Alexandria Real Estate Equities Inc (ARE) 2010 Q4 法說會逐字稿

Good day and welcome, everyone, to the Alexandria Real Estate Equities Inc. fourth-quarter 2010 year-end 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, ma'am.

Thank you and good afternoon. This conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include without limitation statements regarding our 2011 earnings-per-share diluted attributable to Alexandria Real Estate Equities common stockholders; 2011 FFO per share diluted attributable to Alexandria Real Estate Equities' common stockholders; the business plans of certain tenants; and the expected impact of the retirement or 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 debt; obtain capital debt construction financing and/or equity or refinance debt maturities; increased interest rates and operating costs; adverse economic or real estate developments in our markets; a 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.

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

Thanks, Rhonda, and thanks, everybody, for joining our fourth-quarter and year-end 2010 earnings call. We are going to try to use maybe a somewhat shortened management presentation, so we have a little more time for Q&A.

As you know, Alexandria has been built and has grown predominantly with a laser focus on the best intellectual and entrepreneurial adjacency cluster locations for the broad and diverse life science industry. A great adjacency location is absolutely key, together with obviously a first-in-class facility; first-in-class sponsorship; commitment to wisely invest capital; attention to first class sustainable business operations; and clearly a focus on what the client/tenant really needs -- all critical components for success. That has and will continue to be our formula for success.

Interesting to note, Ian Read, who is Pfizer's new CEO, in his recent conference call made the following quote. We are strengthening the fundamentals that drive by medical innovation with a series of actions, including more closely aligning our global R&D network footprint with key hubs for science and technology. We intend to enhance our presence in Cambridge, Massachusetts to complement our existing R&D networks, including those sites located in hubs like San Francisco, New York, La Jolla and Cambridge, UK. And I'm pleased to note that Pfizer is located in our Mission Bay, San Francisco location for their new therapeutic innovation group and our science center in New York, and I'm very pleased about that.

As I review the cluster markets and talk about the quarter real quickly, let me highlight each of the markets briefly. On the West Coast, starting in Seattle, our focus has been on really the number one life science cluster submarket at Lake Union, really the best adjacency location, the highest rents and really the highest quality tenants, and minimize presence in places like Elliott Bay and the Buffalo suburbs, which have suffered. Our occupancy has remained steady at 97.5 with the continuing big player demand and very stable rental rates. This past quarter we leased 86,000 square feet during the fourth quarter, which was, I think, a very good outcome. We see good growth through the release of our 2011 redevelopment non-lab space to lab space with positive mark-to-market and even the potential for a build-to-suit as well.

In the San Francisco Bay area, we've got a very nice balance of three West Bay submarkets, including Mission Bay, South San Francisco and the Peninsula, each of which are good high quality markets having exited the East Bay in the first quarter of 2008. Overall in South San Francisco, on the positive side, Life Technologies, a competitor with Illumina in the tools and services business, is likely taking a big block of space, which is a positive. On the negative, [Elon] has announced that they will be exiting a bunch of space.

In the fourth quarter, we signed 158,000 square feet of leases in the Bay area. Occupancy should remain steady with rental rates steady as well.

For 2011 I think we will likely see some leasing transactions at the East Jamie Court, which is clearly a strong focus of ours. We are finally getting traction there. With our 200,000 square feet of rolls, about a quarter have been pushed into 2012, and the balance three quarters we hope to have resolved favorably during the year, probably a little bit of a slight downtick in the South San Francisco market.

UCSF lease and [Necktar] expansion are moving along hopefully to rapid conclusion at Mission Bay, and the level of demand at Mission Bay has been pretty good.

In San Diego, clearly 2010 was a critical and seminal focus of the Company to create a first-in-class regional team like our other regions and a focus on the acquisition of the best-in-class assets. We accomplished this with the Veralliance integration now being ARE and also the acquisition as we announced previously of the Biogen Idec campus, 347,000 square feet, as well as the 373,000 square feet Campus Pointe project where the anchors are Eli Lilly, Covance and UCSD.

We are able to increase occupancy nicely in the focus on real growth rather than treading water like we have been doing over the past couple of years. We see 2011 having some positive uplift on the releasing mark-to-market, positive redevelopment releasing. We hope to deliver the Illumina build-to-suit early, and we are tracking over 1 million square feet of potential demand in the market.

Fourth quarter was a blockbuster San Diego leasing occurrence with almost 600,000 square feet, including about half of that, a little more than half of that being the Illumina lease.

On the Illumina transaction, I'm going to ask Peter Moglia, our Chief Investment Officer, in a couple of minutes to discuss the transaction as best he can given the confidentiality with Illumina, but essentially Illumina being a leader in the tools and systems for genetic analysis. As I alluded to in the last earnings call, that market sector has doubled over the past five years now with a value of that sector itself with over $42 billion in turnover.

Moving to the East Coast quickly, Southeast unfortunately being a relatively small market, it has been relatively quiet and somewhat remaining weak. We only had about 10,000 square feet of leasing in the fourth quarter. Occupancy has remained steady but and minimal rollover, but, again, rental rates, there are pressure on rental rates in that market.

Suburban DC we had a very nice pickup of 150 bps on occupancy, signed about 66,000 square feet of leases in the fourth quarter. We've got about 150,000 square feet rolling this year, mostly our all-in process, probably somewhat downward pressure on rents, but hopefully not too significant. We are seeing a bit of a tepid demand at the moment. We did complete one nice stabilized acquisition at a good yield with a long-term lease and a credit pharma tenant.

Moving to the New York City, New Jersey and Pennsylvania submarket, I think that one of the crowning achievements this year, in addition to what we have accomplished in San Diego, was to deliver our flagship project, the Alexandria Center for Life Science in New York City with very strong leasing about 96%. The market overall, these three markets kind of combined, we lost a little bit of occupancy, primarily due to weak New Jersey and a little bit of softness in Pennsylvania.

We did announce, or I should say Pfizer announced, their Collaborative Therapeutic Unit moving into our center in New York -- the first time ever that Pfizer has actually done research in New York. Their headquarters has been there, but they have never done research. They signed a 15,000 square feet lease for approximately four years. We are now tracking real demand for over 250,000 square feet for a possible anchor for West Tower build-to-suit. Very small 2011 rollover and exposure in those markets, and we are clearly focused on leasing two empty buildings in New Jersey and Pennsylvania, and hopefully over the next year or so exiting New Jersey totally. We have had that ongoing for a number of years, and we are down to now two buildings.

In the Massachusetts and greater Boston area, we lost some occupancy, but by and large, it is a stable and solid market. We have got good prospects for 2011 to fill vacant space and to address about 500,000 square feet of lease rollover, which I think will be very manageable, about 200,000 of which is our 400 Tech Square lab conversion. We see very good upside there compared to existing expiring rents with Forrester. We will probably see some -- one property that will be leased in Watertown. We will see some rolldown, but overall positive.

We did about -- sorry, 36,000 square feet of leasing in the fourth quarter, so kind of modest. We are tracking well over 1.5 million square feet of lab demand in the market with pretty good rental rates and also a strong office market there.

A number of you have obviously seen some of the announcements regarding Vertex. It is an outstanding biotech company on the verge of commercialization with their flagship Telaprevir product. They have been engaged once again with the [Farber] site in Boston, which was where they had chosen to go pre-crash. That deal is not done at the moment. There is a financing contingency, so we will wait and see for about 1 million square feet. Our Binney Street project, I believe, is their backup.

They have got about 800,000 square feet now in Cambridge, some marginal quality B- product that they will exit over time. About a total of about 800,000 feet -- 150,000 in Kendall Square, about 50% which is already subleased, another 150,000 square feet in University Park, and about 400,000 in Cambridgeport. Vertex, I think the earliest they can exit in canceling about 300,000 square feet is the end of 2013. There is really no impact -- we don't have any exposure to Vertex in our asset base in the Massachusetts market and really no impact on Binney, although it would have been wonderful to have them as an anchor to that project.

The concept of Vertex moving has challenged Cambridge political thinking, I think, more than anything because they felt they were the end-all of really cluster in the Massachusetts area. But it is pretty clear there is the Longwood center and other locations that people gravitate toward, and there was also a big debate over state and local city incentives to lure Vertex to that site. But it is clear that Cambridge is and will remain the life science cluster adjacency location to beat.

Vertex views Boston and Cambridge a little differently than a number of companies because they are one of those companies that don't need to collaborate for future pipeline product. They have already really got that built in. So as opposed to Novartis, Pfizer and others who are very, very connected to the technology transfer world, Vertex really is not and are much freer to move around as they see fit given their commercial stage situation.

The Genzyme deal, people have also asked about it. As you have seen, it appears that they have reached an agreement with Sanofi. Sanofi, this acquisition for Sanofi is really a pipeline fill according to Chris Viehbacher.

Genzyme like Vertex has no real R&D in Cambridge today. They moved R&D to the suburbs, being very cost-conscious and not needing a pipeline fill through collaborations. They have built the Company mostly on acquisitions. So their exposure in Cambridge is really just office, about 350,000 square feet in Cambridge and another 268,000 in another building, and my guess is they will probably retain suburban R&D locations but probably exit the office. And there is a very, very vibrant Cambridge office market today, as you have probably have heard on the other calls. So I think that is not going to represent much of a downturn.

I think it is pretty clear that some are asking if this spells serious trouble in Cambridge, and a lot of people in the know really say that really is very surprising. Cambridge is one of the world's most important sources of next generation technologies and companies and regularly exports them.

In 2009 the Kauffman Foundation study showed that MIT spinouts alone if collected together would rank as the 11th largest economy in the world, and Vertex and it's Telaprevir hep C drug is on the verge of approval following the time-honored tradition where companies that grow up with existing products and don't need to access pipeline fill are really free to move to other locations. So I think Cambridge is going to do just fine, and we don't see any huge pressure from Boston there. I think it is clear that the real threat long-term are places like China and other locations. So we have to keep our eye on that.

Just very recently, ARE signed a new lease, about 50,000 square feet with [Asahi] Pharmaceutical Company of Japan in Tech Square for their new personalized cancer company. This is kind of the wave of the future, H3 Biomedicine, where they are investing $200 million in that platform, and they do need to access the great institutions within Cambridge. This is really the heart and soul of why Cambridge is and will remain critically important.

We are still seeing some interesting acquisitions, and we expect to be opportunistic in 2011. I think you will see more recycling of some of the older buildings we own into newer, better locations and facilities, as well as further land sales. An example, the site in San Diego for a new FBI regional headquarters. Dean will comment on the great progress we have made on our balance sheet and metrics and the important upsize and extension of the line of credit.

We did successfully match fund our September equity raise with acquisitions and expect to continue that approach we pioneered many years ago with the minimization of dilution. We hope this year we will see our first build-to-suit in the Binney Street corridor, so stayed tuned for that. And I think Dean will share with you we are likely to continue the board to increase the dividend sharing with cash flows with our shareholders.

And then finally, maybe one thing before I ask Peter to take over, would be it is important to keep in mind that really high quality, stabilized assets in the infill locations really command the top prices and assets, and secondary or tertiary markets really are kind of still bouncing along the bottom.

So, with that, I will turn it over to Peter to give you some highlights of the Illumina deal.

Thank you. We understand you are very interested in more details of this significant transaction, but, as Joel alluded to, please understand we are bound by strict confidentiality and are limited to what we can disclose. We hope that the following will give you enough color to better understand the positive impact of the transaction and the impact to your models.

The cash yield, ex the additional SAR, is 0% in the first year, then ratchets up to 7% upon full delivery to the build-to-suit. The average cash yield over the lease term is approximately 10.7%. The GAAP yield, ex the additional SAR, is approximately 10.5% initially and then moves to just under 11% upon full delivery of the build-to-suit. The effective rent is higher than the three most recent Class A lab/office comps in the market. Illumina's lease will commence no later than November, and we are obligated to deliver the build-to-suit in two phases no later than 2013 and 2014 with an opportunity to deliver ahead of the schedule.

The tenant has a right to expand further into three more buildings with square footage totaling approximately 297,000 square feet. It is anticipated that the tenant investment in the build the two buildings will be substantial. We expect Biogen to move out before the end of their 15-month term and pay full rent and operating expenses through August. This will provide us the opportunity to deliver portions of the project to Illumina before their November start date with limited downtime.

Thank you very much, and with that, I will pass it over to Dean Shigenaga, our Chief Financial Officer, to discuss financial results.

Thanks, Peter. Let me jump right in here. We reported FFO per share diluted of $4.40, which excludes the gain on land sales and before losses on early extinguishment of debt. This is really on target with FFO per share expectations that we had from the beginning of the year. We also reported EPS diluted of $2.19.

Quarterly common dividends increased to $0.45 from $0.35, up 29% and really reflects our ability to share increases in cash flows with our shareholders. We reported the highest quarter and year of leasing at 1.1 million square feet and 2.7 million square feet respectively. This really is our 12th consecutive year of positive rental rate increases.

Leasing included 350,000 square feet with our lease with Illumina and 130,000 square feet lease at the Alexandria Center for Life Science in New York City. Same property NOI growth was 1.3% and 2% on a GAAP and cash basis, representing our 50th consecutive quarter of positive same property NOI growth. Operating margins were 72%, representing one of the highest operating margins in the REIT sector.

Keep in mind, over the past several years, margins have declined primarily due to the impact of ground-leased assets. Ground-leased brands are actually reported through operating expenses. Occupancy was solid at 94.3% for our operating properties, 88.9%, including spaces undergoing redevelopment.

During the quarter, we delivered a significant amount of new spaces to the operating asset base either through ground-up development or recently acquired assets. Both had a significant impact on straight-line rent adjustments either from normal straight-line rent related to long-term leases acquired with operating assets, or two, free rent and normal straight-line rent on long-term leases delivered from our development projects. The good news is that we recently delivered significant spaces under long-term leases from both recently acquired assets and recently completed development projects. Additionally contractual cash rents are scheduled if not already in place. Straight-line rent adjustments from these assets will burn off over the coming quarters. As a result, cash flows are projected to increase by 15%.

Additionally, as we deliver space to Illumina over the coming quarters, we expect an increase in straight-line rent for four or so quarters. Lastly, FAS 141 mark-to-market lease revenue should drop to $1 million after the second quarter of 2011.

Turning to acquisitions, in the fourth quarter, we acquired five properties, aggregating over 860,000 rentable square feet for $282 million. Stabilized cash yields range from 10% to 8%. GAAP yields ranged from 11% to 9%. Acquisition activity focused on value-added opportunities through releasing of space, immediate redevelopment and near-term development opportunities, for example, the fully leased ground-up development with Illumina.

Turning to our balance sheet, we completed the extension of our revolving line of credit, extending the maturity to January of 2015. The revolving line increased by $350 million to $1.5 billion, bringing our total facility to $2.25 billion. Pricing on the revolver is now 2.4% over one month LIBOR. Our $750 million unsecured term loan maturity remained unchanged at October of 2012, and pricing on the term loan remained unchanged at 1% over one month LIBOR. We anticipate refinancing our term loan in late 2011 or early 2012.

We probably all continue to acknowledge that the debt markets continue to show significant capacity for borrowers. That includes funding from banks, life companies. We are starting to see an opening in the CMBS market, as well as ongoing activity in the bond market, all of which are at fairly attractive pricing. We expect to close a four-year $250 million bank loan this quarter, and we will provide more details on this in our next earnings call.

During December and January, we retired $83 million and $43 million respectively of our 3-7 convertible notes. As of today, we have $250 million outstanding, which we plan to retire by the first quarter of 2012. We also expect to go through the formal rating process later this year.

Turning to credit metrics, our net debt to EBITDA was 6.9 times, reflecting the debt reduction from proceeds from our sales of land in Mission Bay. EBITDA growth and debt repayments are anticipated to continue through 2011, and net debt to EBITDA is also anticipated to improve through the year.

Financial covenants under our credit facility were adjusted slightly to market and can be found on page 34 of our supplemental package. Leverage was 36%, covenant is 60%, the unsecured leverage was 39%, and the covenant is 60%. Our fixed charge coverage ratio on a trailing 12-months was 2 times. The covenant is 1.5 times, and I should point out the current quarter annualized fixed charge coverage ratio is 2.4 times, really reflecting significant improvement. Our unsecured debt yield was 14%. The covenant is 11%.

Turning to sources and uses, for 2011 our net cash flows are expected to be about $100 million. Asset recycling and land sales are expected to be about $150 million, an unsecured bank loan, which I just mentioned of $250 million, other debt equity and JV capital in the range of $300 million, bringing total sources to about $800 million. We anticipate development and redevelopment and construction spending in the $340 million range. Acquisitions of approximately $200 million, secured debt repayments of approximately $115 million, and retirement of 3-7 notes in the $100 million range, bringing total uses for the year to $755 million.

Additionally I should point out availability under our credit facility as of year-end was $750 million. We had cash on hand approaching $100 million, and I think, as I mentioned earlier, we anticipate refinancing our term loan in late 2011 or early 2012 and the retirement of our 3-7 notes by early 2012.

Lastly, moving to guidance, we updated our range of guidance for 2011. FFO per share diluted was provided at $4.58 to $4.68, up $0.02 before losses on early extinguishment of debt that we recognized in January of 2011, and EPS diluted of $1.97 to $2.07. Our guidance is based on various underlying assumptions and reflects our outlook for 2011. Some of the assumptions include the following. Cash same property NOI growth in the 2% to 4% range; GAAP rental rates steps in the 5% range on lease renewals and releasing of space for the year with some variances in results quarter to quarter; straight-line rents for the year in the low $30 million range; G&A expenses flat to modestly up over 2010; capitalization of interest to decrease 20% from 2010; and lastly, our guidance assumes selective sales of land and non-core assets continue over the next few years, including one land parcel that is currently under contract today.

With that, I will turn it over to Joel.

Operator, if you could open it up for Q&A. Thank you, everybody.

(Operator Instructions). Sheila McGrath, KBW.

I did want to ask a few other questions on this San Diego acquisition. Hopefully you will be able to answer them. Just in terms of on the 0% return in the first year and then 7% and then 10.5%, is that do you mean in 2011 and 2012 and 2013? Is that how we should look at it?

Yes, I think -- excuse me, for a little vagueness on the answer, but the free rent period in the first year will be based on a start date of November. But I said also caution as we are trying to work with Illumina to accelerate the time of when they get into their space. The exact timing we don't have a good handle on, but we will be able to report over the next couple of quarters.

Okay. And then if you could just give us some insight, did you have Illumina in mind as a tenant when you bought the acquisition?

The answer was we had four likely candidates, and they were certainly on the list.

Okay. And then when you purchase this asset, if you compare it to your returns thus far on East River, is this going to end up being a bigger kind of IRR contributor than even East River?

Well, they are different because this is an existing asset, and the Alexandria Center for Life Science in New York is obviously a development. So they are really kind of different, but I would assume this would be a higher yield if you looked at it on basically a yield basis (multiple speakers) just given the nature of the lease that we were able to negotiate.

Okay. And Dean, could you give us some insight on the pricing and leverage metrics that you are seeing from the life companies right now in the CMBS market on secured debt?

I can broadly speaking, and I say that cautiously. Because, you know, from my comments earlier that we are actually not in the market on the CMBS side or the life side today, and so I don't have a term sheet to give you an accurate number.

But I would say life companies remain aggressive. The CMBS deals in my opinion probably fall one step behind it on pricing on the life side. And banks I would say for shorter tenure deals probably are extremely aggressive today and are pricing probably tighter but on a shorter tenured basis. I would say your seven to 10-year paper from either the CMBS or the life market would probably put you somewhere plus or minus 5%. The bank side for Alexandria shorter tenured paper, I would probably say something approaching 200 over LIBOR.

Jay Habermann, Goldman Sachs.

Here with [Connor] as well. Just focusing on the JV capital, I guess can you give us some sense of the timing for some of the JVs and the likely cost of that capital? Maybe some of the yields you're looking for in terms of sales and I guess the types of capital that you are talking to at this point?

When you say JVs meaning on -- are you referring to projects or just generalization?

Well, project specifically, and I guess in general as well, the types of capital sources you are talking to.

Yes, I mean we had reported back I don't know a couple of years ago when we started the New York project and I think it was right before the crash actually, we had a term sheet negotiated for the East Tower with a JV partner. I'm trying to remember. It has been so long ago, but I believe it was more or less a 50-50 deal, and we viewed that capital would be helpful. We were actually looking, I think at that point it may be building the East and West Tower together, but obviously the downturn changed that. So I think, as I recall, it was probably both towers now that I think back about that.

But I think when it comes to large-scale projects and also debt was not available really at that time for us, and certainly later it was not on that size of a spec construction project. Today I think the JV sources of capital -- in fact, I met with one very, very prominent JV person in New York not too long ago to discuss the Binney Street project. If we kick off a large-scale project as opposed to a single building, JV capital is something we clearly would look at as an important source of capital. I don't know if that helps answer the breadth of your questions, but that is kind of what we have done to date.

Okay. No, that is helpful. And in terms of returns on developments, can you focus on Cambridge a little bit and perhaps compare returns that you are talking about for those projects versus what you are seeing on redevelopment?

Yes, I mean our redevelopment, the biggest one we have done was really a pretty huge success. I think we achieved and we did a case study a number of quarters ago -- maybe I don't know about four or five or six quarters ago -- on our 200 Tech Square building where, I believe, our returns on incremental capital we put in approached about 16%, 17%. We signed anchor leases in that building when we bought it.

200 Tech Square was going to be an updated and redone office building. We ended up being able to convert it to lab. The rents went significantly up. Our anchors there were Pfizer, Novartis and Glaxo, and that, I think, is one of our most successful projects of big scale. And I think today we are going to be embarking this year on the redevelopment of 400 Tech Square. We don't have pricing yet. We don't know whether it would go new office or new converted lab because there is actually very significant demand for both in Cambridge today.

Very, very hot companies or entities. So we would hope to achieve obviously double-digit returns on our incremental capital into that project.

When it comes to development on the Binney Street corridor, I think we would target something in the range of a high single-digit probably likely given underground parking and other amenities that we have had to provide the city. I would say if we could reach anywhere between an 8.5 and a 10 on an unlevered basis, that would be pretty strong.

Okay. And just lastly in terms of uses of capital, can you talk about the potential? You mentioned dividend increase versus conserving capital obviously to fund the external growth and potential land acquisitions, as well as maybe even debt pay down?

Yes, we have obviously back over the last couple of years since the dividend cut that many REITs were implementing. In fact, I remember being in San Diego in November '08 when I think we did our first day 13 one-on-one meetings. In 12 of those meetings, people begged us to cut the dividend. It was kind of a surreal situation, as you probably recall.

But I think, as we go forward, we would like to see, we just did make a significant -- the Board did a significant increase in the dividend, and I think you will see that going forward in a measured way that so that we are sharing the upside in cash flows with our shareholders, but, at the same time, retaining as much as we can because it is the cheapest source of capital. I don't know, Dean, if you want to add anything to that.

No, I think Joel summarized it at the end there very nicely. Like we did earlier, being able to share the increase in net cash flows to our business while retaining some is the primary objective going forward.

Jamie Feldman, Bank of America.

Can you talk a little bit about the significance of Pfizer's Center for Therapeutic Innovation coming to your center? I mean it looks like from the press release they put out that there other organizations that will be housed within it. So I'm trying to figure out, is that competitive to your space, or is this just a toehold and maybe they can expand from here? But I'm just trying to get a sense of the significance of that lease in specific.

The Center for Therapeutic Innovation is really a brainchild that has emerged over the last couple of years since Pfizer has gone through a pretty gut-wrenching reorganization starting with Jeff Kindler and now with the new CEO. Clearly they want to exit more and more of their siloed campus locations, which are not really adjacent to the innovative and entrepreneurial locations, and part of that was the establishment of a kind of stand-alone entity called this Therapeutic Innovation Center.

Their goal is to create -- put in something and at least initially and it may grow over time obviously depending upon product opportunities -- somewhere between 40 and 60 scientists in a very high-intensity, high-quality lab, and they are not doing Pfizer research. They are not developing either small molecules or biologics. What they are aimed at doing, their sole goal is to access innovative technologies and opportunities from the significant academic and institutional centers that are adjacent to these locations.

So they have already embarked upon setting it up at Mission Bay. Obviously I think they signed a deal that was announced maybe by Jeff Kindler before he left as CEO with UCSF, and my guess is they probably will sign others there. So they are not leasing space or doing anything, but it is solely external collaboration.

And the same thing in New York. When they move in, I think in the next couple of months, that group will be aimed at and they signed, as you saw, the press release that Pfizer put out, they signed some seven, eight, nine -- I cannot remember how many -- collaborative agreements with major New York City institutions, and again, it is aimed at collaborating with those institutions, not doing internal Pfizer research. They are looking at other sites, as Ian had mentioned in the quote I gave, to really access worldwide innovation. So this is where big pharma is really headed and less focus on places like Groton, Connecticut, etc.

And then what is the appetite for growth from that? Is that anything large enough to be like an anchor tenant in a second building?

I don't know that this will be because these are obviously projects that take time because that they are early-stage projects. So the 250,000 to 300,000 square feet of demand, real demand that we have right now and we are working pretty hard on it in New York, for example, one is a biotech company. The other is a major institution aimed at a particular disease area. Those are the two big ones. There's a bunch of small ones. So we're not counting Pfizer in that. But I would expect over time, if Pfizer is successful in accessing innovative technologies that could move from R to D, that they would expand in New York City.

And then could you please walk us through your 2011 remaining expiring leases, kind of the big ones that have some vacancy risk?

Yes, I tried to do that a bit in my geographic review, but let me just go to that page. Bear with me one moment here.

So it is page 40 of the supplement. I will just run down each of the markets. So, in San Diego, we have got a total of 550,000 square feet expiring, and as you can see, the bulk of that is already leased. So we don't see much risk there. The Bay Area, we have got about 269,000; most of it still is remaining. And so we see that as a modest challenge, but we think we can -- we are certainly up to that challenge. In the greater Boston area, about 484,000 square feet, almost 200,000 of which is the 400 Tech Square, which we have a high degree of interest in, probably single building users, and about 120,000 that is remaining that is not resolved. So we think that is inordinately handleable. New York, New Jersey suburban about 38,000, which is pretty small. The Southeast is pretty small. DC we have got one big one we are working on, and the balance is pretty small. And Seattle is pretty small. The Gates Foundation building, which is coming back to us, which is an office building, we are converting it for lab. We have already signed a major lease there, and we see that as resolving. So we don't see inordinate challenges in the releasing risk for 2011.

And then Jamie, just to add some color there, in the marketing, our too early to tell column, most of the leases are below 20,000 square feet in size, and I think there is only one lease that is north of that, and it is in the 50,000 square feet range. So it is spread across a number of smaller spaces with no large, lumpy exposure.

And in San Diego, if Dean will make sure my recollection is correct, I think he has pointed out the [3436] annual base rent expiring in San Diego, a big part of that is the Biogen Idec lease. And if you back that out, that number drops to about $25 or something. So that is important to remember, too.

Yes, that is correct. So if you think of market rents across the three major submarkets down there, that might initially draw some concern. But at $25 of expiring rents, excluding the Biogen space because that has already been resolved, we are in pretty good shape.

Okay. And then finally actually, Dean, so if you look at the increase in FAS 141 and straight-line rent in the quarter, can you give us a sense of how -- the timing of those actually burning off and turning into real cash?

Sure. 141 I think I commented on that after the second quarter of 2011, 141 will drop down to about $1 million a quarter, and straight-line rents will run a little high for a while for two reasons. One, a lot of deliveries on the developments and large leases that have been executed as those burn off space by space to cash flows that will tail off.

However, as I mentioned in my prepared comments, you also have the Illumina lease coming in, timing to be determined over the next few quarters, but no later than November of this year, which will contribute meaningfully to straight-line rent adjustments that are going to be fairly significant for a number of quarters.

That sounds like that is at least flat if not increasing by year-end, straight-line?

No, I don't think it will increase relative to the current quarter of straight-line rent, a number of roughly $9 million. I think I was forecasting somewhere to be in the low $30 million range on straight-line rents for 2011 that kind of frames the range that we would expect.

Will Marks, JMP Securities.

Just a question, a very, very broad question on acquisitions and development and who are you seeing in terms of competition? I don't expect you to name names, but are there some new players that are building this type of space at all, and are the number of acquirers -- has the number of acquirers increased in terms of who you're competing with when you look for a deal?

Well, virtually everything we did this year was off-market, so in that sense we did not have any competition to speak of. But I think deals we saw and we passed on, there was one deal in Sorrento Valley in San Diego, another deal in the Bay area of South San Francisco. There have been a number of deals we have seen that we passed on. So I don't know necessarily the number of bidders and what their makeup is.

But I think it is fair to say I did quote a couple of quarters ago there was a deal that we really liked and went after but lost to a pension fund back in June in the Massachusetts region, which we thought was kind of emblematic of what you are talking about. It was -- I don't remember how big it was, but it was about 60,000, 70,000 square feet building, B building, B location, but AAA credit tenant and a lease through 2028. There were quite a number of bidders because people view that as almost like a bond. So I think it depends on the nature of what the acquisition is.

And then what about development?

Well, on developments, we own our sites. We obviously -- (multiple speakers)

Right. I just mean are others -- are you seeing any kind of increasing activity in terms of -- (multiple speakers)?

The only group I have seen recently in any of our markets actively developing would be Boston Properties on a site in Cambridge that we believe they are going forward with. And I believe that will be a lab building. But other than that, I would say we have not seen any development in the markets at the moment. (multiple speakers) And most people don't have -- most people, frankly, don't have great land sites. You can have land sites, but if they are not really AAA land sites, your competition for really high quality tenants is not very good.

Michael Bilerman, Citi.

This is [Mark Montana] in here with Michael and Quentin. Looking at China and India, I'm hoping you can provide a rough timeline of how long you expect it to fully build out the current projects there? I think there is just shy of 1 million square feet. Also, shed some light on the plan behind the added 2.4 million square feet of potential build in India and just get your overall long-term thesis on the regions.

Sure. Great question. So taking China first, we have a -- our first really test development there was a building in South China. For a variety of reasons, we chose that location. We also had an early partner that decided to exit. And that really got our feet wet in doing our own -- our own team and our own ability to build in China high quality buildings. We do have good activity on that building. It is 280,000 square feet. It is not a lab building. We ultimately want to lease it and sell it because we have no desire to be there.

In the north, we have a land-use right that we can build that's a little bit like Mission Bay near a great -- one of the top five technology centers in all of China. We have our first two buildings under development about 300,000 feet, 150,000 each. It is really the -- they are today the only first-class lab facilities for lease in China. We just had a team there. We are putting together our home marketing plan. That construction is going well. We hope to have space available actually, some prebuilt space for move in later in the year.

And our big challenge in that project, in addition to executing it, which we have done I think very successfully so far, is really getting incentive packages from both the local and national government to be granted to us to give to tenants, as opposed to having tenants have to shop around the 30 locations in China comparing benefits. We have now secured that as of I think I may have mentioned in our Investor Day -- I can't remember -- but we have finally secured that around our last call. And now we can actually go out and put forth an incentive package that is highly competitive. That was a critical step.

So I think you will see activity through the balance of this year.

We are also working on another possible center in the heart of Beijing. We view China as you have to do it very carefully, very slowly and not get ahead of yourself. So we want to make sure we get fully leased on our 300,000 square feet buildings as rapidly as possible before we go to break ground on our next center in the heart of Beijing, which will have a little bit of a different scope collaborating with the major universities there. So it is a bit of a different business model. But I think our goal is the journey of 1000 miles is the first step, I guess, as was said in China.

So we want to travel that road very, very carefully. But clearly over the next decade or two, China is going to be huge, and we think we are well positioned to take advantage of that.

In India our view is a little bit different. The market is different. The infrastructure challenges are very different. But we view India as a easier -- nothing is easy in Asia -- but an easier market operate in because it's obviously a free market. It is not government controlled. And so we have a plan there to develop a series of clusters again in lab and related kinds of businesses much like the Illumina business and life technologies and others, and we think we have a great chance to dominate that market.

We did announce -- or we did not -- but there was an announcement in one of the news wires of an acquisition we made from an Indian company of a project in Hyderabad. And so we think over the long term, India, the benefit of India versus China in one sense is it is lower cost. The access to great people and intellectual capital there is pretty amazing because there is a very young, highly educated population. And we think it makes sense to have footholds in the two most important -- actually the two countries that have half the world's population. So I don't know if that answers fully your question.

No, it is very helpful. Just finally, the 426,000 square feet under development in India, is that going to be readily available similar to some of the space in China by year-end, or is that --?

We think so, correct, and a significant part of which we already have committed tenants in India, existing tenants.

Tony Paolone, JPMorgan.

Dean, I think you mentioned $340 million of development spending this year. Can you give us a sense as to how much of that is for projects that are under way right now versus starting new stuff for instance like a Binney Street build-to-suit?

Sure. You probably picked up from the pages of our redevelopment projects and development projects that there are -- we are estimating $110 million and $70 million respectively of construction spending for those projects.

You probably also noted in the real estate section for projects in China and India that we are forecasting construction spend in the roughly $60 million range. We also have a couple of future redevelopments where we are likely -- they are not in redevelopment today, but we anticipate spending some money later this year, which is probably in the range of $26 million. The rest includes spending both in our development side in Binney to accelerate our opportunity to go vertical, as well as an estimate for unknown projects, which we know are quite possible to occur.

Okay. Just to make sure I got all that, so in your prepared comments, the $340 million, was that just development or was that development and redevelopment spending?

That was all construction spending.

Worldwide.

Yes, it is everything, redevelopment, development, Asia, pre-construction projects, every construction dollar we expect to spend this year.

Okay. And then just to make sure I got your answer right, there was $70 million, I think, in the supplemental on the ground up, $60 million in Asia, and then I think you mentioned $26 million, was it, in the redevelopment?

$26 million of future redevelopment projects that are not in the redevelopment schedule.

And $110 million in actual redevelopment.

Okay. So it sounds like -- (multiple speakers)

And another $50 million that would be kind of other potential.

Okay. Is it $50 million or I'm getting something closer to like $100 million of stuff that is otherwise --

Yes, let me rattle through. $110 million on redevelopment, $70 million on development, roughly $60 million in Asia, $26 million on new redevelopments that are not in the redevelopment pipeline today, roughly $16 million on preconstruction substantially all related to Binney, and the remainder is unidentified. It is a projection of spending that we think is likely to occur but not specific to any project.

Which would be over $50 million. So that should put to about $340 million.

Got it. Thank you. The other question I have is, at your New York center now, you talked a lot about the bigger tenants as being key anchors for the West Tower. But it seems like over the quarters, there were a lot of smaller tenants that had demand. Can you give us a sense as to where those types of tenants ended up going and what that looks like if you do start a second tower?

When you say smaller tenants, smaller tenants who may have interest in the East Tower, you mean?

Correct. And even you had mentioned some smaller ones, but not likely anchored size for the West Tower.

Yes, well, there are a host of smaller tenants that looked at the East Tower, and some of those were up at the Columbia incubator, some of them are in the suburbs of Connecticut, New Jersey, etc. And if you are comparing prices in Manhattan versus those, it is obviously easier to stay in those locations.

I think the West Tower will be the anchors, are probably the two that I mentioned. If and when we decide to go forward with that, one is a large, well-known, independent translational entity focused on a particular disease area much like the Neuroscience Institute we have in the West Tower. But it is a standalone. It does not have an affiliation per se aimed at commercializing products.

And then secondly, there is a pretty fast-growing biotech company that has its eyes on a lot of space north of 100,000 square feet, and this would be the logical location. So those are the two most important current anchors that we would see.

There could be some smaller tenants. I can't tell you today exactly. I mean we certainly have a list of ones that have looked and expressed some interest, but we have not -- I mean we don't really count those as logical or credible to kick off a project of that size. Although we do clearly own curtain, wall and steel today.

Okay. Got you. And then just last question clarifying I think you had mentioned earlier an 8.5% to 10% type of return on Binney Street project.

That is cash unlevered.

And is that going in, or is that an IRR?

Yes, that is initial.

(Operator Instructions). Jim Sullivan, Cowen & Co.

I have two questions. First of all, in terms of same-store NOI number reported, the expenses were up 4.2% in the quarter, and I'm just curious what the major driver of that was and whether we should expect that to continue? And also Dean, if you could address what kind of expense growth is baked into the 2% to 4% forecast for 2011?

The same-store performance and, in fact, the entire portfolio, we should keep in mind that with the majority of our leases being triple net, very little leakage to the bottom line from fluctuations in operating expenses year to year or even quarter to quarter whether it is a hot summer period, a cold, cold winter or just fluctuations in utility rates.

So the good news is, as you look at other property types, you do need to be concerned about fluctuations in operating expenses. But for Alexandria the fluctuations are passed through. Whether OpEx runs high or low, the tenants will bear either the expense or the benefit from lower operating costs.

In this case, expenses were running a little bit I think primarily from utility-related costs. So I don't expect it to be sustainable. I think year to year, quarter to quarter, we see most of our OpEx variations at the utility level, occasionally a little bit in the insurance level, and occasionally some at the property tax level.

Okay. Second question, this is really for Joel. I was intrigued when you talked about the Illumina transaction. You had talked about I think in response to a question from Sheila that there were four potential candidates for that space. I'm curious whether the other three potential candidates have found alternative locations, number one? Number two, whether their requirements represent net additional absorption or trading places or both?

Yes, so what I can tell you is that several of those, we are certainly engaged in finding other suitable facilities for. So stay tuned. And the comment about net positive absorption, yes, some of it would be absolutely net positive absorption. And I think Illumina is a good example.

There are a number of entities that see growth. They have existing facilities, but they are just not able to grow to the extent they need to grow to satisfy the platform and the business opportunity. And so we hope to be there to provide that opportunity for them. I think that is why we have been pretty bullish on our prospects in San Diego.

John Stewart, Green Street Advisors.

Just a couple of follow-up questions on the Illumina deal. First of all, I'm curious what role, if any, Dan Ryan played in bringing that across the finish line?

None whatsoever. Just kidding. Dan and his team and Peter really were the critical elements in that. I think when you have got a first-in-class team and you have got a first-in-class site, nothing is ever easy, but it really made it much more possible to execute such a complicated and such a large sized transaction really in record time.

I guess was that sort of a deal that Dan brought with him, or was that Alexandria at the entity level all pistons coming together to get the deal done?

I think it is probably the latter in the sense that the sale of the Biogen Idec transaction really emerged before the time that we finalized arrangements with Dan. But I think it is fair to say that it is really a combination of all of those factors. And, again, what you need is great leadership, and Pete brought that to the table.

And sorry if I missed this when Peter was going over it, but I caught, I think, a November 1 start date for the release. But what exactly is the free rent period?

You have got a significant period on the front end with no cash rents in the first 12 months of the lease.

Got it. And then it phases in in year two?

Yes, and then the cash rents actually will accelerate in over time.

Got it. Okay. If I could maybe, Joel, get you to comment -- and, first of all, thank you for the continued improvements in disclosure, and looking at the leasing economics, it is pretty impressive particularly over time, and I guess the one thing that is missing from the disclosure is free rent. So if I could just get you to comment on the prevalence of free rent in terms of leasing on a general basis.

I don't know that you can ever make a generalization. I think you really have to deal with the market realities. And so today, if we were to lease or do a deal on Binney Street, which we are working on some things, we are on our conversion at Tech Square, you really have to be responsive to a marketplace. And so the marketplace really dictates what roughly is marketed at any given point in time, and it changes pretty rapidly. And I don't know that I can be more specific. There is no -- it is always very market-dependent and very time-dependent at a given point in time.

(multiple speakers) Sorry. The only thing I would add is that when you are dealing with some large lease transactions for 15- or 20-year terms, you will have a component of free rent if that is the market at the time. And it is not an unusual environment that we have seen in the last year on our leasing front with any free rent that we have dealt with this year.

Sure. Fair enough. Okay. And then lastly, without speaking necessarily to the specific acquisitions in the fourth quarter, but we obviously just don't get as many data points in the lab sector in terms of values. Could you speak, particularly when you consider the trend more broadly in terms of real estate values and interest rates, can you speak to cap rates for your product?

Well, I think what I mentioned earlier in one of the questions, the project that came to market widely marketed in Massachusetts in June went for, I believe, a [6 4] cap rate. That is without any frills -- B building, B location, AAA credit and very long-term lease. We certainly have thought to buy product under replacement costs. That is not always the case with a lot of buyers out there. People are paying sometimes extraordinary prices, which seem a little wacky sometimes to us. But I think, again, it is very dependent upon, is there a value-added component? Is it an off-market transaction? Is it widely marketed? I mean the widely marketed transactions, frankly, are going to be very aggressive in pricing, and I don't think that is necessarily an indication of either high or low cap rates. I think it is what it is at a point in time. And I would say some of the cap rates I think you guys have assigned out there probably seem on the high side.

And you have not seen a shift necessarily in the last 90 days?

No. I would say it has been going on since we all emerged from the two-year debacle, and that probably started in the spring. So I don't think there has been a noticeable shift. I mean you could look at one transaction or another and say, does that make a data point? But I don't think so.

But I think if you have got a first-class location, you have got a first-class facility, and you have term and credit, that is not even a lab product anymore. That becomes almost a desirable acquisition for anybody like the one I described. The pension fund, the one that said, yes, they just viewed it as a bond.

So I think that is prevalent not only in this product type but broadly out there today. But if there are poor locations, poor quality, and you have got some value add, then I think the world kind of changes on that.

So I mean, if you look at our markets -- Lake Union, kind of Mission Bay, the good places in San Diego, you look at Cambridge, you look at Gaithersburg, Rockville in Maryland and New York City, I mean the cap rates there -- if we were to sell flagship assets with term and top quality tenants, those things would be at very aggressive cap rates today.

Suzanne Kim, Credit Suisse.

I do appreciate the disclosures this quarter. The first question is, just to clarify on the dividend raise, I'm just wondering what sort of metric we should look at to focus on? I know you said you are going to increase it with net cash flow, but I'm wondering if you are looking at a payout ratio or targeting a payout ratio?

And then secondly, with regards to your pre-construction pipeline, I know that a big chunk of it is Binney, and the other chunk is the tower in New York City. I'm wondering what the first two priorities are, what you kind of see as most feasible in the near-term as coming on line?

Yes. So let me maybe answer the second question, and I will let Dean answer the first. Between New York and Binney, I think we see a piece of Binney probably going sooner than New York. Although, frankly, if we wanted to start New York today, we could. But we are mindful of a whole lot of things we are working on and some of the goals that we set for ourselves that we don't want to push things too rapidly. It doesn't make sense. But I do see an early start to maybe one of the Binney buildings if we can secure an important anchor tenant. I think that is how I would line it up.

Dean, do you want to comment the dividend?

As far as the dividend strategy, the increase, as well as future increases, I think we commented in both situations that our strategy is to share increases in net cash flows with our shareholders, while also allowing us to retain increases in net cash flows to recycle or reinvest into our business.

I guess I should additionally point out that we don't forecast any shortfalls in our dividend deductions to meet 100% or zero taxable income I should say going out over the next few years. So really it comes down to our desire to share increases in net cash flows with our shareholders.

Right. Thank you so much.

And our payout ratios historically both pre- and post-crash have been, I think, among the lowest in the industry. So we have, I think, a good basis going forward. But, as was mentioned earlier, we certainly want to retain as much free cash flow as possible, as well to reinvest in the business.

And that is all the questions we have at this time. I would like to turn the conference back over to you, sir, for any additional or closing remarks.

Well, thank you, everybody, very much, and we will talk to you in May on our first-quarter call.

That concludes today's conference. We thank you for your participation. You may now disconnect.