Alexandria Real Estate Equities Inc (ARE) 2011 Q2 法說會逐字稿

Good day and welcome to the Alexandria Real Estate Equities Inc. second-quarter 2011 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 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 Laws. The Company's actual results may differ materially from these 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 10K and its other periodic reports filed with the Securities and Exchange Commission. And now, I would like to turn the call over to Joel Marcus. Please go ahead.

Thank you, Rhonda, and welcome, everybody, to the second quarter conference call. With me are Dean Shigenaga, Peter Moglia, [Kubal Ribal] and Amanda Cashin. Maybe starting with a one quote that sums up the current state of affairs in the macro world is Steve Wynn's recent statement about both the administration and politics the greatest wet blanket to business progress and job creation and that is it looks like the environment we're working in. From the President's address to the nation on Monday evening where the debt ceiling debate, I think there is one hopeful commentary on a micro-basis for our sector. We all want a government that lies within its means but there are still things we need to pay for as a country, things like new roads and bridges, weather satellites, food inspection, services to veterans and medical research. I think our collective view internally is the NIH's $31 billion annual budget run rate will likely be preserved. If we get a budget.

It is also positive to note that the FDA's drug approval rate for 2011 is on pace to well exceed that of 2010, 20 new drugs approved to date and one shy of the 21 approved in all of 2010. I think another very interesting article is the July 2011 Journal of American Medical Association. I think it portends well for the biopharma industry. The study found, which really confirms one of our overall key macro thesis, that the Medicare Part D drug coverage actually led to a substantial cut in other healthcare spending, or other healthcare spending by about 10% per patient. So that drugs were actually saving money in the other sectors of the healthcare pie, which we have stated for a long time as really I think this sector's secret weapon. It just needs to be made clear to Congress.

Moving onto the state of the our business today, probably the most significant item is the successful achievement of our initial investment grade credit rating from Moody's and S&P. It is a significant and important milestone for the Company. It's gratifying to know that the agency's highlighted Alexandria's high quality tenant base, stability of occupancy, strength of cash flow, quality of location of our assets, experience and expertise in management, and our leadership in the life science real estate space.

Moving onto leasing, we did have among the second highest quarter, or about the second highest quarter, leasing in the Company's history with about 728,000 square feet. GAAP rates increased about 3.1% and we believe for the balance of the year we'll be in the same realm. We have solid Maryland activity this quarter but had some rental rate pressures there. We did get strong leasing activity in a positive fashion from greater Boston. And also on the occupancy front, we had one move out in our Route 128 59,000 square foot building which will pick up our occupancy back the next quarter as that has been re-leased. It was just the timing item with the quarter.

We also had a solid 148,000 square foot development/redevelopment leasing quarter during the second quarter. I think we're making solid progress on the lease-up of redevelopment assets. You can look at page 45 of the supplement. And expect more lease-up in the third and fourth quarters, particularly strong from San Diego and Massachusetts. We're also likely to see some more development assets pick up, page 46 of the supplement, in the third and fourth quarter and certainly we have a very heavy corporate focus on Mission Bay and South San Francisco, (inaudible), Illinois and East Jamie Court assets.

East Jamie Court, we're nearing completion on suites for 4 new tenants occupying 2 of the 6 floors at the project. Activity is really moderate. And we're tracking a number of emerging stage companies with upcoming needs with tours and meetings, as we continue to press our case to provide high quality facilities as the key differentiator from second or third generation subleases.

At Mission Bay, it continues overall its star appeal as we recently completed a transaction with Pfizer's CTI entity at 1700 Owens. And it is important to note that the pharma innovation engines are highly selective in their locations, much like Baer and now Pfizer coming back to Mission Bay with their CTI group, which we also have as a key tenant in our New York property.

499 Illinois has initiated its formal marketing campaign. We've initiated and we're receiving positive reception in the market as we've expected from a variety of user groups, including life science, clinical, medical and technology. Tours have begun and we expect to be very selective in working with these types of entities over the coming quarters. We also see an opportunity to push rental rates greater than our pro formas.

For 3Q and 4Q we see solid leasing prospects in virtually all of our markets. Remaining 2011 lease rolls, we've got 984,000 square feet rolling over the next 2 quarters, about 22% are leased or certainly likely to be completed, about 42% are in redevelopment primarily 2 big buildings. As you know, almost 200,000 square feet at our 400 Tech Square conversion. We're expecting Forrester Research to exit that building over the coming quarter. And our initial pre-leasing discussions are going very well. We're looking at, I think, a good lease up and a strong ROI much like our 200 Tech Square conversion project. And the second big redevelopment is the Gates Foundation Building coming back to us again in the next quarter here. We're already 55 pre-leased before they moved out with very good upside, 116,000 square feet.

The balance of the 2011 roles, 36% is marketing, about 346,000 square feet. We also signed our last lease for the remaining last space at the Alexandria Center for Life Science New York, of about 5,000 feet and all we have left are a few office bays on one of the floors. We just actually opened a state of the art urban farm there getting a lot of attention in New York City.

On our 2012 lease rolls, 1.4 million square feet, about 25% are leased or likely to be leased. 2 small buildings, about 5% are going into redevelopment for conversion. And the balance, about 69%, 70% are being marketed with balanced exposure in San Diego, San Francisco, greater Boston, suburban DC, and Seattle.

Occupancies over the third and fourth quarter were expecting good pick ups in San Diego and greater Boston. And on new developments, as you know from our press release, we did sign a 307,000 square foot 15 year lease at our 225 Binney Street project, part of the Alexandria Life Science Kendall Square, with Biogen Idec, a truly outstanding company. The building will be office but will be able to handle lab. We have solid rents. And, George Scangos, who we've known for many years, the CEO, commented on his move back from Weston to Cambridge. And said, essentially, they need to be where the heart of innovation and research is and he didn't want a split function of office in the suburbs and research in the cities. So I think that's a good win for Cambridge post Vertex].

On the international front, we think that medium to long-term international exposure carefully and thoughtfully executed is a positive as there is a different growth trajectory overseas which will benefit Alexandria over many years to come. Moving first to the MaRS announcement. They announced the kick off of the second phase, about 764,000 square feet, substantially leased, 100% financing on outstanding terms from the provincial government. Our structure and investment return will be similar to a sub ground leaser, and it's in one of the absolute best locations in Toronto's medical discovery district.

Moving on to India, there have been press reports about Alexandria investments in India, some of which are unfortunately unsubstantiated. Others are directionally true, but perhaps wrong in the details. Consistent with our communication with our investors and analysts, we've sought to allocate capital and invest our resources in key markets and submarkets very prudently. Recent press reports have identified Alexandria as the developer of the Bangalore Helix project. This is certainly accurate, but this is a project we have been focused on for several years and, in fact, those following the Company back in 2007 will recall, there's a project that we were short listed back then, but was rebid over the last couple years due to some just internal governmental issues.

What is not accurate in the press reports are many of the details. Since we are the master developer in the Bangalore Helix project, the full scope of the project is actually larger than what our own capital investment will be. In total, over the next 5 years plus we'll build out approximately 600,000 square feet of technical space with the total investment over that time frame of about $100 million. So far investment has been less than about $15 million given site work and the normal building cycle, we expect that our first facility will be ready in early 2014.

Finally, a quick note on our underwriting standards with regard to international investments. We take pride in our conservatism and underwriting for any investment, which we discussed at some detail in our last Investor Day, in order to earn a risk adjusted return for our investors we focus on earning premiums of several hundred basis points after tax, above what we can earn domestically. It's undoubtedly premature to discuss specific economic details, but we want to try to address questions from a macro level. As we move forward, we'll help investors more fully digest the opportunity. But suffice it to say for now, we view these opportunities compelling and seek to manage risk and be compensated for the risk we ultimately do take.

Finally, a couple of points. We're working intensively to sell a number of non-core land parcels in various submarkets. We're also working intensively on asset recycling, particularly focused on sales of certain legacy and lesser quality buildings in submarkets we would like to exit. We'll likely see additional acquisitions in 2011 focused on key tenants in key submarkets. And significant build to suit opportunities remain in Mission Bay, New York, and Cambridge. We'll keep you updated on the progress. Let me turn it over to Dean.

Thanks, Joel. Good afternoon, everyone. Jumping right in here, we reported FFO per share diluted of $1.15. This excludes the $1.2 million write off of unamortized loan fees related to the early repayment of our term loan. We reported earnings per share diluted of $0.44.

Turning to the balance sheet, let me provide a brief overview of our recent amendment to our term loan. This transaction represents a key milestone with pushing out our last significant 2012 debt maturity. We raised about $500 million of incremental bank debt capital, extended our maturity ultimately to 2016. And pricing on the term loan is at 1.75% over one month LIBOR. This leaves us with about $250 million outstanding on our 2012 term loan. As you look at our debt maturity schedule, on page 29, you will see the highlight there that debt maturities have been pushed out to 2015 and thereafter. Subsequent to quarter end, we repurchased $82 million of our 3.7% convertible notes leaving us with approximately $125 million outstanding today.

Next turning to balance sheet, capital structure, and liquidity objectives over the coming quarters and over the next several years. We're clearly committed to maintaining the broad and diverse set of sources of capital. As you are well aware in July, Moody's Investor Service assigned a Baa2 stable issuer rating to Alexandria. Standards and Poor's assigned a BBB minus stable corporate credit rating to the Company. As a result, we expect to tap the unsecured bond market in 2011, obviously, subject to market conditions.

We're committed to maintaining low leverage and solid credit metrics. We fully expect to reduce and eliminate convertible debt from the capital structure. We're looking forward to further laddering of debt maturities, transitioning variable rate bank debt to fixed rate unsecured bonds. We fully expect to maintain adequate liquidity from net cash provided by operating activities, cash and cash equivalents, and substantially greater than 50% availability under our line of credit. We expect to fund and grow dividends from increasing operating cash flows and to retain net positive cash flows after payment of dividends for reinvestment into acquisitions and/or redevelopment in development projects.

Looking out over the next 6 quarters through the end of 2012, we anticipate future capital needs to be sourced with approximately 50% debt and 50% equity, with equity including proceeds from selective recycling of capital from the asset sales from time to time. Turning next to credit metrics, our net debt to EBITDA was about 6.5 times for the second quarter annualized, and we expect this ratio to improve over time with some variance temporarily quarter-to-quarter. Financial covenants under our credit facility are as follows, leverage was 34% to covenants 60%. Unsecured leverage is 35% to covenants 60%. Fixed charge coverage ratio is 2.4 times, current quarter annualized was 2.5 times and the covenant is 1.5 times. Our unsecured debt yield is in the 15% to 16% range and the covenant is 12%.

Turning to uses and sources of capital for the remainder of 2011, the uses aggregate about $768 million consisting of approximately $50 million in acquisitions. About $244 million in construction spending, consisting of the following; $119 million for redevelopment; $55 million for development; about $34 million for India and China; and pre construction consuming about $12 million; and about $24 million of other projects.

We anticipate common dividends of at least $56 million, repayment of secured debt of about $93 million, repayment of our 2012 term loan of $250 million, and the retirement of about $75 million of our 3.7% notes. Sources of cash for the remainder of 2011 will include our line availability of about $925 million, net cash flows for each quarter annualized over the next year of about $100 million, cash on hand of $61 million, assets and land sales projected to be about $75 million, and, as highlighted earlier, we plan to complete an unsecured debt financing as well.

Turning briefly to same property performance, we reported year-to-date same property NOI growth of 0.50% and 6.5% on a GAAP and cash basis respectively. These results exclude termination fees and reflect contractual increases in cash rents and increases reflective of leases executed in late 2008 and 2009 with some amount of free rent. Additionally, operating expenses in the same property pool was up about 8%. As a reminder, 95% of our leases are triple net and accordingly fluctuations in operating expenses are passed through and recovered from our tenants.

Briefly on G&A, G&A was up about $1.2 million from last quarter, reflecting acquisition costs related to the purchase of a property in Mission Bay and a measured increase in payroll and other costs related to the growth in the depth and breadth of our business. Lastly turning to guidance for 2011, we updated our guidance primarily for capital related matters, FFO per share diluted was provided in a range of $4.37 to $4.42, and EPS diluted of a range of $1.82 to $1.87. Our guidance is based on various underlying assumptions and reflects our outlook for 2011.

Some of the assumptions include the following. A $0.10 loss on the early extinguishment of debt, including $0.06 since our guidance in the first quarter earnings call. Again, $0.02 of an impact related to the amount and timing of the additional term loan that we closed on June 30. And again just to clarify, this relates to the term loan we closed in the second quarter. A $0.05 impact related to the timing of future unsecured bond offering moving from 2012 into 2011.

From a modeling perspective we are not prepared to discuss the details of the bond financing assumptions since these items will be determined based on market considerations at the time of any future offering. We believe our guidance has captured reasonable assumptions for this future event, and we will target 10-year paper in an amount that should provide appropriate liquidity for fixed income investors. We lowered our acquisition assumptions and that impacted our numbers by about $0.01. And we had a $0.01 impact from the timing of repurchases of 3.7% convertible notes.

Straight line rents are expected to be in $27 million to $28 million range for the year, really reflecting the impact of the recent lease that we executed with Illumina in San Diego, driving an increase in straight line rent in the second half of the year. Additionally, straight line rents should drop down to a quarterly average of about $5 million in 2012. FAS 141 mark-to-market lease revenue will be dropping below $1 million beginning in the third quarter and continuing at that rate for a number of quarters thereafter. With that, I will turn it back to Joel.

Operator, we're ready for Q&A, please.

(Operator Instructions) Anthony Paolone; JPMorgan.

Thanks. Good afternoon. You mentioned some build-to-suit activity that you're still having discussions on in Cambridge and New York. I was wondering if you can give us an update on progress in New York in the potential West Tower there.

We don't have any specific news to report, Tony. But I would say that given our fairly intensive marketing program that we put together and we've been organizing over the past month or two, coupled with the legacy demand that we had on the East Tower of about 200,000 feet, I think we look pretty positively at the prospects in New York. We delivered first space, I think back in August, to Lilly. We just signed our last lease for last small piece of lab space just this past quarter. We're now full other than I think we have three or four office, little spaces for lease up on the 15th floor. I don't have anything specifically to report today. I think we're optimistic that New York City is a good strong market with increasing rents. There certainly is a strong demand from a variety of sectors where there are no choices. People, a number of groups of entities, suburbs are not an alternative, so no interest in going to New Jersey or Connecticut or Long Island, or wherever, and so Manhattan remains the destination of choice.

On the Cambridge front, I think we just digested our negotiation and kick off of the project with Biogen Idec so we'll keep you posted. We do have at least two very interested parties in one or more of the other. We have four other buildings. We'll keep the market posted over the coming quarters. We think there is good momentum in Cambridge after an initial worry was that wow was Vertex somehow representing some macro thesis of everyone wants to now get out of Cambridge. We all know that's really not true. That was a unique situation based on the CEO there and his desire to be on the water front and the legacy deal that they had pre-crash.

Okay. Is the idea still to focus on about 50% pre-leasing to get something started in either of those markets?

Yes. I think that would be the minimum we expect. It would likely be higher. I would think in Cambridge, in particular, my sense is it would be substantially north of that. Because we're likely looking at full or heavy substantial building users. New York, it's hard to say because we could certainly go forward if we had 200,000 or more square feet out of 400 because we think the market there has good demand. We're trying to be prudent about how we manage our spend and balance that against, our now being an investment grade company and all the metrics we need to pay attention to.

Got it. On the Toronto deal can you give us a little bit more detail on things like the structure, how much capital you have in the deal right now, and sort of the commitment that the leasing commitment that exists because it has been some press on that project and just want to understand exactly what the details are.

I want to be careful because we're not now in the driver's seat on the project. MaRS itself is. The financing has been provided 100% at extremely favorable rates by the provincial government. They have announced two significant institutional leases. I think it is fair to say that the building is more or less substantially committed. We have approximately $75 million into the project. Our structure is one of being essentially that of a sub-ground leaser with rates that are more or less in line with what that would hold. We will work with MaRS strategically on leasing. We will also work with them on the marketing side, but with you don't have any responsibility any more for construction. We're not responsible for the loan, so the result is actually a win-win for everybody.

So at the end of construction has this construction loan or stay with the property for the duration and you guys are done on the capital side in terms of having to extend?

We are done on the capital side.

Hi, Tony, it is Peter Moglia. There is a construction loan. It is going to fully fund the remainder of the building. It will be in place for approximately three years until the building is completely stabilized and then there is a commitment as well to permanently finance it out. So financing looks really good. There is no need for Alexandria capital to do anything further.

Okay. Got it. And just a couple questions on the leasing side. One is your 2012 lease expirations moved up sequentially and I was wondering what happened there.

Yes. I believe you said 2012?

Yes.

2012 we had one space in Seattle, I believe, about 65,000 square feet. The life science entity actually had a right to early terminate the portion of their space, which they did exercise. The good news is we obviously were aware of it. Seattle is a very tight market for Alexandria and our asset base there. We are engaged in early discussions with very quality entity to take that space.

That was, Tony, to be specific, that is space that's now all office. It is occupied by the Fred Hutch Cancer Research Center and they're relocating that office space elsewhere. We have 1% vacancy in Seattle. We're 55% or more pre-leased on the future conversion of the Gates Foundation Building, so we view this as actually a good thing to be able to have. If possible, we would lease it immediately for office. But we have a desire to potentially convert it to lab because the rents are very strong in Seattle. In fact, on the office side, as you may know, Amazon just increased their south Lake Union presence from 1 million to almost 2 million square feet. That market's been on fire.

Okay. Good. Last question. In Cambridge with the Forrester leaving the couple hundred thousand square feet there, do you think the down time there goes into 2012 before you have a replacement tenant and you start to get rent on that? Or what's the thought process there?

For sure, before we start renting it, I think the conversion time is probably twelve to eighteen months, because it is like 200. It's a big building. It is a complicated redevelopment. But we already have, I would say, advanced discussions for at least half the building or more, potentially even more. That we might be able to announce over the coming quarters, so we're seeing demand there to be extremely strong. That's on the lab side. We know there are a number of office users that could swoop in potentially and try to take it all, which would accelerate it. We're primarily focused on two big lab users who we are deeply engaged with there.

Got it. I may have misunderstood or missed this. That building does come out of service then, is that the idea?

Oh, yes. Forrester will move out. It is a kind of couple of decades old office building that had always been targeted for redevelopment when MIT owned the property. They were just going to update it much like 200, so it will come out of service.

Okay. Got it. Thank you.

You're welcome.

Operator. Michael Bilerman; Citi.

Hi. It is Quinton Falelli. I am here with Michael. Just firstly in terms of your land held for future development, the international land held went up by 1.8 million square feet. Can you just walk us through what some of the increase was from? I am not sure whether it was from the Bangalore Helix project you mentioned or there was some other stuff coming there.

Making solid progress on a lease up for redevelopment assets. You can look at page 45 of the supplement. Add in another to the north of the country. These are generally opportunities where we could either purchase land or we win a bid for land with the government that they come up from time to time and we don't have a choice. They're not high cost either, particularly, but they provide outstanding sub-market locations for our future developments. I would say that when they come up if we're looking at a sub-market, especially if the government is running an auction or a bid, you have to respond otherwise you lose that opportunity in perpetuity. Timing is one hat is not necessarily our choice in all cases.

Right. I think you mentioned that your share of Bangalore Helix would be $100 million.

Right, over the five year period.

Right. So these additional projects over a five year period, what could we be looking at in total out of CapEx in India?

I think on that project we mentioned $100 million, about $20 million a year. We'll try to give you better feasibility over the next quarter or so as we begin to try to highlight some of the specific locations we're in. I would say, Dean, as you look into 2012 what number would you ascribe to that?

I think it is in the prepared section of our call. We highlighted that our spend, at least over the next six months in Asia, is only about $34 million. I would expect that number is going to increase modestly in 2012. We'll provide a better outlook over the next call.

And just one more for me and I think Michael has got one. In terms of the credit ratings and if you read the language, it is very particular about the level of the volume of development you do. How much on an annual run rate, what volume in dollars million are you comfortable doing?

I think our goal there, Quinton, is to really manage the amount of leasing risk, as well as the development dollars, but I think the ultimate governor is going to be the balance with not too much under construction at any given point in time. On the development side in the US, just being real prudent about having significant pre-leasing. Everything to date post crisis in the US that was initiated vertically by us, not purchased as a development to complete, but all the vertical projects including the most recent one in Cambridge have been all pre-leased. In the Cambridge Biogen deal is the third 100% pre-lease project. I think you'll see us manage the lease up risk in that manner and just selectively pursue the opportunities to manage the overall dollar investment.

It is Michael. I have a couple of questions. Thinking about the MaRs project and when you announced that in '07 there was obviously a lot of fanfare regarding talking about the globalization of your business, the internationalization on your business, creating a life science center in Canada. You think about the Edinburgh Bio Quarter, Scotland award and that project in China which you did R&D with a couple of projects, and obviously you have India. Not all come to fruition the same way or get the fanfare that was created when they were announced. Can you talk a little bit about sort of what's beneficial, what's disappointed you, and how you think about it?

Sure. I think that's a great question. I would say the environment we're in today is substantially and radically different than '05, '06 and '07 when we looked at moving in a dramatic way as far as focus to the internationalization of our business. I think it is clear that is happening. The pharma companies are looking at 20% to 30% growth rates in many of the emerging markets, so we have to be aware and pay attention to that change. But I think when it comes more micro, we've always looked at the Canadian market, for example it's about 10% to size of the US market. We've always felt it is a very good market, high quality real estate, low cap rates, there is no 1031 transaction tax deferral there. Not too many projects ever come to market because of tax reasons, so we've tried to build in a measured way, small presences in the greater Vancouver area, the Montreal area, and this was our run at Toronto.

I think at the end of the day this was probably a good result given where we are today after the crash and given that we're now investment grade. This is probably a very good result for us. If we go back to 2007, if we were to have the knowledge we have today, we might not have pursued some of the projects in Canada or Europe. But I think our decision to go for Asia has been a good decision and one that we think is important. We have really no balance sheet exposure in Scotland. We have essentially a long-term option that the original cost of the Scottish enterprise is there. So if something develops there we always have that option. We really have no exposure there. No further exposure to development or spend in Toronto. That's a good result, although not necessarily intended in 2007.

I think China is one thing that has been a big disappointment. We have got a first in class team there. We have first class buildings, but we're suffering from some of the challenges of just the huge bureaucracy and the challenge of incentives and how they're dolled out in China. We're working through that. I think we'll be able to announce probably in the next quarter or two our first big pharma signing there. But it probably isn't a market we can scale in very easily, so as a result we really focused our efforts on India. We have more orders than we can take at the moment which is a good thing. We do have to pay, as Quinton asked, attention to being very measured and prudent on the deals we do. And capital spend, as an overall percentage of the company, and we do believe there is a huge opportunity there. At the end of the day, the way things have worked out really has been for the best. If we're to go back and do it again, we might do things differently given the knowledge we have today if we had it then.

That's helpful. Just a question for Dean. If you think about the $0.05 impact from doing basically terming out your floating rate debt, with that unsecured bond offering at some point, the near future, can we think about what that would be on annualized basis? I know it is a little bit circular because you are going to term out your debt, overall interest rate will go up and because your capitalizing basically half of your debt for your development pipeline, the rate at which you capitalize for your development pipeline would mean that you're going to cap more interest so the GAAP impact is going to be much less than the cash impact. I want to know if you can sort of walk through at least within some goal posts on annualized basis by doing a fixed rate financing and pick a number, say you will term out $500 million of your floating rate debt exposure and pick an interest rate, 5%, what would that do to sort of your capitalization rate for your interest capitalization, so what would it do there and what would happen on a GAAP and cash basis?

Yes. I think you articulated the question and the methodology or the impact on our business very well, Michael. If you use the numbers that you rattled off, I don't have the exact math, but using the numbers that you used in your question at $500 million, at 5%, we got a $250 million term loan being repaid at almost 1% spread over one month LIBOR, any incremental, the difference between that term loan and the $500 million number you use in your example, would go to repay outstanding borrowings on our line of credit at 2.4% over one month LIBOR. So there is a differential between those two interest rates, LIBOR based rates with the spreads and the 5%. You're correct that 50% of that roughly speaking and you can do the math, the capitalization of interest relative to the gross interest costs in any given period, softens the impact of the higher cost to capital in the refinancing.

The exact impact on weighted average interest rate for the interest capitalization calculation is highly dependent on the mix of fixed rate debt averaging, somewhere in the 5% range on our balance sheet, and floating rate debt at a much lower cost. And the proportion of the mix of fixed to floating changes, as it will with a bond offering, that also drives the weighted average interest rate use for capitalization. So the interest rate change for capitalization is driven by the mix of fixed and floating, proportionally, as well as the transition from LIBOR based low cost variable rate debt to a say 5ish range fixed rate ten-year financing. I hope I provided some color without actually giving you the actual interest rate. Because I don't have my model in front of me to tell you the exact incremental change on our weighted average interest rate.

Right. I guess rough math, if we did 500 at 350 basis points spread, it would be basically about $17.5 million or almost $0.30 a share cash dilutive. But probably let's just split it in half, because half of your debt is capitalized, so it probably mean that 2012 estimates people don't have this in their model would have to come down by about $0.15.

Yes, but keep in mind in this scenario of numbers, while 250 will go to repay a term loan and the short answer will be, the remaining will go to pay down our line of credit, we're also in the midst of retiring our 3.7% notes and so that needs to be considered. There is a GAAP impact of 6% on those notes, so it is a little more complicated than what you described. But if you are just keeping a very simple assuming, half goes to the term loan and half goes to the line of credit, I fully agree with the math that you're describing. That's somewhat of a static analysis, too, right, Michael, because in reality the LIBOR curve is moving, as you look forward LIBOR is moving up and the impact to 2012 as an example, won't be assist dilutive as it will be for 2011.

Okay. Thank you.

Thank you.

Sheila McGrath; Keefe, Bruyette and Woods.

I was wondering if you can give us color on any interest at the new Mission Bay acquisition, on the vacant space there.

Yes. At the moment, I don't have anything specific by way of type of or nature of tenant. But as I said, we have had quite a few showings and quite a few discussions, including life science, clinical, medical office and technology. I think over the coming quarter or so we'll be able to give you a more granular view of that, but I'd say stay tuned. So far, it's really the only significant block of space around. We think that we have 1% vacancy in that market and I think things look pretty good. I will let Peter comment as well.

I just wanted to remind you that the way we underwrote this is that we weren't going to get our first tenant in there until month 13 and then we were going to lease it up over 24 months total. We're taking our time. We want to push rents. We're coming out at a very high rental rate versus what we underwrote, and we're going to be patient and try to accomplish that before we go ahead and lower it and try to increase the velocity of the leasing.

Okay. One other quick question. I think we all saw the editorial, I it was the CEO of Merck in the Journal just talking about how the government shouldn't put legislation that might block innovation at pharmaceutical companies, and I am just wondering if you can highlight to us legislative things in Washington right now that your tenants might be watching closely.

Yes. I may have Amanda comment generally. I would say there are three significant issues. The big one is the budget overall and any negative impact NIH, et cetera, so that's clearly one. There is a bill which looks likely to pass in the patent area which would be moving our system from a first to invent for a first file. That could be good or bad depending upon I have seen it go both ways. The world of technology likes that. The world of life science hasn't historically been used to it, but it is not necessarily the worst thing in the world. You just have to be careful about publication. I think there is an attempt to institutionalize the whole SBIR granting as opposed to these renewing year-to-year and that would be good, too, but, Amanda, you can comment a little more broadly.

I guess maybe just one more thing to add to Joel's three items is another possibility with data exclusivity. There is talk from Washington to decrease the time that biologic's are protected from data from their clinical packages. Currently, the Congress is holding that year level at 12 years to protect the data, but the White House and the Obama Administration is pushing for a lower time period of seven years. I think that 12 years is the optimal length. But if it were decreased, then I think that could impact incentives to invest in that biologic's space. Although I think we're optimistic that it won't go to that seven year lower level.

Okay. Thank you.

Thanks.

Operator. Jonathan Habermann; Goldman Sachs.

Good afternoon. Jay Habermann here with Conner. Joel, can you talk about asset sales as a source of capital? I know you mentioned $75 million in the back half of the year. Just curious how you think about sources of capital beyond the current year and how you think about asset sales in that context?

Yes. As I said in my opening remarks, we certainly have moved to a position where we'd like to liquidate a number of land parcels in a variety of sub-markets. Because, number one, they're not income producing. Number two, they're really not so much any more core. And in some cases, they were purchased with a different mindset pre-crash, or at a time even earlier kind of a legacy asset. I can think of a couple, but I want to be careful here for accounting purposes. I think you'll see some of that unfold over the coming quarters, and I think even in the coming years as we try to lighten up on any land parcels which fit that bill.

Sometimes also we've had acquisitions historically which have come with adjacent parcels, with FAR, or we have gone out and got it entitled and we didn't make that acquisition really for that additional FAR, and we see an ability to sell some of that off. We've got one situation in Maryland we're looking at today where we may be able to monetize something where we felt the building was right, but we didn't necessarily need additional FAR. We'll look at opportunities like that, and I think you'll see us report actual sales that happen. We have done it in the past. I think you will see that ramp up a bit.

On the operating property level, we are looking clearly at a number of sub-markets and a number of buildings which have, as the Company grew up we acquired. Now we don't see them quite as core and critical to the Company's operations or locations. I think you'll tee up sometimes groups of assets or one-off assets and look to recycle that capital. Clearly, recycling is very important to us as part of our sources of capital. So I think you will see us intensely focus focused on that. Hopefully that's helpful.

That's helpful.

Jay, we have been talking about one particular land site for some time now that's been under contract. As best we can tell right now it will probably close in the third quarter.

Okay. Thank you. Could you speak a bit about market rent growth, what you are seeing across some of your core markets, whether it is San Diego, San Francisco, and Cambridge?

Yes. I would say, and then I will have Peter comment, I would say in Seattle we see very good stable rents. We're seeing some of the spaces we have rolling and coming up, we see very positive. I think the overall impact of what's going on in south Lake Union has been helping that. I think Mission Bay we see, as Peter mentioned, our ability to move north of where we pro forma 350 rents there to somewhat higher rents, more than we would have guessed before. South San Francisco is kind of a different story. I think we're struggling competing with second and third generation space and sublease space. I don't see any momentum there, and kind of an over hang on the market. I think we're seeing very positive rent growth in San Diego and stay tuned over the next quarter or two for that. I think first time in three or four years maybe more that we have seen it dramatically turn around.

I think Cambridge we're seeing again good strong rent and decent stability there. Maryland is a bit on the weaker side. New York has been strong and North Carolina, I'd say, has been hanging in there. I don't know, Peter, any other comments?

I think you touched on basically most of it. Mission Bay is definitely gotten stronger. But south San Francisco has gotten weaker. The mid-peninsula and south San Francisco are pricing about the same level right now between $2 and $ 2.75 a dollars a foot. San Diego has been the rock star of all of our regions. The downturn rents in Torrey Pines and ETC went from about $3 down to $2.25 to $2.50. There was one deal in Torrey Pines that even went under $2, which was something that we hadn't seen since probably the founding of the Company. But we're looking at deals now all above $3 in those sub-markets and the demand is strong. In fact, in one particular project that we're redeveloping we've had two buildings and four tenants, and so we had to find space for others elsewhere.

Seattle, rents have remained fairly stable there. The overall vacancy in the market has always been low. There hasn't been a lot of growth because there hasn't been a lot of growth in demand there, but rents remained stable. Massachusetts remains fairly stable. We're not seeing too much decrease in demand, or decrease in rental rates due to the Vertex move out. That product is not available now. It won't be for quite a while. Pricing has been holding.

As Joel mentioned, Maryland has been a weaker market, but I'd say that the rental rates are at the levels they've been at over the last three or four years. Certain instances things are pricing a little bit lower than historical. But overall the newer, high quality products still in the high 20s, low 30s range. And then North Carolina is a very stable market, not a lot of growth but not a lot of decrease in demand either.

Okay. Final question and sorry if I missed this. Have you identified the assets? I know you targeted $50 million of acquisitions later this year. Have you identified the assets thus far?

We have a few negotiations that are ongoing on land sites. There are three specifically. The one that I mentioned earlier will very likely close in the third quarter.

Talking about acquisitions, not dispositions.

I am sorry, totally missed the question. $50 million on acquisitions, we do have some in the pipeline, yes.

Okay. Thank you.

Thank you.

Next we'll move to John Stewart with Green Street Advisors.

Thank you. Dean, on the land under contract, expected to close in the third quarter, what's the sort of order of magnitude on the proceeds there?

High teens, just shy of 20.

Okay. And, Joel, I know you said that you don't have any balance sheet exposure in Scotland. I think a year ago I had been under the impression that one of the land parcels for sale was in Scotland. Was that maybe an option exercise of some kind, or has that already moved and I missed it, or what's the story there?

Yes. John, it's Dean here. I can't remember the exact timeline. It seems like it has been close to two years ago when we sold a portion of the land that was tied under an option at a minor, practically break even. I think it covered our transaction costs to transition it back out of our option to allow somebody to build on it. So, it was a small amount of what we held. What we do have tied up on our balance sheet related to Scotland is primarily diligence costs to get the option under control, as well as a little bit of soft costs for early site planning for the overall project. But based on what we understand the needs are there over time, and the way the option is at such a favorable basis, we truly believe that our basis will be recovered, meaning we'll be able to transfer the option if we choose to, to other parties. That will probably occur over time.

Okay. And, Dean, sticking with the same line here. It looks like the international land held for development in the international bucket on page 47 moved up by close to 2 million feet during the quarter. Can you explain what the driver was there?

Yes. I think in the question that Quinton at Citigroup asked, I had commented that most of that related to acquisition of land, not particularly high priced by any means compared to US standards in our Hyderabad cluster and then one in the north. And sometimes these land opportunities, John, as I describe come up from time to time on bids, or auctions, that are run by governments, either local or national. So you have to respond if that's a sub-market and a location you feel strongly about. We do from time to time, timing is maybe less in our control than it is just opportunistic, or just kind of ad hoc. But those were the two main drivers of that number increasing.

Okay. And then can you, Joel, describe your ownership interest in the Bangalore Helix project? I know you said the $100 million is your share. You're also the master developer, so can you just help us understand is it a joint venture with the government? What's the story there?

No. It's a 60 year ground lease where we have responsibility for helping master plan this whole site. It sits adjacent to what is in Bangalore really the prime high Tech Center of the electronic city, where emphasis and many of the major technology companies are located. It is a very good location. We looked at it for a long time. It sits now a very close to an off ramp of the new fly way so you don't have to go necessarily across town. But in addition to doing the master plan work, and the government is in a sense our partner there, not in the joint venture, but in a ground lease arrangement, we do have a commitment over this multi-year period to build up to about 600,000 feet of technical space and at about a $20 million clip a year. That's really what we're talking about. I would analogize it to being in the Palo Alto area. It sits near a number of pretty big pharma firms and certainly at the heart of the technology center in Bangalore, which is one of the best cities and sub-markets in all of India. We really love the location.

And so, Joel, forgive me for belaboring the point, but you did say joint ventures, so is there another joint venture partner other than the government?

I am sorry. I am saying it is not a joint venture. It is really pursuant, our relationship is pursuant to a ground lease. That's the structure.

Got it. And then just lastly, I thought you said 600,000 square feet for $100 million, so is it $165 bucks a foot that it costs to build out there? That seems higher than I would have guessed.

Over time, it depends. We are likely to be building for US, big US or European firms. We'll announce probably over the coming quarter or so our first big build-to-suit that we'll be delivering for a big pharma there. The space is pretty technical and western standards. I think the land is much cheaper, building costs are somewhat cheaper, but obviously the technical infrastructure has to be to international standards.

Okay. Thank you.

Philip Martin; Morningstar.

Good afternoon, everybody. I just wanted to see if you, Joel, or whoever may want to speak just in terms of the attitudes among your existing and potential tenants towards development, redevelopment, or just even relocating, especially as tenants just continue to analyze and manage current and future space needs. Are you hearing some exciting things from them?

Yes. That's actually a really great question. We almost never get. I think it probably is there is two sides of the world. As I mentioned in the prepared remarks, a lot of big pharmas are, and Amanda has talked about this frequently, are exiting or substantially slimming down their core research functions on their remote locations and suburban locations.

Pfizer, for example, is moving two big requirements out of Groton into Cambridge, one landed at MIT and another is still out for market or site selection. Historically they chose Groton because it was a great place, it was on the water. So their fermentation capability was enhanced by that location, but they realized for decades they can't be as productive there as in the heart of one of the innovation centers. So you see big pharma moving pretty dramatically along those lines. That's the reason we have been successful in New York and Mission Bay in particular. You see a number of other companies and we'll speak about this in the coming quarters. Peter will give highlights then as well, moving out of current, I would say Class B or C space, into first Class A space, upgrading at current rates. We see that going on pretty dramatically in San Diego. We saw it with Illumina. I think you will see it with a number of other entities. That's something we have seen a bit in the Bay Area. Baers moved to Mission Bay also for cluster purposes.

I think there are other companies that will move out of clusters. Because of attention to rental rates, particularly small companies exiting Cambridge. We've seen that actually for a decade, moving to the cheaper suburbs, 128 or 495. And those being replaced by bigger, stronger companies, so I think you see some of that. It is kind of a mixture. I don't know, Peter or Amanda.

The only thing I would add is the reason why big pharmaceutical companies are breaking down these remote silo campuses and looking to the top sub-markets in our regions is because they're really trying to access innovation and really trying to have a more open collaborative, open innovation concept. So they're locating to the strategic locations to collaborate and really to innovate to increase their own research and development productivity. I think that's a key reason why you are seeing pharma so aggressive in these locations.

Is demand increasing at a rate where space needs in terms of how is Alexandria positioned to handle that potential increase in need in terms of land availability, space availability, et cetera? Or are there going to be expansions of clusters, or new clusters created because of the change in managing space needs?

I think you are seeing a rationalization at big pharma and you're seeing an excess capacity both on people and in facilities that are now being redeployed to these very high, high performance drug. They call them, at least some of the companies call them, drug performance units. So moving out of big campuses into very targeted, tight, clusters, so I think New York has benefited. Cambridge has benefited. Mission Bay has benefited, in particular. We see some of that in Seattle. Certainly a bit in San Diego.

So I think our thesis over the past many years has been if we could have both land, redevelopment assets and just existing space, in the best sub-markets that are adjacent to the great centers of innovation, the MIT's, the Harvards, the University of Washington, the UCSF, UCSD, et cetera, Duke, North Carolina, et cetera, we're going to be more likely to be benefited than if we have less quality locations. And I think that's been dramatic. That's why over a period of years we try to essentially dominate, as best we could, the sub-markets that we have chosen. I think we have made good calls. South Lake Union and East Lake Union in Seattle, Mission Bay in San Francisco, Torrey Pines in UTC and San Diego, Cambridge.

That's how we tried to position the Company. And now thinking of international growth, we clearly see Asia as an important factor. We made a bigger bet on India than we have on China at the moment, although we think China will work out. It is just the ability to scale in China is tough and takes a particularly long time given a whole range of issues. I think over time and over the coming decade, you will see other countries emerge in Asia which will provide good growth. It is really a redistribution of resources among many participate participants in the life sciences industry.

This is Peter. I would like to add that the way that this trend has been effectuated hasn't been we're going to move this group out of New Jersey and put them into Seattle because we won't have a presence in Seattle. It has been done by acquiring companies in Seattle and instead of taking the product back to the campus, actually keeping that company in place and growing it. Gilead was a perfect example. They were a 4000 square foot tenant of ours. Gilead purchased the Company and we did a build-to-suit for them for 110,000 square feet. So, it has been a net positive in the growth of the industry. They're not just taking people away and putting them somewhere. They're purchasing an existing company that needs space and actually growing it.

I think you're actually seeing both.

Yes.

Sounds like it. It sounds like the industry is growing and expanding, maybe as a result partially of the recession or the down cycle. But also, just to try to again, manage and refocus space needs.

It is internationally and one has to also be aware there is downsizing and rationalizing heavily in the US and Europe. Where those have been are really in the these remote campuses or locations luckily we don't have exposure to. You look although Michigan, Illinois, places in the UK, places in Austria, France, Italy and other locations, and our entire thesis has always been if you stay in the triple A cluster locations with adjacency, you will be benefited by this reinvention and movement to the personalized medicine model. I think that's what's been proven true. We just have to be careful that we manage our business prudently and be highly disciplined in our site selections. That's why we have been very careful overseas as well.

Okay. And then just one last question on land sales and even other assets sales. On the land sales, do you expect to be selling the land north of where your aggregate costs are with respect to that land?

Correct. You will see although a small transaction in the third quarter sub $20 million, high teens. I think you will be pleasantly surprised at the price per foot that we're going to receive on the parcel.

Okay. The same thing on asset sales. I am assuming that there is pretty significant interest out there for what you're marketing and that would be north of your aggregate costs there?

Yes. Correct. And just to be fair, we don't have a list that we're working from right now. We're deep in valuation to see which assets may align well with particular users, owners, other parties that may find use for the particular assets that we might consider. So I think as we go through the next few quarters, we'll provide more color as those decisions are vetted.

Okay. Thank you very much.

Thank you, Phillip.

That will conclude the Question-and-Answer session. I will turn the call back over to Mr. Marcus for any additional or closing remarks.

We thank everybody. We're a little over an hour. Thank you very, very much and we'll talk to you on the third quarter call.

That will conclude today's call. We thank you for your participation.