Alexandria Real Estate Equities Inc (ARE) 2011 Q1 法說會逐字稿

Good day and welcome, everyone, to the Alexandria Real Estate Equities, Incorporated first-quarter 2011 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Rhonda Chiger. Please go ahead, ma'am.

Good afternoon and welcome. This conference call contains forward-looking statements within the meaning of the federal securities law. The Company's actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's annual report, on Form 10-K, and its other periodic reports filed with the Securities and Exchange Commission.

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

Thanks, Rhonda, and welcome, everybody. Thanks for joining us for the first quarter call. We are going to be try to be efficient, and I will be as brief as possible. I will turn it over -- once I am done, to Steve Richardson, who will highlight some of the important updates on the San Francisco, market and then Dean finalize comments from our standpoint before we open it up for Q&A.

On the status of the business today, I think we're making good progress in virtually all of our key life science adjacency markets, despite a sluggish recovery, the quarter I think is a pretty decent, solid quarter, again given the macro environment, which is still challenged. We clearly have the best-in-class and most well-located lab space, and that I think gives us comfort for each quarter in and out of leasing, releasing, et cetera.

I think, when you look at the NIH government funding, which has been driving a lot of attention lately, certainly that the government-funding level; 2010 was $31.2 billion, and 2011 is $30.9 billion. So there is a small, federal budget cut, but we feel that the feds are very -- and certainly Congress, appears to be, very supportive keeping the levels above $30 billion, which should provide us adequate funds, certainly on the go-forward basis over the next year or 2.

In 2010, our clients garnered 12.7% of the annual NIH budget, up several percentage points for the year before. And the BioPharma budgets for 2011 should stay north in the aggregate of $60 billion, which is good news. On the leasing front, we had a solid 550,000-plus-square-feet leased for the first quarter, and I think we are on a run rate for the second quarter to be equally as solid. We had 28 leases, as you know, from new or renewal space. We had a modest uptick with a bit of shorter-term leases, but don't take that as any particular trend.

Massachusetts' strength was offset a bit by some of the challenges in Sorrento, Mason, San Diego, and a little bit in our North Carolina market. 16 leases were redevelopment and development space, and again, Boston and San Francisco, our 2 leading markets, were very solid in that regard. Steve will cover this more in depth in a few minutes. And our 2011 lease rolls about 1.6 million square feet coming up should be very manageable.

We only have San Francisco and Boston, Cambridge, with over 100,000 square feet to release, so we see that as very achievable, and we are still looking at GAAP rental rates on a yearly basis of somewhere between 0% and 5%. On redevelopment space, on the 784,000-odd square feet in redevelopment, we are making, I think, good progress on one of our Torrey Pines properties, and we will be able to report you on the coming quarters, I think.

Also in the University Town Center, our Campus Pointe asset, very good progress on that and we will be reporting to you there. I think in the Boston/Cambridge area, each of the assets we have for redevelopment there, again, good progress. And also the Rockville redevelopment, we will be able to report good progress. So overall, I think you'll see the lease and negotiating committing numbers continue to rise over the coming quarters.

Moving on to acquisitions, and again, Steve will detail more in depth the Mission Bay acquisition, but as we stated at the Citigroup conference in Florida in mid-March, we will continue to be opportunistic in our search to find AAA locations and AAA facilities, where we can add and create value, coupled with our conservative and rigorous underwriting standards. I think if you look at the Mission Bay acquisition, our view was that this was a move to secure a AAA location and a AAA set of buildings on their own merit.

There are really the best waterside site in Mission Bay, immediately adjacent to the UCSF R&D campus, and right across the street from the billion-dollar 3-hospital complex now under construction. We, at one point a number of years ago, looked at potentially acquiring this, but with so much land through the Cotellis acquisitions, we decided not to go forward. But we are pleased to have this opportunity.

It's pretty clear we've got the best knowledge about that sub-market of any commercial real estate entity, and I think clearly, the most capable and conservative underwriting. I was a solid buy, although not a steal. In fact, very few steals in AAA real estate today. But we do see a unique ability to solidly increase cash flows, and I think appreciation will come over time, especially given the ability to tenant one of the buildings, and it is clear in Mission Bay, we have a real pricing power, and it is, as Steve will tell you, almost a fully occupied sub-market.

When we think about the acquisition versus development issue today, it's not just a simple matter of comparing yields or IRRs. But we have significant and unique ability, I think among virtually few companies have this kind of a luxury, in 3 strong markets to develop on either a build-to-suit, or a significantly pre-leased scenario. Mission Bay, we've got about 300,000 square feet left to build and pretty good activity there in the early stages. New York City, we've got 800,000 square feet, and we will kick off our pre-marketing of the West Tower on June 6.

So as we begin to really pull in what we know will be existing pent-up demand, we will keep you posted on our plans for the West Tower, about a 400 square foot tower. And in Cambridge, 1.7 million square feet to develop. We clearly have the ability there to build that out and I think it's fair to say, today, we will likely formally announce our first build-to-suit for about 300,000 square feet in the second quarter, when we expect to have a signed lease at the Alexandria Center for Life Science Kendall Square.

And again, we will keep you posted on New York City, our Alexander Center for Life Science there, after June 6 kickoff. And our lab rates in New York we think are comfortable approaching the $80 triple-net range. We can also be adept enough to acquire, if it makes sense. And clearly with the Mission Bay property, we believe that was solid conservative underwriting. We can do that, increasing cash flows where we see strong, positive rent growth trends, where we've got pricing power, it makes good sense.

Let me turn it over to Steve Richardson, who runs our San Francisco Bay office and region, to get into more depth on that acquisition.

Hi, this is Steve Richardson, the Executive Vice President Regional Market Director for the San Francisco region. The regional recovery has really continued and has intensified with significant absorption of space from technology companies, such as Motorola, Dell Computer, Xianga, Hewlett-Packard, Google, Facebook ,and salesforce.com. And imminent demand from another cohort of technology companies.

The life science sector has also remained steady and healthy, with incremental demand keeping vacancy rates in the West Bay, which stretches from San Francisco to Palo Alto, in the 9% to 10% range. The life science vacancy rate would actually have been driven lower, were it not for a recent 11th hour termination of negotiations for a large block of sublease space in the South San Francisco market.

The healthiest of the life science sub-markets continues to be Mission Bay, featuring a current vacancy rate of just 1% or so. Alexandria's vision of Mission Bay as a world-class cluster, attracting strong credit tenants with international significance, continues with enthusiasm. And as Joel mentioned, we are pleased to formally announce the purchase of 409 and 499 Illinois St., a world-class, newly-developed 453,000-square-foot laboratory facility, constructed on a spectacular 3.8-acre waterfront site in Mission Bay, for approximately $293 million.

The 2-building project is designed in a 6-story configuration, situated over a secured 2-level parking structure. The 409 Illinois facility, containing, 241,000 square feet, is 97% leased on a long-term basis, to one of the Bay Area's most promising life science companies, FiberGen, which is focused on several large product opportunities. It is a well-capitalized company with a diversified product pipeline and blue-chip pharmaceutical partnerships.

The 499 Illinois facility contains 211,000 square feet. It is currently vacant and requires further development to bring it to market and stabilization. We expect to engage a broad range of life science, medical office, clinical practice and research, and technology companies, now currently in the market. And based upon our view of market conditions and certain assumptions, we expect to achieve a GAAP stabilized yield for the overall project in the range of 7.2% to 7.6%, and initial cash yields in the range of 6.5% to 7%.

These yields are based upon the current rental rates we have achieved in Mission Bay, and do not account for potentially higher lease rates that may arise for a plethora of factors. One, the site is clearly a unique waterfront offering in a market that is now at a 1% vacancy rate for life science product, where Alexandria has real pricing power. It is adjacent to both UCSF's research and hospital multi-billion dollar campuses, and we expect these demand drivers to enhance our rental rates and yields for the facility in the near- and the long-term. But we've taken a conservative view in our underwriting and future leasing.

The price-per-square-foot is also competitive, with recent transactions featuring existing and old lab facilities in speculative land in the South San Francisco market. But, this world-class property is located in the much healthier and diversified sub-market, Mission Bay. It is also important to note that this facility includes 590 parking spaces, and to provide an apples-to-apples comparison with Alexandria's Mission Bay facilities, and the South San Francisco lab market, approximately $65 should be deducted from the price-per-square-foot metric, deriving a price-per-square-foot of $581 for the facility.

This is infrastructure that provides a return on investment with real, urban, CBD parking rates, unlike South San Francisco's market that does not provide for paid parking for expensive parking structures. This is clearly the right asset at the right time for long-term appreciation and high-quality, increasing cash flows.

We have solidified our dominant market position in Mission Bay. The salesforce.com land sale was an important event, since it both enhanced Mission Bay's international reputation as a diversified, world-class intellectual and innovation center, featuring both life science and technology enterprises; as well as advancing Alexandria's pursuit of an investment-grade rating, by monetizing a significant non-income producing asset.

The Illinois acquisition serves a similar dual-purpose and that it boosts the Company's near-monopoly, Mission Bay footprint to more than 975,000 square feet of existing space, plus the ability to provide another 290,000 square feet or so for build-to-suit users, while at the same time bringing beneficial cash flow to the Company and enhancing the metrics for investment-grade ratings.

We continue to make steady progress on the East Jamie Court facility in South San Francisco, with 2 of this 6 floors fully leased. We are taking a measured approach to the South San Francisco sub-market, with a key focus on tenant retention. Such as our recent renewal of Theravance at our 901 and 951 Gateway project for a 10-year lease; securing high-quality growth companies such as Zonix in our 249 E. Grand campus; and solid, incremental progress on East Jamie Court, with a number of promising companies, including StemCentrix. But we have chosen not to invest significant capital in additional ground-up development projects without significant pre-leasing.

On a final note, we are also advancing our 2011 rollover efforts, and are either in negotiations or serious discussions with approximately 70% of our remaining 120,000-square-foot rollover for this year. The majority of these tenants in these suites anticipate extending their lease, and one of the spaces is in the process of being backed-filled with a new tenant. With that, I will go ahead and have it over to Dean.

All right, thanks, Steve. Welcome, everybody. As we reported, our earnings for the quarter, FFO per share diluted, was $1.15, excluding the $2.5 million loss on early extinguishment of debt. And earnings per share was reported at $0.44%.

Moving to the balance sheet real quickly, and as a quick reminder, an overview of our recent amendment to our facility, we extended the maturity ultimately to January 2015. The line of credit increased by $350 million to $1.5 billion, bringing the total facility to $2.25 billion. Pricing on the line of credit was 2.4, over 1 month LIBOR. The $750 million term-loan maturity remains unchanged at October of 2012. And the pricing on that $750 million term loan remains at 1% over 1 month LIBOR.

In addition, in the quarter we closed a new $250 million unsecured term-loan, with pricing at 2% over 1 month LIBOR. The covenants are identical to our unsecured line of credit, and the initial maturity is in 2014, with an option to extend the maturity to 2015. As you probably are aware, at the bank lending environment continues to strengthen for solid sponsors like Alexandria. Lender interest remains very strong and pricing continues to improve.

Our guidance, which I will get to a moment, assumes a small portion of our $750 million term loan, is refinanced this year, with the remainder being refinanced no later than 2012. During the quarter we retired $96 million of our 3.7 convertible notes, which leaves us about $206 million outstanding as of March 31. Briefly, let me summarize our balance sheet capital structure and liquidity objectives over the next several years.

Our objectives include, reducing LIBOR as a percentage of total gross assets, and improve the ratio of debt to EBITDA; maintain diverse sources of capital; reduce outstanding convertible debt; manage the amount of debt maturing in any single year; refinancing outstanding variable-rate debt with fixed-rate debt; maintain adequate liquidity from net cash provided by operating activities, cash and cash equivalents, and availability under our line of credit; maintain available borrowing capacity under our unsecured line of credit, in excess of 50% of our total commitment of $1.5 billion, except temporarily as necessary to finance acquisitions; fund dividend from operating cash flows and; most importantly, retain net-positive cash flows after payment of dividends for reinvestment into acquisitions and/or redevelopment and develop projects.

Moving briefly credit metrics, our net debt to EBITDA is 7 times as of March 31, and it continues to have an outlook of improvement through the year. Our financial covenants under our credit facility are as follows. Leverage was 37%, the covenant, 60%; the unsecured leverage is 40%, the covenant, again, is 60%; the fixed-charge coverage ratio was 2.2 times on a trailing 12, the covenant is 1.5 times; and our current quarter annualized fixed-charge coverage ratio is 2.5 times, showing a significant improvement. Our unsecured debt yield is 13.5% and the covenant is 11%.

Briefly, let me turn to sources of cash for the remainder of 2011. As I had mentioned in our prior call, our net cash flows are anticipated to be approaching about $100 million for the year, which leaves us about $75 million for the remainder of 2011. We have cash on-hand of approximately $110 million, we're anticipating asset sales and land sales in the $75 million to $150 million range. We also anticipate an unsecured bank loan in the $400 million range, and other capital for about $300 million, consisting of unsecured debt, secured debt, perpetual preferred, or common stock .

That brings our total sources to about $1 billion, and keep in mind, we have approximately $841 million available under our line of credit as of March 31. Turning to uses of capital for the remainder of the year. Acquisitions in total are projected to be about $395 million, this includes $293 million for the transaction we completed in Mission Bay. And therefore, we have about $100 million of incremental acquisitions forecasted. Our construction spending breaks down to a total of $277 million as follows. Redevelopment, anticipated to be about $116 million; development, about $77 million; projects in India and China, about $43 million; pre-construction activities, about $22 million; and CapEx and other TI products of about $19 million.

Common dividends for the remainder of the year, assuming no changes in the existing share count of about $75 million for the next 3 quarters; prepayment of debt in the range of about $98 million;, repayment of the $750 million term-loan, as I mentioned earlier, in the $100 million range; retirement of the remainder of our 3.7 notes at about $206 million, bringing total usage just slightly above $1.1 billion.

Lastly, let me comment on guidance for 2011. As we reported FFO per share diluted, of a range of $4.52 to $4.57, an EPS of $2.03 to $2.08. Our guidance is based on various underlying assumptions and reflects our outlook for 2011. Some of these assumptions include the following, $0.05 loss on early extinguishment of debt, this includes $0.03 since our guidance in early February; The increase in acquisition expenses, partly in Q2 from the transaction at Mission Bay, and the remainder being spread over the second half of the year.

Increase in interest expense related to the acceleration of refinancing, originally anticipated in later quarters, including refinancing of a small portion of our $750 million term loan in 2011 versus 2012. And of course, the acceleration of other financing from 2012 into 2011. Cash same-property NOI growth in the range of 2% to 4%. GAAP rental rate steps on lease renewals and releasing the space, in the up to 5% range, with some variances quarter to quarter.

Straight line rents are expected to be in the low $30 million range, with amounts back-end weighted in the year. FAS141 revenue will drop below $1 million come the third quarter. G&A expenses are expected to be up modestly over 2010. And lastly, our guidance also includes the items that were previously highlighted in Sources and Uses of Capital. With that, let me turn it over to Josh.

Thanks, everybody. Operator, if you could open it up for Q&A, please?

(Operator Instructions). Mr. Anthony Paolone, JPMorgan.

My first question is on the Illinois acquisitions. How much more do you have to spend between just finishing up of the second empty building and just any CapEx or tenant improvements that you need to do to get it filled up?

Hi, Tony, Steve Richardson. We expect between the infrastructure and the improvements there for that building alone somewhere in the range of I would say $100, $125 plus a square foot.

Okay. And then, how do you look at hurdle rates on starting new acquisitions or starting new development, redevelopments, and also looking at acquisitions. Because it seems like you are willing to take down your returns a little bit to do this, and I understand the strategic nature of it, but just how do you think about that across other parts of the portfolio now, since your portfolio is increasingly in these very strong locations?

Well I think it's pretty rare to have, Tony ,acquisition opportunities in what I would consider to be the 3 critical markets, or sub-market, Mission Bay, Cambridge and York City. Obviously other markets, you've seen some of the activity, San Diego, et cetera. So, I think in Mission Bay, this was the only non-Alexandria-held commercial real estate there and we haven't really coveted that type for a long period of time. And I think only by really moving out of some of the land holdings, which were really dragging, in a sense, both from a balance sheet and a cash flow standpoint, once we were able to successfully exit, I think our view of an opportunity to buy AAA location, AAA buildings at not a bargain basement price, but at a pretty full price, gave us an opportunity, though, where we see pretty good pricing power and we underwrote it in a pretty conservative fashion that it was something we wanted to do.

It is immediately cash flowing, I think there is a great opportunity to increase well beyond our pro forma based on future rental rate increases. So I think there, the choice between doing that versus kicking off another building where we did not have a current build-to-suit candidate that was ready to go, I think made good sense. I think in Cambridge, again, very few properties are trading hands so there's no opportunistic acquisitions opportunity that we can see, certainly in the immediate timeframe, and so by securing a build-to-suit there, we would obviously look at that. And again, it isn't simply, as I said, purely IRR- or yield-driven. I think it really is a focus on location, quality of buildings, and is there a chance to add value to increase cash flows and could we exit that asset at a price that would be much better than we brought in, and I think the answer on how those pieces, are yes.

Yes, Tony, is Peter Moglia. Joel just hit the nail on the head there. We look at what the stabilized yield would be one of the leased up the second building, and we believe it's going to be at least 100 basis points over what the going and Cap would be if we had bought it stabilized. So we felt really comfortable with the pricing, given that spread. And then obviously, we always look at the unlevered IRR and ensure that it's going to cover our projected long-term cost to capital, and in this case, it surely did. So to just your hurdle rate question, that would be my answer.

All right. And then just the one follow-up to that. It sounds like then, a quality asset like that on just a stabilized basis would probably have a yield somewhere in it sounds like maybe in the 5s, perhaps?

I would say that it's possible, stabilized today, that that could trade below 6, but I would look at it as a 6, 6 even.

Does that kind of pricing -- what does that do to your thinking in terms of joint ventures, you've gone down that path a little bit in the past and I guess maybe update us on that thought?

Well, we saw one asset last June that I think I've alluded to in meetings or in conference calls where it was a B location, AAA credit in a suburb of Boston that went for a 6.4 cap rate to an institutional buyer. If Mission Bay isn't a lot better than that, waterside view next to the, again, the campuses we describe, it would be hard to imagine that it would attract pretty aggressive cap rate buyers. On a joint venture basis, I think we have to kind of see how -- our view is probably the most probable joint venture opportunity for us is really on the Binney Street, the Alexandria Center for Life Sciences Kendall Square, because the magnitude for build-out there is large. We do have one deal that we find a letter of intent and we are looking to finalize the lease over the coming 30 days or so. We will share more with you next time. But, I think that's probably an opportunity that we would think joint venture with work for us.

Okay. Thank you.

Michael Bilerman, Citi.

Yes, good afternoon. Just staying on the Illinois acquisition, when you bought Biogen Idec, at the investor day, your first 2 bullet point was, best asset in the Florida major sub-market and a high discount-to-replacement cost. And a really value-add, going in and using the skills set. I recognize your view of AAA asset, AAA location, but it would appear as though, just based on the cost that you've put into your other Mission Bay buildings and what you just sold the land for salesforce.com that this would be pretty much some more circa around replacement cost, maybe a tick above, maybe a tick below, but probably not too far off. And so I'm just wondering how you can compare and contrast that?

Michael, hi, it's Steve. I think there is a couple of components of this. One, it is, again when you look at the price-per-square-foot, and it is important to look at the parking structure as an integrated part of the building, ad when you break that out as a revenue-generating entity unto itself, you do end up with a replacement cost figure that I think you're probably right, is somewhere in that range of plus or minus where we've been, and that includes tenant-invested capital as well.

As far as the value-adding potential here, we have a 1% vacancy rate in Mission Bay, the building will appeal to not only our core target of life science, drug discovery lab companies, you've got important clinical people that we've actually through to the facility as recently as last week , medical office building users, technology users, so you have a diversity of demand there that we think will allow us to add value and bring just a great new cohort of tenants in there. We were conservative in the underwriting, the lease rates we've targeted were the ones that we have achieved with a number of the tenets looking back over a number of years. So I'm hopeful, but we did not underwrite it this way, that we do in fact have rental rates and yields that our enhanced above and beyond what we've already accomplished.

Hey, Michael. Is Peter Moglia. I think you're referring to the comments I made at investor day. I would say this case we are going to be using our skill set and connections. We do have leasing to do to accomplish our goals. And, we are going to be making a spread over what we would buy at stabilized asset for. So I think in that vein, the profile does fit. But I'd also like to mention that this is a bit different than the Biogen Idec deal because this is a very scarce asset. If you look at a map of Mission Bay today, and plotted where sales force is going and the hospital and all the other uses, there's very little land left, and nothing in this particular area for a number of years. So you have to really consider that when you're looking at the overall pricing and the overall strategy of this. There is going to be very little available in Mission Bay for a number of years, except for what we have and what we can build.

How much parking income is coming off the asset today?

There is a total of 590 spaces, I think roughly half of those are leased . I don't have that figure out the top of my head, but we can get back to with that.

You are allocating, based on your $65 about $30 million to the parking?

Yes. We have built parking structures in Mission Bay to support our existing facilities, so we have a good sense of both the parking space rental revenue, the parking space cost, and those, in and of themselves are stand-alone, financial entities. So I just thought it was important to highlight that dimension of this building, because the parking is an integrated part of the building in a way that is not true for other Mission Bay facilities. And certainly isn't true for South San Francisco, where, if you do drive density, you've got to build parking structures and you derive negligible or literally no revenue for that investment.

Now is this a revenue source you're looking to increase our you think in place it justifies the 7% return?

It's looking at it in the latter sense that it justifies that return. Being adjacent to a hospital over time, will we have an opportunity with daily parking to help enhance -- that all I think is a reasonable expectation. Again, we didn't factor that in for our underwriting.

And keep in mind, Michael, too, I think as Peter said, we've underwritten it on, in the sense yesterday's rental rates leases is already signed not looking at anything in the future. So, I think we felt good about the conservatism we build into the numbers.

And just thinking about from a seller's perspective, Shorenstein is not a stupid real estate guy, he's a pretty shrewd person. Clearly, if there was more value to be had by leasing out the space, and then selling off that income stream to anybody, you would think that that would be the strategy they would pursue. So I'm just trying to reconcile those comments a little bit.

Yes, well, I think a couple of things, and Steve can give a little bit more color, they were trying to, I think, monetize assets in this particular fund for their own reasons. There were a number of bidders at the table, I think at least 1 of 2 of probably would have beaten us in pricing, but I think the certainty of our diligence, knowledge and market knowledge there, I think convinced them that we were the best buyer here. And I think that you have to remember that this is a market, they don't really deal with or they have very few life science assets so it's not really in their sweet spot. But Steve, you could comment beyond that.

No, I think that's right. I think you are right, they are a very well-respected organization. I think they had a keen sense of timing. I think we've stated that this was not a bargain basement price, it was a reasonably full price for where the property is in its stage of development and leasing. And I think they just chose to act upon the timing for both macro market reasons, but also their fund, I think they are out there raising another fund right now and it probably helps them to have a sale completed in a prior fund and point that to investors.

Great. Thank you for the color.

Ross Nussbaum, UBS.

A couple of questions, maybe we'll move past Mission Bay. If I'm reading the supplemental correctly, it looks like you spent, or planned on spending, $43 million in China and India this year, which is not an insignificant amount of money. Can you talk about where you are now on those expansion plans?

Sure, those dollars actually go across a number of projects, and so individually, there is no one project consuming all that capital. And if you look at India and China, if we had million square feet, so it's a modest investment in that particular market at the moment, and as we advance our efforts in that particular region, we will continue to provide more color

Yes, there is, in India, and we at the moment don't want to necessarily get into great detail, but we are doing a build-to-suit that has been increased in size by one of our top 10 tenants coming from the US, among others and that's one of the key focal points of this, and we will probably, over the coming quarters -- at the moment that they do not want us to say anything about this particular expansion. But, we will hopefully be able to share that with you in coming quarters.

Okay. On the leasing in the first quarter on the 28 leases, it looks like it was a 3-year terms, shorter than I would've expected. Can you add some color on why those lease terms were not longer there?

Yes, as I said, don't read even growth and rental rate mark-to-markets don't necessarily, as Dean said, look at a single quarter s necessarily a trend for the future. I think they are very individualistic, and I would say I would take nothing in particular away from or attribute anything to them in particular. Yes, one quarter's statistics tend to get skewed and I would always look back on the prior rolling quarters, at least when you get to our first quarter, it's really tough because it's the only period presented. But if you look back you can see the recent trends back in 2010, the average lease term on renewed and released space was 8.1 years, and the average lease term on develop/redevelopment or vacant space was closer to 10 years. So that was the recent trend, and we are only 1 quarter in. Is 3-year term will easily average out as we get through the quarters.

Okay. That's helpful. Last question, Joel, at your investor day, I guess last December, I thought you were pretty emphatic that one of your key priorities for this year was moving forward towards investment-grade rating.

Yes.

And walking a fine line between advancing that goal and not doing any more speculative development. So I guess how do you put the Mission Bay acquisition in that context, where you're not taking the development risk but you're taking the leasing risk? And how do you think about that relative to the timing of getting a rating and where are your that process?

Yes. I think that is a great question, and, it does present a fine line of balancing a number of competing issues. I think we felt good, though, that we were able -- I mean had we not had the 2-year severe downturn, I think our view of selling that kind of land at Mission Bay may have been different. The world would be different, I think. But, it is like Vegas, you play the hand you're dealt, so we played the hand we were dealt and exited quite a number of the parcels at a pretty good gain, certainly a pretty good priced-per-FAR-foot, and, moved from a non-income producing asset. And the deal we just bought, again, we don't choose the timing of when buyers come -- or sellers come to market, they come to market for a variety of reasons, as Steve said, raising another fund or whatever.

But I think it is fair to say that certainly from a ratings perspective, and that was not the main motivation for this purchase, it was the items that we all kind of just enunciated, it certainly would be viewed and I think a very positive light because it's great real estate, it is immediately cash flowing, it's a pretty decent return with some good upside. And even though we've got some leasing risks, we've got a 1% vacant market with about 4 different sectors that would be looking at that building with I think a lot of interest. So we feel pretty comfortable in taking that risk.

We said, both at the investor day and otherwise, we're not interested, and would not do speculative development. So, any -- our other Mission Bay site that would be developed on the west side would be only on a substantially leased, pre-leased, or build-to-suit basis. New York, we are going to test that market starting in June; and in Cambridge, we do have our first building that, assuming we execute the lease, would be a build-to -suit. So again, want to try to balance all the things and carefully balance the volume at which we're doing things to do things I think and in a step-wise passion prudently and be as careful as we can about everything. It's all obviously a whole set of balancing efforts.

And where you exactly with the agencies at this point?

We're not formally before them, but we believe that, I think as Dean has mentioned a number of times, we would hope to be formally in that process in the latter half of 2011.

Thank you.

Yes, good afternoon. Joel, you mentioned that Manhattan triple-net rents are approaching $80 dollars. I was wondering if you could run through, as you sometimes you, the lab rental rates for your major markets across the country? And secondly, with the rents penciling out near $80, what that might mean for your potential return for the second building in Europe versus the first?

Yes, let me just talk about maybe the 3 major markets, San Francisco, Steve can give you a little bit of what the current rental rates are in the 2 markets we are dealing with.

Sheila, Mission Bay has remained steady in the low- to mid-40s, and from the South San Francisco to the Stanford market, we've seen some recovery from a pretty distressed point to probably the mid-30s, and see that tightening up incrementally.

And I think in New York, as we've said, we feel there is certainly -- our lease rates are approaching as we indicated, $80. We know that there is an incubator up the Columbia that's got rates pretty similar to that. There's no other product in New York City. We see the office market market coming back pretty nicely, and notice that there are a number of developers even looking at developing office space. So that all bodes well for I think future increases. And in Cambridge, I think Peter can comment, but I think rents are pretty much in the mid-50s to high-50s, triple-net.

That's right. But we actually saw what may have been a $70 comp today on a recently signed lease in the news. I'd tell you, San Diego has really been pushing rents. $2.50 was really the asking rent for most of the Class A space for the past 12 months, but we've really vaulted to the $3 range for the past couple months, and we think we're going to continue to push that. North Carolina is still fairly dormant, so the rental rates have really settled in the low 20s range. Maryland is probably in the mid-20s to low-30s for newer product. Am I missing anything else? That's about it.

Okay, in the second part of the question was with rents now approaching $80 in New York, how does the pencil out for your return on the second building versus the first?

Yes, I think it really pencils out pretty nicely, because if you look at the second building, we would see somewhere, again you never know what the infrastructure improvements will be for a given tenant whether it will be more of a shell deal or more of a split at the build-out or whatever, but I think it's fair to say that we would probably have overall cost probably somewhere in the $650 range, because we don't have to put in the amenities we put into the East Tower, and I think we would have more intense lab than we have in the East Tower, and I think clearly we would be in an even a slightly better position with respect to returns than the East Tower, assuming rents that we have already signed, not future rents. So we feel I think reasonably comfortable with that scenario.

Okay, and last question, just wondering if you could give us an idea of the level of activity or interest at either New York or Cambridge versus 6 months ago. Are you having more dialogues and conversations that would lead you to believe that you might have an earlier start on either a build-to-suit in Cambridge or the second building in New York?

Yes, well I think as we were saying just a couple of minutes ago, we have signed a letter of intent for approximately 300,000 feet in Cambridge . We will see if we can turn that into a signed lease. We have I think a high level of confidence, but until it is done it's not done. So I think that moves us a significant step ahead on the Cambridge development side. It still is, together with the Bay Area, 1 of the 2 top markets in the country, I think New York is not far behind. So I think there is good activity in Cambridge from a number of sectors, both the life science and tech sector, we're talking about a life sciences user here for the building.

And New York, we've not really engaged in many discussions, but we know where we left off, the end of last year, and we have a list. There were 2 significant institutional users that would require something in the range of north of 200,000 square feet. We are going to revisit those specifically, come the June kick-off, and assuming those haven't changed, and they couldn't have gone anywhere else in the city because there is nothing, we would expect there would be good activity and then we would have to look to the future and see what makes sense as far as capital allocation and timeframes for people to make decisions, et cetera. So I'd say, yes, better than 6 months ago for sure.

Okay, thank you.

John Stewart, Green Street Advisors.

Thank you. Joel, can you give us a sense on 499 Illinois, is this sort of a Biogen Idec situation where you've got a tenant in your back pocket?

John, hi, it's Steve Richardson. My colleagues in San Diego did a spectacular job there. There's always that hope, but this may take a little while. We do have discussions, there are early discussions; there is tenant demand in the market. But we will have to stay tuned the next couple of quarters, we're not trading paper with anybody right now, I can tell you that.

So what are you underwriting in terms of the lease-up period?

We've got a 2-year lease up period

That's fairly consistent with our underwriting on the campus down in San Diego that we purchased from Biogen. It was a lengthy lease-up period.

Yes, this is Peter. We did assume a full 13 months before we actually had revenue coming into the second building.

For 1 of 3 tenets.

Yes.

And, what is the in-place rent-per-square-foot at 409 Illinois?

They were roughly high-40s

Okay. And, Joel, you made a comment that was intriguing about several different sectors that would be in line to take this. Is your intent to keep 499 as lab or are you looking at alternative uses?

Well, that's where we hope to have maybe something up our sleeve. Our main goal is to bring a lab tenant in, and we've actually looked at it as a single-building users or multi-tenant users, we are looking at it both ways. But, I think it is pretty clear, Steve had a showing last Friday, I believe, there is some institutional pent-up demand that may overpower anything else, and if we can push prices in a certain direction, it might be a combination very much like we did at 1500 Owens, a combination of traditional lab, office, and even a clinical component, and if that gets mandated, there could be a nice opportunity to drive rents in a way that maybe we wouldn't have imagined on either a traditional office, medical office or traditional lab. So that kind of kind of our secret hope here.

Okay. And then my last question is, when you did this acquisition and think about the build-to-suit in Cambridge, how are you going to pay for all this? Particularly when you're considering going to the agencies later on this year?

Yes, I think it is fair to say that other than in the depths of the downturn when we, like many companies, raised funds in a number of ways , we certainly did a number of offerings and we did one convert, probably we'd never do that again, that were not match-funded that were really funded on the basis of keeping the balance sheet in good shape, keeping a lot of liquidity and not knowing whether the banking system was going to be there or not. Historically, other than those pretty tough 2 years, we've always considered to really match-fund those at a point when we felt we wanted to pay down the line. We've got a lot of capacity on the line, obviously our goal over time would be to match-fund, and our goal has been, was before the crash and certainly after the crash, to minimize any dilution on that, and so that we would continue that same kind of philosophy .

I would think though, to get an investment-grade rating wouldn't you need to bring leverage down a bit?

Well, I think our numbers are in pretty good shape. I think we'd like to see our debt-to-EBITDA numbers, as Dan said, to continue to trail down into the 6s in a very positive fashion. Part of that will come from bringing on additional EBITDA, but, yes, our goal is clearly to continue to eliminate secure debt and obviously refinance the $750 million term loan and obviously tap the bind market. So those are all kind of a combination at play.

Okay. Thank you.

I think overall, our leverage is not bad shape and I think moving out of that Mission Bay land holding, I think helped us significantly.

Okay. Thank you.

Ladies and gentleman, that is all the time we have for questions. I'd now like to turn the conference back over to Mr. Marcus for any additional or closing remarks.

Thank you very much. We appreciate it, we are trying to be time efficient here, and we look forward to talking to you on the second quarter call. Many thanks again.

And that does conclude our conference for today. We thank you for your participation.