Alexandria Real Estate Equities Inc (ARE) 2010 Q1 法說會逐字稿

Good day and welcome, everyone, to the Alexandria Real Estate Equities first quarter 2010 results 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 maam.

Good afternoon and thank you for joining us. This conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended in section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding our 2010 earnings per share attributable to Alexandria Real Estate Equities common stockholders, 2010 SSO per share attributable to Alexandria 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, refinance 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 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 existing leases, defaults on or non-renewal 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 this date of this call, and we assume no obligation to update this information. Now I would like to turn the call over to Mr. Marcus. Please go ahead.

Thank you, Rhonda, and welcome everybody to the first quarter 2010 Alexandria conference call. With me today are Dean Shigenaga, Peter Moglia, Peter Nelson and Paul [Revell]. Let me start off as I always do with a series of macro comments. We're very pleased to report another quarter, our 51st, of solid, stable and consistent financial operating performance, and as of the end of last year, the fifth best performance of all REITs, of all equity REITS, on a total return basis since our IPO. Although, as most of you know, the capital markets have shown remarkable resiliency 2009 actually, a mere 12 months ago. Hard to imagine. When the markets were still in free-fall the underlying health of the real estate markets are finally stabilizing but still challenging in some locations. Our job over the last year has been to focus, really focus strongly on management's focus on prudent risk management and maintaining solid stable performance and emphasis on strong business practices and a laser focus on our clients and their business, and maintaining our innovative and sound business strategy, which we pioneered, continuing the innovation of our unique product offerings as landlord of choice to the broad and diverse life science industry and continuing to focus on, obviously, revenue and profit growth.

This quarter witnessed the epic reform in healthcare signed into law by President Obama on March 23 entitled the Patient Protection and Affordable Care Act, kind of a simplistic notion for something that's incredibly complicated. I think it's important to remember, as I've said many times, biopharmaceutical products really are the only part of the healthcare expenditure pie that can truly ultimately contain and lower costs. And that should serve us well in the years ahead. If you look at the biopharma industry, global drug sales are expected to hit $1 trillion over the next five years, burgeoning markets in the developing world will help make up losses to generic competition elsewhere. Good news that growth is continuing to be robust notwithstanding the passing through the peak years of loss of exclusivity on many of the blockbuster drugs. A reflection on how much the global pharma market has moved away from the dependence on global blockbusters and obviously the five or six major developed markets, we see a 5% to 8% compounded annual growth rate over the next five years increasing the overall market size $300 billion in these markets. And the real focus is the more productivity and innovation as business models change and these entities get off their main campuses and move to the touch points of innovation.

The pharma industry under the law that I just indicated will have about a $105 billion estimated cost of contribution to that regulatory scheme, including about $38 billion in Medicaid discounts over ten years, about $28 billion in industries' fees over ten years, about $32 billion over ten years and the so-called donut hole coverage, and about $7 billion coverage on follow-on biologics. I think it is fair to say that this healthcare reform gave the biotech industry much of what it wanted. The big win was the 12 years data exclusivity protection which became law as part of the provision to establish a regulatory pathway for follow-on biologic products. And many of the newer products, whether they be proteins, monoclonals or so forth, are really the products of the future. Also, we are very pleased that strong government funding continues with a 3.1% increase as of October of this year in the already strong $31 billion NIH budget. And of the top ten recipients -- kind of an amazing statistic -- of NIH funding in 2009, nine were ARE tenants which garnered almost $2.5 billion. Also, when you combine big pharma and biotech R&D, it hit an all time high as of the end of 2009 at $65.3 billion of R&D funding. So we move forward into 2010 with solid and positive metrics and inertia.

Moving to the operations and financial results of the quarter, we're pleased to report $1.09 FFO per diluted share with solid and stable metrics throughout our operations, plus a very strong leasing quarter. Just going to mention the balance sheet briefly. Dean will detail the updated multi-year capital plan in a few minutes. We continued the -- continuation of our debt payoff and pay-down strategy. We only have one secured debt maturity coming up this year, on October 1, of about $13.5 million. So our balance sheet is in very good shape and we're pleased with the strength and the flexibility [thereof] the metrics and our capital plan, as Dean will highlight. On occupancy, let me get into detail there. We've reached a fairly stable level of occupancy at about 94% with a historical average noted of page 22 of the supplemental of about 95.2%. Start off with the weakest market, which was San Diego, and certainly the other companies that operate in that market were doing better than most of those, but you see across the board whether it be our niche or office, et cetera, it continues to be a lagging market.

We had a loss of about 180 basis points over this past quarter, although we expect to pick up some occupancy through the balance of the year as we see some emerging demand. I think we're pleased that our assets are located in the best sub markets of UTC and Torrey Pines, and recently we think that one of the competitive B-quality spaces that was open for lease for a landlord decided to make what we thought was kind of a foolish decision to capture an early-stage tenant, about 40,000 square foot tenant in this B-quality building at a $1.50 triple net in Torrey Pines. Something that I think we would never do. And just kind of was an indication of maybe desperation in that market. But I think that we see most of the normal leases being at a much higher rate and we see a continuing solidification, I think we've probably hit bottom there.

Moving to San Francisco, we did, in one of the two key life science cluster markets, we did see a 40 basis-point pickup in leasing to 95.8, so very, very healthy. All of our assets are clustered in the Mission Bay, South San Francisco and Palo Alto locations, which really are the premier locations. Current vacancy rates a little above 10%. We expect it to be more in the 7% to 8% by year end. With the East Bay still hugely struggling in a much less desirable geographic location, far higher vacancies. We see that market struggling. We exited that market in early 2008 right before the collapse of Bear Stearns with a great sale of our few assets in that market. We also added, as noted in the press release, the top tier life science company post-quarter end to our all-star client list at Mission Bay. Again, just reconfirming that those companies that are big and global make fairly conscientious decisions of where they want to focus their leading edge R&D, and we're very pleased among the number of locations they chose Mission Bay.

In Seattle we lost 100 basis points. That is really not due to a weakness in the market. It really was due to the move of Gilead from some smaller spaces where they were located in a building of ours to its new flagship location. We delivered that space on East Lake Union in a build-to-suit during the first quarter. We still see, and our current occupancy being 98.1%, as still very, very good. The good news is our very high-quality assets are primarily clustered in the best East and South Lake Union sub market locations, which have remained very strong. We still see some of the poorer quality locations around Elliott Bay where we exited a [tiring] lab building leased to a company which was going to have a role over the next year, to an ultimate user at a gain. And we thought that was a good move and we still see continuing weakness in the suburbs, but in the heart of our market, in Seattle, we see good, solid, performance.

The Southeast, not much to say other than a slight 20 basis-point decrease as the Southeast continues as a quieter and weaker market. We're working hard again, as I said last quarter, to keep steady occupancy and protect rental rates. A minor market for us in New Jersey, suburban Philadelphia, you see there is a significant decline in occupancy. Remember, occupancy is not rent weighted so it tends to skew the numbers. A few assets we've acquired over time with no real clustering, and a building going vacant caused that. And as we've said, we plan to exit New Jersey over time. We've sold half our assets there and probably the others over the coming couple of years. In suburban DC, this was a very strong comeback and really the big winner for the quarter at a pickup of 110 basis points, based on high-quality locations, very well located, and outstanding physical structures and the best -in-class operations really won us a number of deals. And this was really bolstered on the [back] of stimulus funding and the strengthening of the NIH budget. There is some continued softness in some of the sub markets, and I'll address that in a few minutes regarding some asset acquisitions.

In Massachusetts, again one of the top two cluster markets, we had a nice 60 basis-point pickup to 94.9%. We have minimal vacancy with our best-in-class assets and locations while others sit with empty [shell] space. The eastern Massachusetts market has continued to show, I think, really strong fundamentals. The availability rate in Cambridge is down other than some vacant shell space to very low single-digits. We see good activity in the middle market range of about 20,000 to 35,000 square feet. The suburbs, at least the Route 128 suburbs, pretty much minimal availability. The region continues to attract large pharma and big biotech. Merck of Germany acquired Millipore, a very solid acquisition, and Merck announced that their chemical units will be headquartered on Route 128 and expecting a head count growth in the future. Celgene invested in $130 million in company called [Agios], and I think you'll continue to see positive examples. The Pfizer-Wyeth merger resulted in no net job loss in the region, and AstraZeneca has reported adding head count to their Waltham R&D center while downsizing. Delaware, all good signs and really go to the heart of our thesis on clustering. Same property results, we're pleased to report up on a GAAP basis, 0.4% and on a cash basis 0.8%. Dean will highlight this. This continues our unbroken quarter-to-quarter results, probably a record among most REITs.

Moving on to leasing, we had a very, very strong leasing quarter with 564,000 square feet leased with rental rate increases on a GAAP basis for renewed and released space up 1.8%. Cash 0.7%. So this is a very good sign and including -- included in that is 137,000 square feet from both development and redevelopment. Overall average of about six years with minimal TIs and release in commissions. Our [2010] rollovers are down to about 685,000 square feet or about 5.8%. As you see from our expanded leasing rollover schedule, about 36% to date are leased, 19% -- I should say as of the end of the quarter, I believe -- 19% redeveloped [into] redevelopment, a shell building in San Diego where we have got a really built-out infrastructure and an industrial building in Seattle for 2010. Twelve percent negotiating or anticipating and 33% marketing. The 2011 lease rollovers of about $1.7 million, 9% leased to date, 25% into redevelopment primarily, that is they are really three locations. But the big one is, and almost 200,000 square foot, of 400 Tech Square, one of the buildings that is on our campus, very similar to 200 Tech Square which we have had such success with. So we hope to move into redevelopment next year and move that from an old tired office to a state-of-the-art lab conversion.

At 200 Tech Square, as you know, our anchors are Glaxo, Pfizer and Novartis. We've achieved a yield on investment of about 10% and a yield on incremental dollars about 17%. So we're pleased with those results, 33% negotiating or anticipating and about 33% marketing. So I think we're in good shape going through this year and into 2011. We delivered several building into redevelopment. One really very strong one in Maryland at 56,000 square feet. And so let me move to developments, kind of a lot to report there. We delivered 109,000 square feet to Gilead in Seattle with about a 9% yield. In April, we signed at 49,000 square foot lease to a top tier big pharma company at Mission Bay North. The key focus for Management over the coming quarters, next quarter in particular, will be the favorable resolution of the 162,000 square feet to a building complex at East Jamie Court in the 58,000 square feet remaining in the [Excellius] building, certainly, our highest priority. Virtually all the remaining space is the Alexandria Center for Life Science in New York City is under negotiation, and we hope to fully stabilize that building in the second half of 2010, two years ahead of our internal model presented to our Board in June of 2006. So we're very pleased about that.

We continue to move forward with the process of the First University initiative with a credit tenant preleased build-to-suit, and we'll keep you posted in coming quarters. And we continue to work on signing our first credit tenant lease in our international markets. We placed one important undeveloped parcel fully entitled, likely to go office, into Discontinuing Operations. And you can fully expect a number of key land parcel dispositions over the coming quarters. We have been approached by a number of users for possible shell build-to-suits which we're likely to pursue as well. Then moving to acquisitions, and then I'll just finish up after that and turn it over to Dean for his comments. We're seeing kind of a pickup in the acquisition market now reappearing after about a year-and-a-half or two-year dormancy due to the structural decline of the credit markets and stock markets, et cetera, which we are all having lived through happy that those things have at least gone for the moment.

One of the hallmarks over the years with Alexandria is really a very disciplined best-in-class real estate and life science underwriting capability experience and expertise with a key focus on the maximization of a favorable return on invested capital. Give you color on a couple of acquisitions we've seen this past quarter, one 57,000 square-foot building converted from a FedEx facility. Actually , we did that conversion a number of years ago in a secondary Maryland sub market where we had a right of first refusal. It was a kind of unusually low cap rate, above market rent beginning in 2011.The anchor tenant, which turned outer to be on diligence a weak tenant, over three months behind in rent, 20 people and 30,000 square feet with the balance of a space sub leased to an office tenant. We passed and it was sold to another REIT. I guess the lessons there, bad credit above market lease maybe not likely to survive, and institutional quality pricing kind of moved us off of that opportunity.

Second set of opportunities, two-building complex, 82,000 square feet adjacent to one of our main campuses in a secondary Maryland sub market. The ownership came to us as a preferred and likely buyer although it was marketed. A very weak public life science tenant in one of the buildings we rejected outright because of our life science underwriting. And subsequent to our rejection, about a week or two later, he company announced the principal -- or the failure of the FDA rejection of -- or the failure of its principal product in the market, and so I guess it was a good call. The other tenant in the other building was primarily office, who is one of our major tenants and they indicated they would be moving out. So I guess the lesson I'm passing there is, bad credit, too high a price for 75% vacancy next year on a challenged sub market.

And the third item, third opportunity we looked at and passed on where we had first look based on a long history of relationships with the main owner, or the main guy in a private non-profit, was a campus in a very good sub market in Maryland, 122,000 square-foot modern main building, was required to be rented at an unusually low rate for about a mid-single-digit yield with some multiple smaller outdated buildings on site and some additional land. But in Maryland, hard to justify value to the land that may not be developed for many, many years. So passing there, the lesson is inadequate return on invested capital. So moving on to our client-tenant base, page 27 of the supplement, we've tried to continue to expand that. Continues to say very, very strong, well diversified and no undue concentrations. So let me turn it over to Dean for his detailed

Thank you, Joel. The first quarter of 2010 was a quarter that could be described as a quarter flush with capital for REITs. REITs had access to a variety of sources of capital as proven by the announcement of various debt and equity deals. Banks and insurance companies continue to compete aggressively for financing of high quality real estate owned by quality REIT sponsors with limited or no new quality transactions for lenders to finance. And terms for secured loans have tightened significantly in favor of borrowers. It's an odd time period, with REITs having access to significant amounts of capital with very limited high quality opportunities to deploy capital through acquisitions. Alexandria is in a unique position with highly desirable land for build-to-suit projects. Let me move on to our solid operating results and then circle back momentarily to our balance sheet, sources and uses of capital in our 2010 guidance.

The key elements to our business model including, but not limited to, our favorable lease structure, unique life science underwriting team, highly experienced real estate team and laboratory facilities focused on locations adjacent to key research institutions and key life science sub markets, continues to provide stable and consistent operating results. Eight-eight percent of our leases are triple net leases, with an additional 8% providing for the recovery of the majority of operating expenses. Ninety-four percent of our leases provide for annual rent escalations, and approximately 92% of our leases provide for recovery of major capital expenditures. Our average occupancy percentage at December 31 of each year from 1998 through 2009 and March 31, 2010, was over 95%. We are through the first of four quarters and on our way to our twelfth year of positive increases in rental rates on new and renewal leases for previously-leased space, and our 47th consecutive quarter of positive same-property results.

Additionally, operating margins remain relatively steady at approximately 73%. G&A expenses averaged about $9 million per quarter in 2009, are up this quarter and reflects the usual items that cause expenses to be higher in the first quarter when compared to the fourth quarter, including various payroll-related expenses that max out during the year and result in limited or no expense in the fourth quarter and the usual audit-related expenses that are incurred in the first quarter of each year. We are still projecting total G&A expenses for 2010 to decline in comparison to 2009. Before moving to our value-added projects, let me clarify our rental rates on vacant, redeveloped and developed space leased. We reported an average rate of $27 and $29 for cash and GAAP respectively. Our reported rental rates are impacted by leasing rates for lower quality, previously vacant space during the quarter. If we exclude leasing activity for previously vacant space, our rental rates for redeveloped and developed space averaged about ten years and $31 and $34 on a cash and GAAP basis.

Next, turning to our value-added projects, let me briefly comment on our capped interest for the quarter. We advanced pre-construction activities to an appropriate stage related to parcels supporting the future [ground-up] of development of approximately 290,000 rentable square feet in Mission Bay, and ceased capitalization at quarter end related to pre-construction costs, including interest, property taxes and insurance. We also delivered our ground-up development aggregating 115,000 rentable square feet in Seattle to Gilead Sciences, Inc. At the beginning of the first quarter, we added two new redevelopment projects, aggregating 129,000 square feet. One asset is located in Torrey Pines and the other asset is located in eastern Massachusetts. We also were required to capitalize interest related to our future development site in Toronto as a result of construction activities completed during the quarter. Additionally, we had several other smaller construction projects, not a redevelopment or development project, with required capitalization of interest during the quarter.

Capitalization of interest should be flat to slightly down next quarter, with a decline in capitalization of interest occurring in the third and fourth quarter as we deliver significant spaces from our redevelopment and development programs. Our value-added projects include unique adjacency locations in Cambridge, along with the medial area of Boston, Mission Bay, South San Francisco and New York City. A significant portion is under active development, active redevelopment, or undergoing pre-construction and entitlement work. Many of these assets are strategically located adjacent to key life science entities in each of the top life science cluster destinations. Ultimately, these assets will be redeveloped or developed, leased to high-quality life science entities and will generate significant revenue and cash flows. Over the last five years, on average we have leased approximately 500,000 rentable square feet of space related to our active redevelopment and development projects.

During the first quarter, we leased about 137,000 square feet of space related to our redevelopment and development projects. This 137,000 square feet is unrelated to the 115,000 square-foot building that was delivered to Gilead during the quarter and leased many quarters ago. This run rate on an annualized basis is approximately 550,000 square feet, and puts us on track with our historical average of about 500,000 square feet of redevelopment and development leasing per year. By the end of 2010 we anticipate about 80% of our 865,000 square feet under development being leased, with a portion of this committed. The delivery of this -- [these] projects will generate significant revenue and cash flows and will result in a corresponding decline of required capitalization of interest. Additionally, our land parcels will provide significant opportunities for monetization and reinvestment of capital into our business and will provide important capital to repay outstanding debt. As of March 31, have one parcel classified as held for sale and we anticipate the sale of other parcels over the next few years. However, as of quarter end no other parcels qualify as held for sale.

Moving on to our balance sheet. Consistent with my comments last quarter, the lending environment continues to show considerable strength. Secured debt lenders continue to bid aggressively for high-quality assets with high-quality sponsorship. [Loan to values] are more common around the 70% range with rates in the 6% and sub-6% range. Banks and insurance companies are aggressively chasing the best deals, and signs of bank warehousing debt for securitization continue. These are obviously all positive signs for the real estate industry. Later, in the back half of 2010, we will begin formal discussions and negotiations with our lenders for the amendment of our credit facility. The environment for credit facility amendments remains solid. Banks continue to step up for new relationships providing commitments of up to $200 million. Existing relationship lenders continue to increase commitments, and obviously certain banks are not renewing their commitments. We continue to keep in close contact with our lenders, and based on our recent discussions, we have a high level of confidence that we will successfully amend our credit facility later this year.

Our tenant receivable balance of $2.7 million is down over $1 million since December 31,and represents one of the lowest receivable balances over the past several years. we added additional credit-related information to our supplemental package for our top 20 tenants, further highlighting the strength and diversification of our tenant base. During the quarter, we adopted accounting standards, Codification 810, formerly known as Statement 167, amendments to [Fin] 46R. This literature was adopted effective January 1, and required that companies including Alexandria reconsider their consolidation conclusions. We have one development joint venture that currently owns a development parcel in a triple a irreplaceable and unique location in the Longwood medical area of Boston, in which both parties to the venture share major decisions. As a result, pursuant to this literature, we deconsolidated this venture and have reported our interest as an investment in Unconsolidated Real Estate entity under the equity method of accounting. Please refer to the definition section of our supplemental package in our Form 10-Q when filed for additional information.

Moving on to sources and uses, we are very comfortable with our balance sheet position today. Additionally, our balance sheet capacity along with conservative and reasonable assumptions for sources of capital, highlights the flexibility we have to cover our uses of capital through 2014. Sources of capital include the following -- $609 million of availability under our credit facility, $107 million of cash on hand, $80 million of annual free cash flows, $75 million to $100 million of new loans or refinancings each year. We're currently engaged in very early discussions for the refinancing of one loan with a contractual maturity in 2011, and a current outstanding balance of approximately $76 million. Sources also include $50-plus million per year of asset sales. While $50 million per year is a reasonable assumption, it is likely that sales of non-income producing assets end up north of $50 million per year in both 2011 and 2012. It is important to keep in mind that this list of sources of capital is not exhaustive, and other sources of capital may be utilized to successfully execute our capital plan in addition to making adjustments to our capital plan from time to time as appropriate. In summary, this list of sources highlights the flexibility we have in meeting our uses of capital through 2014.

Turning to uses of capital, our estimate for construction for the remainder of 2010 is in the high $100 million range. This projection includes our estimate to complete approximately $69 per square foot and $139 per square foot for our redevelopment and development projects respectively, plus a few other smaller projects. Uses also include repayment of secured debt maturities net of $284 million of refinancings related to two largest secured debt maturities. Uses also include the successful renewal of our credit facility at three-quarters or greater of its current $1.9 billion capacity. We also have our repayment of our [$3.7 million] convertible debt. So through 2014, our uses of capital are meaningfully less than our sources of capital.

Moving next to credit metrics, our net debt to adjusted gross assets was stable at about 45%. Net debt to adjusted EBITDA was approximately 8.1 and we see this improving in the coming quarters and years. Unencumbered NOI represents a large portion of operations at about 55% of total NOI. The book value of our unencumbered assets as a percentage of gross assets was approximately 71%. The weighted average interest rate as of March 31 for our outstanding debt was approximately 4.74%. This is the rate as of quarter-end which is a specific point in time. This rate is clearly different from our weighted average interest rate for capitalization of interest, which is based on the average interest cost during the three months in the quarter, not a specific point in time, and is subject to the changes in our outstanding balances of debt from month-to-month. Facility covenants are very specific to each company and dependent on the specific terms and definition of each facility agreement. As such, covenant calculations and compliance will vary company to company. We believe our credit metrics related to our facility covenants are solid for our business. Leverage was about 43%. The facility limits about 65%. Our secured debt percentage remains below 15%. Our limit is 55% under our facility.

Fixed charges are solid for our business at about two times, and the facility limit is about 1.4 times. Our capital plan over the next several years 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 debt and equity broadly defined. To be clear, equity capital will include reinvestment of free cash flows, selective sales of income and non-income producing assets, opportunistic JV capital and common equity. JV 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. We also expect to improve credit metrics over the coming quarters and into the next few years. As I mentioned earlier, we anticipate the monetization of various land parcels going forward.

Moving lastly to our guidance, our guidance for 2010 for FFO per share diluted was [$4.43], up $0.01 since we provided guidance in early February. And 2010 earnings per share diluted was $1.80. Our guidance is based on various underlying assumptions and reflects our slight increase in our outlook for 2010. Some of these assumptions include the following -- our occupancy is forecasted to be flat to slightly up by year-end. Same property results are projected to be flat to 2% in that range on both a GAAP and a cash basis. Straight-line rents are forecasted to increase in the third and fourth quarters as we deliver long-term leases from our development projects. Origins are projected to stay in the 73% range. Other income is projected to be approximately in the $1 million to $2 million range per quarter. G&A expenses are projected to be in the low $30 million range. And by the end of this year, we anticipate about 80% of our 865,000 square feet undergoing development in a position to being leased with some space being committed, with the projects generated in significant revenue FFO and cash flows. Capitalization of interest for 2010 is expected to be in the low $60 million range., will be lower than 2009 and will reflect the delivery of significant square feet out of our redevelopment and development programs. Our projection for capped interest also assumes a decline quarter-to-quarter, primarily in the back half of 2010. Lastly, our guidance assumes selective sales of land and non-core assets continue through 2010 and beyond. With that, I'll turn in back to Joel.

Okay, operator, we're ready for questions, please.

Thank you, sir. (Operator Instructions). We'll take our first question from Anthony Paolone from JPMorgan.

Thank you. My first question is on the leasing spreads in the quarter. The cash spread were up I think 0.7% and GAAP was up, I think 0.8%. It would seem like that spread should be wider, given typically you have contractual lease bumps in the lease. I was wondering if there was something in the quarter that caused it to be so tight.

No. I don't think there is anything unusual. I think you can run a model on the statistics and find that you can probably achieve about something in the 2.5% and 3% range on steps and end up with that leasing statistic.

Okay so there was no change in just your typical bumps that you get in your leases.

No, nothing unusual on average for that square feet that was completed in the period.

Okay. On the balance sheet sequentially, and I don't know if you had mentioned this, but the land held for development went up by $40 million. Did that come out of somewhere else or was -- what was that?

You said land held for development?

Yes.

Yes, we had, in my comments earlier, Tony, we had moved a few portions of our Mission Bay West parcel, 290,000 square feet that had completed pre-construction activities, that basically we've advanced the pre-construction work. In fact, we also have piles on the ground on one of the sites, which allows us the strength, the time to deliver, once we're engaged in a tenant negotiation for a build-to-suit project. But basically, the majority of that increase in land held for future development is related to that, but I should also comment that it's also skewed to the upside. It makes the basis look a little bit high because there's a fairly significant change in the balance in the current quarter related to our foreign currency translation for our projects in foreign markets basically. It is substantially in Canada. That foreign currency translation entry is booked every quarter when we report, and flushes through equity, not through the P&L. But it results in this quarter in an uptick in our land held for future development.

Okay. And you're running through this and I think I missed this. You had mentioned some of the items that you ceased capitalizing in the quarter. What were those? I guess this was one of them?

During the quarter we obviously had delivered the building for Gilead. And we had -- pulling back my notes here, guys. Well, actually that was -- we completed, also. We brought in two redevelopment projects into our active development. We completed one development project for about 50,000 some-odd square feet. We delivered the Gilead building, which I mentioned. And then we also had some critical construction activities ongoing with our project in Toronto during the period.

Okay. And those -- the Toronto stuff stopped, is that -- ?

Yes, correct, as of -- I believe as of quarter-end we had completed those activities.

Okay. And then just a little bit bigger picture. Can you give us an update on the deals you think you were working on with universities and some things like that , that you talked about in the last couple of

Yes, we have a number of ongoing initiatives, Tony, that I described, that would be -- I would say primarily on land of institutions, where they would put up the land and we would partner with them to create a facility that is needed and they would be leasing the space. The most advanced one is one that I've referred to before, which I hope we'll be in a position at some point to announce. When you're dealing with institutional clients, it sometimes is a long process, given approvals and just diligence issues that go through a variety of different committees. But it's the building -- the first one we're looking at is a gateway building to a very large campus, three stories, probably about a 90,000 square-foot building, used for various state-of-the-art life science and technology uses.

Okay. Is there anything else -- any update in terms of Scotland or India that you can provide?

Well, in Asia we continued to move ahead our projects, particularly we have a small project in South China which we hope to finish the end of this year. And ultimately, a tenant not for life science but ultimately probably technology, manufacturing and [sell that] project probably because it was our first project and we kind of got our feet wet. But not one we would want to stay in that location. It was really driven by a partner of ours who ultimately decided to not take part of the building for just their own business reasons in China. And then we have a two-building complex in North China, about 300,000 square feet, that we are working on. Hopefully we'll finish the shells during the last quarter or two of this year, and we're working on landing a tenant. We're in discussions with a tenant to fill, at least hopefully, part of one of the buildings. It's a US tenant we're bringing into China and actively marketing the balance. So stay tuned. We hope to have some good news there. And then in Scotland we're working on the possible sale of several of the land parcels that we have rights to at some gains. And, again, those are just working their way through. Those are complicated for a variety of reasons, but the buyer is there. The seller is willing [us], and we just need to work through a number of hurdles. So hopefully we will have that done maybe done through the balance of the year. And then Toronto, just stay tuned on that because there is be some probably updates on that over the coming quarter or two.

Okay. Thanks.

You're welcome, thank you.

We'll take our next question from Michael Bilerman from Citi.

Yes, [Karen Belowie] is on the phone with me as well. Dean, on the capitalization, what was the relative to the fourth quarter? It sounds like things had certainly come -- came out, the redevelopment, the development, as well as that land moving from -- in Mission Bay moving from pre-construction to just land which you're not capitalizing anymore. What was the, I guess, the average balance that you were capitalizing interest on sequentially? And did the rate change? It looks like 5.2% in the first quarter.

Yes, if you turn -- I'm looking for the page here, so give me one moment, Michael. If you turn to page -- I think it's page 16 of our supplemental. The top half of the page shows our weighted average interest rate used for capitalization, the current quarter, it is an average rate for the three months in the period was 5.2% versus the average for the three months ended for the fourth quarter period was 5.42%. So the interest rate itself dropped about 20 basis points. The average basis, I think appears, at least substantially appears, in the CIP schedule. It's about --

It's one point --

In the one point -- it was $1.4 billion last quarter.

And $1.5 billion this quarter. So I would have thought it would have gone down, not up by $100 million.

Give me one second, Michael. CIP was $1.3 billion as of quarter-end. It did go down.

So I guess during the quarter you're saying you were running a higher -- during the quarter the balance you were capitalizing on was 1.5,billion just to get the $19.5 million of capitalized interest.

Yes, that is right, Michael. There were -- I think the primary driver, although it was driven by a few things, we did add about 131,000 -- about 130,000 square feet of two new redevelopment projects almost, I think, right at the beginning of the quarter, which added probably to the basis that you may not have originally estimated. We also had, as I had mentioned, some important construction activities related to our project in Toronto that were advanced during the quarter, which you may not have anticipated, as well. So those are probably the primary drivers relative to your model.

And so you're expecting -- you last expected cap interest for the year to be $60 million. You're now expecting it to be low $60 [millions] Is that $65 million or $62 million?

One of the challenges, Michael, is that the forecast for capped interest is highly dependent on a variety of factors, which is the exact timing of delivery, or completion of construction projects, combined with the interest rate assumptions. And because it's a forward-looking estimate, it's subject to some variability. So on average, my outlook for capped interest really hasn't changed a whole lot. I think last quarter I said it was in the $60 million range. I think I just gave guidance in the low $60 million range. So I'm still in that general area. I think we'll end up, sub $65 million. But I am saying that very cautiously because there are a lot of variables that impact that number at the end of the day.

Okay. In terms of land, you have he one land held for sale, what is the book value of that land? If you book a gain, is that gain included in guidance? And I guess it sounds like you said a couple times on the call that you expect monetization of land parcels to accelerate. I'm trying to get a sense of what volumes you're targeting.

Sure. The asset that is held for sale as of quarter end is a small parcel. The book basis is about $3 million. There is no gain included in our FFO guidance related to that parcel or any other parcels. The magnitude of land sales going forward will be highly dependent on our negotiations and our appetite for specific parcels. But I can share with you that they do range in size from this very small parcel up to a transaction size that would be very significant in north of $100 million range.

And that's [obviously] on Mission Bay. Where are you in terms of marketing the space from a tech/IT perspective on the campus?

Yes, we have a number of users who are looking at the east parcels, which aggregate about one million square feet. And those discussions and negotiations continue, and we think there will ultimately be a favorable resolution of that. And then as we said last quarter, we also are well into discussions on the south parcels, about 500,000 square feet to go medical office. Again, parcels that we probably would not hold long-term. And the hospital, I think they are now about out of one point, some billion dollars, they are, I think, just about $100 million or so short of their total goal. So there is no doubt, if you go by the site there is a huge amount of work going on there. So that is going forward without doubt and there is no medical office or administrative space office space available in that over one million square-foot campus. So we think that that's going to be a very nice opportunity for somebody with medical office focus.

Sorry, one last one. On the same-store expenses,is there anything -- they were down 4% year-over-year, which was certainly a larger decline than I would have thought. Is there anything happening there?

No, not really, Michael. The majority, and keep in mind the majority of the decline in OpEx in the same-store pool actually results in a corresponding decline to recoveries. That's why in the same-store page you see a decline in revenues, yet positive growth in NOI. The growth in NOI is coming off the topline in growth and rental income.

Okay. Thanks.

Thanks, Michael.

We'll move on to [Jana Gallon] of Bank of America/Merrill Lynch.

Hi. You discussed some of the acquisitions that you decided to pass on. I was hoping that maybe you could discuss some of the assets that you're seeing coming to market or that you expect to come to market, and if they seem to be more quality or something that you would be interested in?

Well, that's a little hard to do given the competitive landscape, but I would say in each market, we're seeing much more of a willingness of sellers either because they're recognizing there is a more robust environment for sale transactions, or on the other hand, people who are looking to exit and achieve liquidity. I think we still don't see any real distressed sellers out there in our niche. There may be in the office world but we certainly have not seen it. But we think there is a number of opportunities that we see, and we'll keep you posted on those. Again, our criteria really must be very well located, obviously high-quality facilities and obviously, a tenancy that we think meets our standards. And a return on invested capital that does as well.

And just to follow up on -- What led to some of the weakness in San Diego and your Seattle markets? And what are kind of your prospects for releasing this space?

Well, there is no weakness in Seattle. We're over 98% leased and the only downturn was due to Gilead moving from some or our -- we have them in a smaller space. They exited and moved to a build-to-suit and then we're back filling that space. So I wouldn't sense that is a weakness at all. If somebody in this market has 98% of a market leased, that has got to be a huge win. San Diego, I think I've said many times, is really a result of a multi-year set of kind of perfect storm events, where a number of big pharmas who went to San Diego have exited that market in favor of, say, the Bay Area or other markets. The institutional demand and focus, which has been the primary stalwart up on Torrey Pines, has slackened over the last couple of years heavily due to a number of the institutions' focus on Florida, where a number -- three of the institutions, I think, achieved grants, and other benefits that exceeded $1 billion dollars from Jeb Bush and others. So that took away a lot of their focus out of the the La Jolla area for expansion.

And I think just the downturn -- the structural downturn caused a lot of biotechs certainly to need less space and so that reduced the focus in San Diego. And then the two leading San Diego companies that really one would expect to kind of lead the space, kind of the anchoring space, which are Biogen Idec and Amylin. Both are having shareholder challenges from Carl Icahn on increasing valuation, valuations for those companies. So I think there's a kind of a set of reasons why you see what you see in San Diego . But it is not certainly unique to us. It certainly is true of all lab landlords and even the office landlords. I think Kilroy and others have certainly experienced some pretty significant weakness in the San Diego market. We think it has kind of bottomed, but it is one market we're pretty focused on to help

Thank you very much.

You're very welcome.

(Operator Instructions). We'll take our next question from Will Marks from JMP Securities.

Thank you and actually the -- all the extensive discussion has cleared up any issues I had. So thanks.

Okay. Thanks, Will.

(Operator Instructions). It appears we have no further questions at this time. I'd like to turn the conference back over to our presenters for any closing or additional remarks.

Thank you. I think we made with inside of an hour, which makes it efficient. We thank you for your time and participation and look forward to talking to you in late July with second-quarter results.

That concludes today's presentation. Thank you for your participation.