about incremental estimated cost, some of this has to do with the recent leasing activity and then finally getting a conclusion on the split between landlord and tenant investment. And occasionally, we are able to provide some incremental funding under certain situations to certain companies that we feel very comfortable with, which generates incremental returns. Some of that is known. Some of that is unknown, meaning it's available but there is, in certain circumstances, the amounts have not been -- the elections have not been made to spend some of our capital. And I suspect that that will continue with some of the space that we have available that's unleased at the moment on the development pipeline.

I guess what I'm confused about is the estimate investment per square foot for each of the projects hasn't changed. Yet, your total capital that you expect to spend on them has gone up by almost $100 per square foot or $100 million. So, where is that occurring?

That's a good way of thinking about the two numbers. If you look at the estimated investment per square foot, which is about in the middle of the schedule, ranging from $350, $390 to $500 a foot, represents our original estimated investment into the project at the time that we placed these assets into active development. That excludes land. So first off keep in mind it does exclude land which on average is in the $60 to $70 a foot range. So, I think when you boil it all down together, we're actually still pretty close to our original investment overall on a blended basis to what was forecasted in the table there from $350 to $500 a foot.

But I'm just thinking just, sequentially, you haven't changed anything, any of your investments on any of the projects, yet you're amount left to spend went up by $96 per square foot.

That's pretty close to the number, Michael, and it really reflects the final estimate of our blend between tenant and landlord investment in the final fit-up with some of these projects.

And it is returned capital?

Most definitely.

Yes.

Okay. Just turning to, if you look at your market page on page 14 of the supplemental, where you list all the markets, if you were to look at the effective rent per square foot, dividing your annualized base rent by your operating properties, it looked like in San Diego, that went down by about $2.00 or 7% from $29.41 to $27.33, which is having a big impact on the total, which effectively declined 50 basis points sequentially. And I guess I'm just trying to understand how your base rents can go down even though you've been signing rents up for a pretty long time.

Yes, my only guess is that occupancy has probably trended a little bit down in San Diego. We're sitting at about 90%. I don't have the specific details in front of me, Michael, but my guess is it's fairly in line with the trend in occupancy.

Okay, thank you.

Mark Biffert, Oppenheimer.

Good afternoon. Just going back to the development page, I was just wondering, looking at the building that Exelixis is going to be taking in the fourth quarter, did they exercise the option for the remaining space at all, do you know?

No, they have not.

Till the end of the year.

They have until the end of the year to exercise that option through December 31.

Okay. So you don't know if they plan to or not yet?

We do not.

Okay. And then thank you for the color on Massachusetts and the Bay Area. I was just wondering if maybe you could quickly review all the major cluster markets in terms of RFPs that you are seeing in the market?

When you say RFPs, meaning for just leases?

Leases and build-to-suits.

I don't know that we could review all the RFPs in the markets. A lot of that is pretty confidential. But I think I would say in my comments, Mark, we see kind of an uptick for the first time in quite a while in San Diego. Rents have gone down there and our occupancy, as you see, is among the lowest of any of the major markets as Mike was just making an inquiry about. But we are seeing kind of a movement there that we haven't seen for a while on a positive basis.

I think Steve covered the Bay Area. They are tracking more than somewhere between 300,000 and 500,000 square feet of demand. I think Tom said in our markets, 500,000 square feet of demand in Massachusetts.

In the Southeast, I would say the demand there is soft. But we are working hard to make that up. Maryland, I think the demand is very significantly up as we indicated over the last quarter or so, heavily due to the stimulus increase to the NIH budget. We've got three major projects that appear to be being filled up due to that alone. And then Seattle is pretty much filled up. We don't have any space there so we can't seek any request for proposals. So that's kind of a quick run around the nation as to what's happening.

And, in New York, I said we're pretty amazed that we have negotiations ongoing for about 2X of the space that we have available in the East Tower, which is, as I say, pretty surprising, given New York has been under great pressure certainly in the office sector.

So given the trend that you've seen of improvement, I'm just wondering if you can maybe speak to whether or not you would start development in 2010 or if we could expect you to start, especially if you are able to close some of those leases; and maybe New York you might start the second tower or in any of the other markets?

Well I think the issue there is one of our primary goal is to maintain and protect occupancy and rental rates. And so that's the first focus or one of the main focuses of the Company. And so that's where we are putting our efforts. Clearly the deleveraging process is important. And if it turns out in Mission Bay, for example, once we fill up the building, I thinks Steve mentioned if we have a credit tenant build-to-suit, we would evaluate the balance sheet opportunity at that point to look at that. So I don't think we have any current plans at the moment.

Okay. So your preference -- what would be your preference in the market, either to do acquisitions or to do development?

I think our preference is to continue to focus on our core opportunities. And as we've said before, and as I've said specifically in my comments, we don't need to look outside the asset base. We have probably the best locations in San Francisco and the best locations in Cambridge for the future. That is where the Company will grow as time goes on.

Okay. And then just one last question. Johnson & Johnson came out and said they were going to do a number of layoffs. Do you know if any of that will impact any of the space they have with you?

No; and remember, J&J is a little bit unusual. They are considered to be a pharma-type company, but really they aren't. They are much more a consumer products company. And they don't do a lot of in-house research. They do some and they've made acquisitions that have resulted in R&D. But historically they have not been like a Pfizer or a Merck. Just kind of a different type of company.

Okay, thanks.

Anthoney Paolone, JPMorgan.

Good afternoon, guys. It's Joe Dazio here with Tony. A big picture question regarding capital allocation. Dean, you ran through I guess the sources and uses and you have no real debt maturities until 2011. So where do you sort of view the order of priority for reducing the balance on the line of credit, the term loan, and maybe even potentially buying back some more of the converts?

Yes, I think that you will see that occur over time. I guess the line balance we've got some time and tenure left; we've got a revolver that matures in October of 2011 and the term in October of 2012. When you think about the term loan, it's not -- it's a piece of debt that once you pay down, it's gone, so there's no reason to take that out early. But the revolver has the flexibility of paying down and retaining the capacity so you will see us focus there.

As an example, the $120 million secured loan that we closed in October went directly to paying down the credit facility balance. And I highlighted several loans which are in the queue, two at terms sheets, totaling $75 million. And another portfolio targeted for 2010 that will probably raise $80 million to $100 million of proceeds, all of which go directly and immediately to paying down our credit facility balance.

The convert question you asked, many converts have traded up and have very little discount left. But, our plan would be to reduce some of that before its maturity, but nothing in the hoppers at the moment on that.

Okay. And then just a quick question on San Diego, and I guess also the Southeast. You've seen a little bit of occupancy pressure in those markets recently. Is that a function of weakness in the respective Life Science markets there? Or is that just a spillover from weak office markets in those markets as well?

Well, in the Southeast, I think it's kind of a combination of that. Remember the Southeast is not a -- North Carolina is not one of the top markets. It's a secondary market. We have kind of a dominant position there and we're located in really great locations in the Research Triangle Park. But clearly as [flex] office, R&D kinds of tenants or landlords suffer weaknesses, obviously, they become very interested in trying to attract Life Science tenants maybe at any price. I think it's pretty hard for them to do that, given fit-out costs and knowledge of the product type. But I think that puts a little pressure in that area that you wouldn't normally see say in Cambridge or South San Francisco or Mission Bay. That's just the nature of that market.

And I think in San Diego, certainly, some of the product that is R&D flex in some of the secondary markets, which would be Sorrento Mason, Sorrento Valley, certainly put pressure again on Life Science landlords who are up against say others who kind of want to do anything at any cost in their buildings. But maybe at the end of the day can't deliver the product, can't deliver the infrastructure, but they are out there kind of throwing in bids to brokers. But in the Torrey Pines area, I think you have less of that or in University Towne Centre, where we tend to be more focused.

Okay. And quick question for Dean regarding CapEx disclosure on page 31. Do you have offhand, the amount of recoverable and revenue-enhancing CapEx that doesn't relate to development and redevelopment spend?

No, I don't, but let me think about getting that into our future supplemental packages.

Okay. And then last question, can you guys just give some broad details on doing deals on university land such as hurdle rates, etc?

Well, that's kind of secret sauce, so I'm not sure I want to say anything. But I would say that these are not ones that I think anybody can do. They take long-term, trusted relationships. You have to have very sophisticated knowledge of tax issues and bond issues and 501(c)(3) issues in order to do this.

But I would say that given what we have done historically in the development side, when you look at kind of our all-in costs, we clearly would not be something less than our average weight of debt and equity capital. And we would look at a reasonably good spread above that. Otherwise we wouldn't have interest; it wouldn't make any sense. So, the one we have pretty much very close to teed up, I think would fit nicely into that box.

Okay, great. Thank you.

(Operator Instructions). James Feldman, Bank of America, Merrill Lynch.

Thank you. I was just hoping you could give a little bit more color on kind of how tenants thoughts are towards expanding or towards investing more in their facilities this quarter versus last quarter; kind of where you think we are in the cycle in terms of mood?

Maybe I will ask both Tom and Steve because they represent the largest regions in the country, and they can give you a flavor for general kind of thinking in that regard.

Yes. Hi, Jamie. I would say that the tenants are coming out a little more and acting a little more definitively. I will say that there wasn't a complete dearth of tenant activity during the depths earlier this year or late last year. There were still tenants out looking in the market, but it was definitely slow decision-making. And we are seeing now a lot of the tenants that we see in the Cambridge market particularly have relatively smaller space requirements, sub 50,000 foot square foot space requirements. And they are looking for space that they can move into in the next six to 12 months. And we have some shelf space there that we can set up quickly and we also have some existing inventory that we're able to get them into quite quickly.

And we've seen a reasonable amount of activity over the past two to three quarters. And even before that, it wasn't -- the activity didn't stop. It did pause a little bit, but it's not bad. We're pretty happy with the amount of activity right now.

So, Steve, do you want to maybe on that question?

I would say it's very similar in the Bay Area. I think you have two factors at work. Pharma continues to look at the San Francisco Bay area as one of the places they need to partner with companies, replenish their pipelines, so essentially you are having additional capital come into the marketplace there. And with fresh capital and these liquidity events, that helps to continue to fuel the early and mid-stage companies. So, the square footage that's in the marketplace is represented by companies that do have fresh capital, that do need to make decisions.

I think they are being cautious and prudent in their decisions, but ultimately, they know that they've got a timeline to execute and build their platform with this fresh capital. The other is kind of the emerging market; I referenced a biofuels company. Again, another industry segment that is receiving significant capital investment. The markets are there and we see that trend just continuing.

Okay. And then if you look at the third-quarter occupancy numbers versus the second quarter, there were certainly some markets that came under more pressure than others. And then DC made up for that. As we think about 2010, do you see that trend continuing, where DC continues to be a real standout and the others continue to face more pressure? Or do you think we're getting towards the bottom of those as well?

That's a hard thing to predict occupancy in this broad microenvironment. I think it used to be when we were just used to kind of cyclical changes, I think it was a lot easier.

But I would say as I just look down the market, I think San Diego still, although we've got some good, we've got very good activity, I think you will still see a little bit of pressure there. I think the Bay Area, again, hopefully will hold its own, but we will see. I think there's some good opportunities.

Eastern Mass, again, I think we're at a point where we're starting to see kind of a turnaround, similar with the Bay Area's as Steve just described, so we are hopeful in those markets.

Southeast, a little too early to know there. It's a small market, so any vacancy creates kind of a big impact, but we're working hard to try to shore that up.

I think Maryland, suburban DC, you will see good strengthening there because of the stimulus money. And I think Seattle has maintained itself relatively stably in what is a pretty awful office market up there. So I see we are probably at a decent point. But again, it's hard to say. I think in this environment it's very hard to tell.

Things have gotten a lot better than they were, but still there are some pretty big macro hurdles out there, and I think it's hard to predict with great precision based on past histories of cycles. This is just much more of a structural cycle than it is just a traditional economic cycle.

And then finally, Joel, can you talk a little bit about opportunities you may be seeing overseas?

Well, we broadly, for the long term, our view is that Asia, you've got a large population that is highly underserved in the medical research and medical products area. And so, we still view that as a very significant opportunity over the long term.

I think Europe is hard to predict. We may be a little bit more like Europe in the future, but Europe still has very high quality science; a great amount of research that comes out of there, although some of that has come to the United States in Novartis's move. And Novartis just announced $1 billion expansion into China.

So, I think overseas, Europe represents an interesting opportunity. We've got a foot on the ground in Scotland, and we have some great opportunities for some fee development work there and maybe some land sales at a profit. And I think in Asia, I think, over time, you will see that will become an important part of what we do. But again, that's over time, but we still feel that it's a very positive area for our future growth.

Okay. Thank you.

Will Marks, JMP Securities.

Thank you. Good afternoon. Dean, I was wondering on the land held for future development, this new disclosure you have between March and June, the number went up significantly. And I think you referenced it, but it didn't give me a complete answer. Can you explain what that was?

Yes, so what you are referring to I think is on page 3 of our supplemental. I guess anywhere where you see a time series of land held for future development over the various balance sheet dates. But you are referring to $109 million balance as of March 31 and a $240 million balance as of June 30. Again, as you know, we have a number of parcels going through preconstruction activities over the past several years. The majority of that is up in Mission Bay and in Cambridge, which I highlighted, and it's also highlighted in the back of our supplemental package.

But, we also had, over the last four to eight quarters, several other parcels that were going through the preconstruction phase, entitlements, design, etc., and as usual, will go all the way through that point. And that allows us to really strengthen the time to deliver space to the market because you need to be able to go vertical as soon as you have a credit tenant opportunity. And so we will continue the entitlement efforts until we're done.

Once we are done with those construction activities, capitalization is shut down as required pursuant to GAAP and the dollars associated to those parcels shift from CIP into land held for future development. And so there were probably four or five different parcels that got to that stage between March 31 and June 30.

So are you actually moving [stuff] from land to CIP and then back to that land line?

No, most of the time you will see it going the other way. As you see from September 30, '08 to '09, the trend has been going the other way as land parcels complete the entitlement and design process, it moves out of CIP into the land held for future development.

Okay. I guess maybe the name seems a little bit misleading because you are going -- it seems like the stuff further along would be in the CIP, but I think I understand it now.

Okay.

Let me ask you, I think maybe for Steve, can you comment briefly, one, just a simple question. Is the UCSF Medical Center on track and when is it supposed to open?

Yes, the UCSF hospital is on track. They've got activity underway right now, and I believe it's about 2013 when they are slated for opening, sometime in that timeframe. And Joel talked about stimulus and how that's impacting Maryland and Washington, DC area. This is a major public stimulus of well over $1 billion right in the heart of Mission Bay to complement and supplement the research component, so we're really looking forward to that. And I think it's already driven a diversity of uses into Mission Bay as well.

Okay. Steve, it's just my last question. In your prepared remarks you may have mentioned this and I maybe missed it. But the big sublease space in South San Francisco, has any of that been taken over the last quarter?

That has not. That remains the other large block of space. And I think as part of that 300,000 feet, tenants are looking at that and wrestling with the implications of that as well.

Okay, great. That's all for me. Thank you.

Dave AuBuchon, Robert W. Baird.

Thank you. Regarding the $120 million secured financing, what was the NOI of securing that loan?

Dave, I don't have that with me.

Do you --?

But one way, I don't know if this doesn't answer your question, but I think if you took the cap rate, it actually ended up being about a 55% loan to value on a 8.25 to 8.5 cap, I believe.

This is Peter Moglia. I negotiated that loan. The debt service coverage ratio was close to 2.

Two times?

It was very strong cash flow.

Okay. What about on a debt yield basis?

Yes, I wouldn't -- without knowing the NOI right now I couldn't guess that.

Okay. And I believe you said, Dean, when you were highlighting the sources of capital, you had another $75 million of additional loans that were going to close soon at a 7% --?

We have two loans with insurance companies term sheet level right now totaling about $75 million. And the interest rate that we are dealing with is right at 7%. These are ten-year deals just like the $120 million loan that we just closed in October that was also a ten-year deal.

So I mean, is the market coming back quickly or are these just better quality assets, or --?

Well, no. What the difference is -- Joel gave you the rate on the $120 million at 7.75%. And that's reflective of how the rate that we locked in under the term sheet two to three months ago, and how much it's improved since then. So that's true, but not in the 30 days since we closed $120 million loan. But over the last two to three months there's been significant improvement.

Okay. Question on G&A, I apologize if I missed it, but the ramp-up in Q3 versus Q2? And then I believe you said in your comments regarding guidance, that's going back down? Is there something [stable] that's happening in the quarter?

No, nothing unusual. If you look back over the trend, we've been anywhere from going back to '08, $8.9 million, $9.4 million, $8.8 million, $9.6 million. So it's fairly consistent in that range. I just think that we're going to see a slightly lower number in the fourth quarter relative to $9.6 million, more consistent with some of the low points over the last four or five quarters, as shown on page 4.

Okay. And then last question is, $55 million, that's the asset sale number that you think you can achieve inclusive of the One Property you mentioned you've already sold for $6 million?

55 total asset sale plus proceeds from asset sales in '09 plus the assets that are queued up as held for sale. As of 9/30, I think the number is $40 million to $45 million in total gross proceeds on the asset sales.

That's $14 million in the first quarter.

Right, okay. Thank you.

There are no further questions in the queue. I'd like to turn the conference back to Mr. Marcus for any closing remarks.

Okay. We appreciate your time. We ran a bit over, and we look forward to talking to you in February for fourth quarter and year end. Many thanks, again.

This does conclude our conference call today. We would like to thank you for your participation.